How Asset Return Agreements Can Bolster Reform: The Kazakh Experience

Guest contributor Robert Packer last week highlighted what can be the most contentious issue presented by the U.N. Convention Against Corruption – a request for the return of assets stolen as a result of corruption.  One reading of the convention seems to give countries victimized by corruption an absolute, unrestricted right to the return of the proceeds of corruption located in a second state.  But as Robert observed, states holding stolen assets can be reluctant to return them to a country where the chances the assets will again be lost to corruption are high and can find language in the convention arguably giving them the right, if not to keep the assets, to make return conditional on the requesting state taking steps to ensure the returned assets benefit citizens rather than again being stolen.  While there is always the danger that conflict over whether a return should be unrestricted or conditional will become acrimonious, a recent experience shows the result can also lead to a solution that benefits all parties.

That is the most important lesson to come out of the agreement between the governments of Kazakhstan, the United States, and Switzerland governing the return of stolen assets to Kazakhstan.  Although it has been the subject of considerable commentary, on this blog (here and here), on the FCPA blog, and elsewhere (examples here and here), these analyses have concentrated mainly on how the returned funds benefited Kazakh citizens.  But this is only part of the story.  Of equal, if not more, import are the stringent controls placed on the governance of the returned funds and the anticorruption reforms to which the Kazakh government agreed.  The controls helped the Kazakh government ensure the funds would be used properly, buttressing its commitment to its citizens and reassuring the states holding the assets, and the reforms helped strengthen its financial management system and increase resource transparency, thus reducing the chances of future losses from corruption.

The agreement was the result of the conflicting claims the governments of the United States, Switzerland, and Kazakhstan had to some $84 million in a Swiss bank that had landed there thanks to corrupt dealings in Kazakhstan. The three compromised their claims in 2007, agreeing the monies should be placed in trust for the benefit of poor children in Kazakhstan, an objective all three had supported throughout negotiations on the disposition of the funds.  The three also concluded a separate agreement with the World Bank for it to provide technical assistance to the government of Kazakhstan and oversee the disbursement of the funds. The two agreements contemplated the creation of the BOTA Foundation, a Kazakh non-profit corporation, that would hire an international NGO to administer the monies.  Just over $115 million (the $84 million principal plus interest) was disbursed through three programs: conditional cash transfers, scholarships to attend Kazakhstan higher education institutions, and grants to support innovative social service provision(at the 2014 close of the program an external evaluation gave the foundation high marks for seeing all monies reached the intended recipients).

The governance structure of the foundation and the controls on its management of the funds were critical, not only in ensuring the monies went to citizens but for boosting the confidence of Kazakh citizens in their government and its commitment to seeing the funds were properly used.

*Foundation governance.  The three governments agreed the foundation would be “entirely independent of the Government of the Republic of Kazakhstan, its officials, and their personal or business associates.” The tripartite agreement provided that the foundation was to be created by five “founders,” again independent of the government and any government official, who were to be selected by the unanimous agreement of the three governments.  The founders then chose seven persons, “respected international individuals and Kazakh citizens, preferably known for their championing of children’s causes” and again “totally” independent of the government and its officials, to constitute the Board of Supervisors.

The governments of Switzerland and the United States were given the option of each naming one of their nationals to the board (which they both did).  The remaining, non-government members had to be approved by all three governments, and any non-government member could be removed at any time by a joint decision of the Swiss and American government.  The board’s first order of business was to approve the document governing the management of the foundation.  The document then had to be approved by all three governments, and any subsequent change to the document also required the unanimous approval of the three.

*Financial management.  The $84 million along with accrued interest was not released to the foundation all at once.  Rather, the money was disbursed in tranches with the remainder held in the Swiss bank and subject to the U.S. claim, a claim the U.S. could assert at anytime if it concluded the monies released were being misused.  The release of a funding tranche was subject to the approval of the World Bank, which had to okay the foundation’s plans for spending the tranche.  Once the Bank approved the plan, the funds had to be used according to the plan; monies could only be reprogrammed with the Bank’s consent.  The foundation was audited annually by an auditor unanimously approved by the three governments and selected from a list provided by the Bank.  The Bank also drafted the terms of reference for the auditor.   The agreement among the three government provided that “the implementation, administration, management, and expenditures of the BOTA Program shall be conducted by a reputable international non-governmental organization.”  The World Bank was charged with “supervising and monitoring” the NGO chosen.  The foundation’s financial records were to be maintained for five years, and the World Bank and the three governments had the right at any time to access the records.  The World Bank drafted the foundation’s operation manual, which governed personnel, procurement, and the other day-to-day affairs of the foundation and which all three governments had to approve.  The foundation was required to report periodically on its programs, reports which were subject to review and comment by the World Bank.

The creation of the BOTA Foundation and the disbursement of the monies to poor children was only one part of the agreement between Kazakhstan, Switzerland and the United States on the return of the funds.  In a second part the Kazak government bound itself to two reforms to combat corruption and so reduce the chances funds would be stolen again.  Moreover, the agreement to implement the two reforms had teeth.  The order the U.S. federal court issued releasing the frozen funds provided that if the Kazakh government failed to follow through on either, no further monies would be disbursed to the foundation and the U.S. could seek repayment of all funds that had been advanced to date.  Leaders of the Kazakh government thus devised a creative way to bind themselves and their successors to carrying out two reforms critical to national development.  They were —

*Public financial management.  The agreement with Switzerland and the United States provided that the Kazakh government would receive World Bank help for five years to improve the management of its public finances.  With Bank support, the government would “examine and analyze the budget management process in specified sectors to formulate a comprehensive, realistic and strategic plan for improving public financial management in Kazakhstan.” The government agreed further to collaborate with NGOs to expand the reforms and to use the process as a “consensus-building tool for policy design and implementation.”  All reports on the effort were to be publicly disclosed as well as provided to the Swiss and U.S. governments.

*Resource transparency. The Kazakh government also committed to implement the Extractive Industries Transparency Initiative and its principles “including, but not limited to, ensuring full participation of all extractive industry (oil, gas, and mining) companies; ensuring integrity of reported data; establishing a comprehensive work plan; ensuring adequate and sustainable financing for EITI implementation; appointing and managing an appropriate consulting and auditing firm; conducting national and regional workshops on EITI data reporting and implementation; and such other measures as may be deemed appropriate.”

Kazakh leaders may have been a bit too ambitious in expecting both reforms would be fully realized in the seven year life of the asset return agreement, a conclusion a 2013 World Bank review of its Kazakhstan program confirms.  While several reforms to the government’s financial management system have been achieved, the Bank reported that “overall reform progress . . . has been rather uneven” with the greatest changes coming in tax and customs administration where collections have increased and corruption has been reduced.  The EITI effort, however, has  been quite successful.  As the Bank review recounts, Kazakhstan was declared “EITI Compliant” in 2013, and a National Stakeholders Council was identifying what more the government needed to do to meet the EITI standards established in 2013.

Despite the failure to transform completely Kazakhstan’s financial management system, the Kazakh experience shows how much progress can be made in reforming government policy and ensuring returned monies are used properly when the returned state, the states where the funds are located, and international partners work towards a common end.  The three-nation agreement represents one of the most significant strides the international community has made in dealing with the proceeds of corruption and stands as a model of what can be achieved through a cooperative endeavor.

5 thoughts on “How Asset Return Agreements Can Bolster Reform: The Kazakh Experience

  1. Interesting case study, Rick. The decision to release the funds in tranches is interesting. On the one hand, giving the returning states continued leverage to ensure compliance is certainly useful. On the other hand, I could envision a situation where withholding part of the funding (even if it accrues interest in the meantime) delays progress because it reduces the resources available from the maximum possible level. It certainly would not be a worry in all cases (and presumably was not in the Kazakh case), but it was a question I had reading the post and wanted to flag.

    I was also wondering if you think this framework is possible when there are only two governments involved. My hunch is that countries claiming money held by other sovereigns would be more reluctant to agree to terms imposed by a single country than by a pair or group of countries because the latter case looks less like another sovereign imposing its will and more like a multilateral agreement among equals. I don’t have any empirics to back that hunch up, but would be interested to know if you agree.

  2. The bota programme seems to be one of the most, if not the most, successful example of asset restitution, however a few big questions still remain up in the air. First of all, most asset restitutions (think the Abacha, Marcos, and Duvalier funds) fall well short of the bota programme’s standards, as such success seems to depend on a certain combination of political and diplomatic conditions. Such variability is unjust to the victims of corruption, but should we push for reform of national legislations or improving the international conventions? Secondly, some claim that the bota programme was only possible due to the nature of the assets (confiscate bribes paid to an American citizen); could and should such strict conditionality be extended to the restitution of other types of stolen assets? Finally, no Kazakh official was ever prosecuted and the bribe taker (a mr. James Giffen) was convicted of nothing more than a minor accountancy transaction after some shady inter govt. us politics sullied the case against him; is an asset return and some general institutional reform really ever a substitute for solid convictions of the perpetrators of corruption?

  3. Its great to see the BOTA Foundation held out as a model. It does present an important learning opportunity. Here is a link to a case study we drafted that in addition to describing how BOTA worked and what it accomplished, draws lessons and presents recommendations that we hope will be useful to others. https://www.irex.org/resources/achieving-development-impact-inclusive-asset-return-model

    Reply ↓
    Nathan Sandals on March 5, 2016 at 2:01 pm said:
    Interesting case study, Rick. The decision to release the funds in tranches is interesting. On the one hand, giving the returning states continued leverage to ensure compliance is certainly useful. On the other hand, I could envision a situation where withholding part of the funding (even if it accrues interest in the meantime) delays progress because it reduces the resources available from the maximum possible level. It certainly would not be a worry in all cases (and presumably was not in the Kazakh case), but it was a question I had reading the post and wanted to flag.

    I was also wondering if you think this framework is possible when there are only two governments involved. My hunch is that countries claiming money held by other sovereigns would be more reluctant to agree to terms imposed by a single country than by a pair or group of countries because the latter case looks less like another sovereign imposing its will and more like a multilateral agreement among equals. I don’t have any empirics to back that hunch up, but would be interested to know if you agree.

    Reply ↓
    robbiepackman on March 7, 2016 at 10:47 am said:
    The bota programme seems to be one of the most, if not the most, successful example of asset restitution, however a few big questions still remain up in the air. First of all, most asset restitutions (think the Abacha, Marcos, and Duvalier funds) fall well short of the bota programme’s standards, as such success seems to depend on a certain combination of political and diplomatic conditions. Such variability is unjust to the victims of corruption, but should we push for reform of national legislations or improving the international conventions? Secondly, some claim that the bota programme was only possible due to the nature of the assets (confiscate bribes paid to an American citizen); could and should such strict conditionality be extended to the restitution of other types of stolen assets? Finally, no Kazakh official was ever prosecuted and the bribe taker (a mr. James Giffen) was convicted of nothing more than a minor accountancy transaction after some shady inter govt. us politics sullied the case against him; is an asset return and some general institutional reform really ever a substitute for solid convictions of the perpetrators of corruption?

    Jill,
    thanks for the link to the case study. It will help future visitors to the post. And I also take it that I did not misstate the provisions of the complex agreement creating BOTA.

    Nathan,
    you are right that release of the funds in tranches could have been problematic, and in fact fragile states have so often complained about the disruption that results when donors release their funds in tranches that the 2011 World Development Report, Conflict, Security and Development, highlighted the problem and urged donors to provide recipients with a release schedule to minimize the problems. But as you note, guaranteed disbursement robs donors of any continued leverage and the same is true with the BOTA funding. Fortunately for all concerned, it appears that all parties abided by their initial commitments.

    I am not sure if agreement on conditional return is easier to reach when there are more than two governments involved. My guess is that there are so many contingencies involved it would be hard to isolate any particular factor.

    To robbiepackman,
    like many public policies, asset return involves a series of trade-offs between conflicting, if not incompatible, objectives. It would have been optimal in any of the returns you mention to see all bribe payers and takers prosecuted and the funds used for unambiguous public benefits. But the parties negotiating the agreements are constrained by so many factors that I am amazed at what they were able to realize in spite of the constraints.

  4. Pingback: NEWS RELEASE | The BOTA Foundation: A Model for the Safe Return of Stolen Assets? | PtP Initiative

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