Too Many Cooks in the Kitchen? Why Commodity Futures Trading Commission’s New Anticorruption Enforcement is Not Superfluous

In March 2019, the Commodity Futures Trading Commission (CFTC)—the US federal regulator of commodity markets—issued a new Enforcement Advisory concerning foreign bribery in the commodities sector. According to the Advisory, the CFTC will presumptively decline to pursue civil monetary penalties against parties that timely and voluntarily self-report acts of foreign corruption that would otherwise violate the Commodities Exchange Act (CEA), so long as the self-reporting party fully cooperates, provides appropriate remediation, and there are no other aggregating factors. Of course, this Advisory implies that when these conditions are not satisfied, the CFTC will seek to impose sanctions in foreign bribery cases. And indeed, only a couple of months after the Advisory was published, the CFTC informed Glencore, a Swiss mining and trading company, that it was being investigated for corrupt practices that violated the CEA. The CFTC’s new Advisory and the Glencore investigation are a wakeup call for all market participants, especially broker-dealers and future commission merchants, that the CFTC is serious about cracking down on foreign corruption in the commodity trading sector.

This is notable because typically we think of the US addressing foreign bribery through the Foreign Corrupt Practices Act (FCPA), which is enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Yet while bribing foreign officials would indeed violate the FCPA, such conduct could also amount to violations of the CEA or its implementing regulations whenever commodity prices in the US are affected by the foreign corrupt practices: in such cases, the bribery could qualify as a form of prohibited fraud, false reporting, or market manipulation. For example, a commodities trader could violate CFTC regulations if it uses bribes to secure swaps or derivative contracts. Likewise, a company that paid bribes to foreign officials for purposes of monopolizing crude oil production in order to increase the commodity price and manipulate benchmarks for related derivative contracts would be in violation of the CEA’s anti-manipulation provision. The possibility of CFTC enforcement raises concerns about “piling on,” with duplicative penalties levied by separate US agencies for the same underlying conduct, but to address that concern CFTC Enforcement Director James McDonald has emphasized that the CFTC would “will give dollar-for-dollar credit for disgorgement or restitution payments in connection with other related actions.”

Of course, that only raises another question: Why not just leave the foreign bribery problem to the DOJ and SEC to address through FCPA enforcement actions? Does CFTC enforcement in the foreign bribery context really add any value? The answer to that latter question is likely yes, for at least two reasons:

Continue reading

The Biggest Beneficiary of the Lava Jato Leaks Is Jair Bolsonaro

As most GAB readers are likely aware, one of the biggest stories in the anticorruption world in the last couple of months has involved the disclosure of private text messages by Brazilian officials involved in the so-called Lava Jato (Car Wash) Operation. Lava Jato, which has been in progress for five years, is one of the largest anticorruption operations ever, not just in Brazil but worldwide. The operation has secured the convictions of scores of high-level Brazilian political and business leaders once thought to be untouchable, including former President Lula of the Workers Party (PT). Lula’s conviction rendered him ineligible to run in the 2018 presidential election—which he likely would have won—and this factor, many believe, helped far-right candidate Jair Bolsonaro win the presidency. The prosecution of Lula, and a number of other PT figures, triggered accusations, mainly from PT supporters and others on the political left, that the Lava Jato Operation was a politically motivated conspiracy against Lula and the PT. That view had not been taken very seriously by Brazilian or international experts outside of a relatively small circle of left-wing activists, though when Judge Moro, who had presided over most of the Lava Jato cases, including Lula’s, accepted a position in Bolsonaro’s cabinet, it certainly fed into that narrative.

Then, last month, The Intercept published a series of stories based on leaked/hacked/stolen private text messages among the prosecutors on the Lava Jato Task Force, and between Task Force prosecutors and then-Judge Moro. According to The Intercept and others reporting on this these revelations (dubbed “VazaJato” on social media), the disclosed texts corroborate the longstanding PT narrative that the Lava Jato prosecutors and Judge Moro were ideologically biased against the PT, especially Lula, and that Lula was denied a fair trial as a result. The Intercept described its own reporting as “explosive,” and while one might quibble with the lack of humility (guys, it’s generally better form to let other people praise the importance of your work), the characterization is accurate. Now, I think the evidence of misconduct is less clear than The Intercept and other commentators have suggested (see a useful debate on the legal and ethical issues here), and I find the claims of ideological bias especially flimsy (see here and here). But there’s no doubt that the revelations have tarnished Judge Moro’s reputation, and have also damaged the credibility of the Lava Jato Task Force prosecutors (though unfairly and excessively so, in my view).

Who has benefited from these stories? The conventional wisdom seems to be that the VazaJato stories hurt not only Sergio Moro, but also the Bolsonaro administration—both because Moro is a senior figure in that administration, and because the VazaJato stories imply, or state outright, that Bolsonaro’s election was illegitimate due to the fact that the strongest alternative candidate was barred, on trumped up charges, from running. And the biggest beneficiaries of the VazaJato stories, the conventional view maintains, are Brazil’s left-wing parties (the PT and its allies), mainly because the VazaJato stories show (allegedly) that the PT activists were right all along when they claimed a right-wing conspiracy against Lula. That view is plausible, and seems widely shared (not least by The Intercept’s reporters and editors, who makes no pretense of journalistic neutrality). But I think it’s wrong.

Indeed, I worry that the biggest beneficiary of VazaJato may be President Bolsonaro, and the biggest loser may be the Brazilian left. I say “worry” because I view Bolsonaro as a dangerous bigot and wanna-be authoritarian, one who is also likely to worsen Brazil’s corruption problem. But my personal political views are not really important for present purposes—I mention them in the interests of full disclosure (much as I have been careful, in previous posts, to disclose my cordial professional relationship with Lava Jato Task Force lead prosecutor Deltan Dallagnol). Rather, my goal here is to explain why I think the VazaJato leaks, and the narrative they have helped to amplify, are likely to help Bolsonaro, while hurting the Brazilian left. There are four reasons for this perhaps counter-intuitive conclusion: Continue reading

The European Union Elections and the Future of European Anticorruption Policy

GAB is pleased to welcome back Professor Alina Mungiu-Pippidi, chair of the European Research Centre for Anticorruption and State-Building at the Hertie School of Governance in Berlin. Her many publications include the Cambridge University Press volume A Quest for Good Governance: How Societies Build Control of Corruption and most recently “Romania’s Italian-Style Anticorruption Populism,” in the July 2018 issue of the Journal of Democracy.

Do Europeans care about corruption?  If the results of the May election to the European Parliament are any guide, they do.  Turnout to fill its 751 seats was the highest since the first election in 1979, and polling data shows corruption was a top concern of many voters. A YouGov poll found corruption and migration were what troubled voters the most, and earlier research had shown that respondents’ perceptions of how member governments handled corruption to be a good predictor of their trust of both national-level and European-wide institutions. Party leaders apparently believed these polls. The heads of the major ones all issued pre-election statements denouncing corruption and backing open government (a surprise given their foot-dragging on a parliamentary ethics code and reluctance to commit to greater transparency in the operation of the parliament itself).

Can Brussels solve what voters believe is the problem of corruption in Europe? This very large question can be unpacked into three more manageable ones:

Is Europe in fact as corrupt as Europeans think it is?  Are their perceptions of corruption matched by reality?

Do the results of the May elections indeed reflect a demand for stronger anticorruption policies and better governance?

If Europeans are indeed demanding better governed, less corrupt polities, can the EU’s limited anticorruption instruments satisfy the voters demand? Continue reading

Guest Post: Mercosur’s New Framework Agreement Is an Asset Recovery Landmark, But Significant Flaws Remain

GAB is delighted to welcome back Mat Tromme, Director of the Sustainable Development & Rule of Law Programme at the Bingham Centre for the Rule of Law, who contributes the following guest post:

In asset recovery, international collaboration is key. In December 2018, four Mercosur countries—Argentina, Brazil, Paraguay, and Uruguay—adopted a new kind of landmark framework agreement to collaborate in investigations and sharing of forfeited assets resulting from transnational organized crime, corruption, and illicit drug trafficking. The agreement’s provisions on law enforcement collaboration are important but not groundbreaking, as many countries collaborate in investigations, including through Mutual Legal Assistance (MLA) agreements. This framework agreement can be seen as a direct application of Article 57(5) of the UN Convention Against Corruption, which calls on state parties to “give consideration to concluding agreements or mutually acceptable arrangements, on a case-by-case basis, for the final disposal of confiscated property.”

Where the new framework agreement is particularly novel and innovative is in its provisions on asset return. While there are a number of technical details, the big picture is that any of the four countries may lay claim to a portion of the assets, so long as that country played a role in its forfeiture, irrespective of where the assets are located. The framework agreement provides (in Articles 7 and 8 in particular), that the asset shares will be negotiated on a case-by-case basis, with each country’s share to be based principally on that country’s role in the investigation, prosecution, and forfeiture of the assets. Other factors that may be considered include the nature of the forfeited assets, the complexity and significance of international cooperation, and the extent to which cooperation led to the forfeiture.

To the best of my knowledge, this sort of framework agreement is rare, the only other recent example is the “Framework for Return of Assets from Corruption and Crime in Kenya (FRACCK)”, a multilateral non-binding initiative for the return of assets between the Governments of Kenya, Jersey, Switzerland and the UK. There had been calls to establish a similar initiative in Latin America going back several years (see here and here). The framework agreement has the potential to set a precedent by institutionalizing the return of assets across borders, not only improving the asset recovery and return process in Latin America, but also serving as an example for other regional collaboration agreements in Africa, Latin America, or Asia. Indeed, the 3rd African Anti-Corruption Day (held last week, on July 11th) was organized on the theme of finding a “Common African Position on Asset Recovery.” According to the African Union, the purpose of this is to advocate for Africa’s unity in demanding the recovery and return of stolen assets, and making the return process transparent and accountable.

While the approach and ambition of the agreement is laudable, the framework agreement has three important shortcomings: Continue reading

Can Political Opposition Decrease Corruption? Evidence from Brazilian Municipal Governments

The idea that checks and balances in the government—such as legislative oversight of the executive branch—can reduce corruption is intuitive, but quantitative empirical evidence for or against this hypothesis is relatively scant. Moreover, the effect of a separation of powers on the extent of corruption may depend on whether the same political party or faction controls both branches of government, or whether different factions control the legislature and the executive. Indeed, some legal scholars have argued that the true separation of powers is not between branches of government, but rather the political parties in the government, and that the traditional view of the separation of powers—ambition counteracting ambition—only works if different branches are controlled by different political parties. But the likely effect of such partisan separation on corruption is not entirely clear: If the legislature is controlled by a party or coalition opposed to the party that controls the executive branch, this could mean increased legislative oversight and lower corruption, but alternatively, increased opposition may simply drive the executive to bribe the opposition to go along with his or her agenda, leading to more corruption.

Carlos Varjão and I investigate this the question empirically in our recent working paper, “Political Opposition, Legislative Oversight, and the Performance of the Executive Branch.” We focus on municipal governments in Brazil, which are particularly suitable for this sort of study for a number of reasons: there are many municipalities with a similar overall government structure, there’s a wealth of data on various forms of corruption (mainly embezzlement, procurement fraud, and over-invoicing) from Brazil’s public audit reports, and there’s considerable variation in both the level of corruption and the political control of the branches of the municipal governments. Our findings are striking and unambiguous: increased representation of the political opposition in the local legislature is associated with more legislative oversight of the executive, less executive branch corruption, and better public service delivery. Continue reading

Colombia’s Harsh Criminal Penalties for Corruption Are an Illusion. Here’s How To Fix That.

Whenever a new corruption scandal comes to light, many politicians instinctively react with strong punitive rhetoric, and this rhetoric often translates into action, usually in the form of amendments to criminal codes that make penalties for corruption offenses harsher. Latin America supplies plenty of examples of this (see here, here, here, and here.) Yet despite this emphasis on punishment, many corrupt politicians avoid justice altogether, and in the rare cases where they are found guilty, many end up doing only short stints in comfortable detention centers. Consider, for example, Colombia, which has unusually good public data on corruption convictions and sentences thanks to the work by the Anticorruption Observatory of the Secretary for Transparency. According to this data, between 2008 and 2017, criminal courts in Colombia have convicted 2,178 individual defendants for corruption (51.2% for bribery, 23% for embezzlement, and the remainder for other corruption-related offenses), but only about one-quarter of these convicted defendants actually went to prison. Approximately half of these defendants received suspended sentences, while another quarter were sentenced to house arrest. And of those who did go to prison, the time served was only about 22 months on average, much lower than the penalties on the books for corruption offenses. No wonder many Colombians believe the criminal justice system is too lenient.

The reason that actual Colombian sentences end up being so light, despite the penalties on the books being so heavy, is that Colombian law includes a set of provisions that allow for a variety of sentence reductions if certain conditions are met. For example, a defendant who accepts guilt can receive a 50% reduction in his prison term. Inmates may also reduce their prison term through work, with very generous terms: An inmate reduces his sentence by one day for every two days of ordinary work (8 hours of work per day), or for every four hours of work as a teacher. An inmate can also reduce his sentence through in-prison education, with  six hours of study translating into one day of sentence reduction. Furthermore, once an inmate has served 60% of his sentence, he can petition for release for good behavior. 

This excessive leniency needs to be addressed, not only in corruption cases but in all cases. Specifically, Colombia should adopt the following revisions to its criminal laws: Continue reading

What Was the Holdup on the Walmart FCPA Settlement? Some Wild Guesses

Most Foreign Corrupt Practices Act (FCPA) cases don’t attract much attention outside of a relatively small circle of lawyers, compliance specialists, anticorruption activists, and other FCPA nerds. But every once in a while a case comes along that gets a bit more attention from the mainstream media, or at least from the general business press. The Walmart case is one such example. The greater attention to that case is probably due to some combination of the Pulitzer Prize winning New York Times reporting on bribes allegedly paid by Walmart’s Mexican subsidiaries—allegations that helped get this case rolling—as well as the fact that the retail giant is more of a household name than, say, Alcatel or Och-Ziff.

As most readers of this blog (a group in which I imagine FCPA nerds are overrepresented) are likely aware, the Walmart case finally settled in late June, with the total monetary penalties coming to about $283 million. I already did a bunch of blog posts on the Walmart case while it was in process—including, perhaps most relevant now, a piece two years ago reflecting on what lessons we might learn if the case settled for somewhere in the neighborhood of about $300 million, which several news outlets had declared was about to happen. And since the announcement of the settlement this past June 20, there’s been no shortage of commentary on the case in the FCPA blogosphere (see, for example, here, here, here, and here). So I don’t have too much to add to the discussion.

I did, however, want to address one relatively small but intriguing puzzle. As I just mentioned, back in May 2017, news outlets reported that the Walmart case was on the verge of settling, for somewhere in the vicinity of $300 million. Over two years later, in June 2019, the Walmart case settled… for an amount very close to $300 million. So, what was the holdup? If the parties had basically worked out the amount that Walmart was going to have to pay back in May 2017, why did it take another two years to finalize the settlement? Neither side has an obvious incentive to delay: Walmart would like to put this behind it and stop paying its expensive lawyers, and the DOJ and SEC’s respective FCPA units have limited staff and a ton to do, and would also like to get the case over and done with. It’s possible that the delay was due to haggling over the exact penalty amount, or that Walmart thought maybe it could get a better deal from the Trump Administration and so decided to hold out, or perhaps there was some last-minute development that one side or the other thought might justify substantial shift in the settlement amount, even if in the end it didn’t. But I would guess (and it really is just a guess) that the two-year delay was due to one or both of the following two factors: Continue reading