Chill Out: Fine-Tuning Anticorruption Initiatives to Decrease Their Chilling Effect

Who is “harmed” by aggressive anticorruption crackdowns? The most obvious answer is corrupt bureaucrats, shady contractors, and those who benefit from illicit flows of money. And while there are concerns about political bias and other forms of discrimination in the selection of targets, in general most of us rightly shed few tears for corrupt public officials and those who benefit from their illicit acts. But aggressive anticorruption crackdowns may have an important indirect cost: they may have a chilling effect on legitimate, socially beneficial behavior, such as public and private investment in economically productive activities. Although chilling effects are often discussed in other areas, such as with First Amendment rights in the United States, there is little discussion of it in the anticorruption context. That should change.

For example, in Indonesia, recent efforts to crack down on corruption appear to have stunted simultaneous measures to grow the economy through fiscal stimulus. As this Reuters article relates, “Indonesian bureaucrats are holding off spending billions of dollars on everything from schools and clinics to garbage trucks and parking meters, fearful that any major expenditure could come under the scanner of fervent anti-corruption fighters.” Nor is Indonesia the only example. In April 2014, Bank of America estimated that China’s corruption crackdown would cost the Chinese economy approximately $100 billion that year. One can challenge that estimate (as Matthew has discussed with respect to other figures used in reports on the cost of China’s anticorruption drive), but the more general notion that aggressive anticorruption enforcement can have a chilling effect on both public and private investment, which in turn can have negative macroeconomic impacts, is harder to rebut.

Taking this chilling effect seriously does not imply the view that corruption is an “efficient grease” or otherwise economically beneficial. The point, rather, is that although corruption is bad, aggressive measures to punish corruption may deter not only corrupt activities (which we want to deter) but also legitimate activities that might entail corruption risks, or be misconstrued as corruption. So, if we think that corruption is bad but that anticorruption enforcement might have an undesirable chilling effect, what should we do? Continue reading

Guest Post: Corruption Among Development NGOs, Part 2–The Hot Potato of Upward Accountability

Roger Henke, Chairman of the Board of the Southeast Asia Development Program (SADP), a development grantmaker based in Cambodia, contributes the following guest post (the second in a three-part series):

My previous post in this series described the results of a survey that estimated the incidence of fraud and associated problems within the Cambodian NGO sector. The survey utilized a relatively independent source, the grantmakers that fund local NGOs (LNGOs), and triangulated the results with information supplied by the firms that perform external audits for LNGOs. The basic idea was that grantmakers are likely to have an evidence-based opinion of the quality of their LNGO partners’ financial management, governance, and fraud risk (and fraud incidence). After all, grantmakers assess organizational soundness before awarding a first grant to a potential partner LNGO, periodically monitor the work being funded by that grant, and require extensive, often cumbersomely regular, results and financial reporting, as well as yearly or project-based external audits. To put it simply: Grantmakers conduct regular due diligence (in the broad sense of the term) on LNGOs.

It seems strange that such an obvious source of objective data on NGO corruption and some of its correlates had, to my knowledge, never been considered before. Why not? My guess would be that the strained and ambivalent relationship that the aid community has with concept of so-called upward accountability is to blame. The engagement is strained in at least the following two aspects: Continue reading

Contract Administration: A Step-Child of Anticorruption Policy?

It is hard to imagine a more prosaic-sounding government job title than “contract administration.”  It is equally hard to imagine one more neglected, both by governments and the anticorruption community.  The House of Commons reports that British civil servants consider contract administration “mechanical and unimportant,” and with few exceptions those concerned with controlling corruption have paid the issue little attention.

But for those seeking to curb government corruption, contract administration is anything but prosaic or unimportant.  Once a firm has been awarded a contract to furnish goods, provide services, or build a building there are many ways it can cheat government: by delivering substandard goods, padding invoices or performing unneeded extra work to name.  Zambia’s Auditor General found road construction companies had failed to provide the required cement, concrete, and gravel in all 18 roads projects it audited, meaning the roads will not last as long or carry as much traffic as the government contracted for. An IT firm New York City hired to computerize the city’s payroll system bilked it out of more than $600 million through inflated invoices and phantom extra work.  In India a medical equipment manufacturer supplied neonatal equipment that exposed babies and hospital staff to electrical shocks.

The bad news is that these are just a few examples of the ways government can be cheated during the execution of a public contract.  The good news is there are handful of steps governments can take to reduce if not eliminate corruption during contract performance.  They are: Continue reading

Should There Be a Public Registry of Politically Exposed Persons?

Under the “Know Your Customer”-oriented regulatory regime endorsed by organizations like the Financial Action Task Force (FATF), financial institutions and similar entities must apply heightened scrutiny to so-called “politically-exposed persons” (PEPs), as well as their family members and close associates. FATF defines PEPs as individuals who are or have been entrusted with prominent public positions (such as heads of state or government, senior politicians, senior government, judicial, or military officials, senior executives of state-owned companies, and important political party officials), as well as their family members and close associates. (For simplicity, here I’ll use the term PEP to include both the PEPs themselves, and their family members and close associates, as the FATF recommendations make clear that the latter should be covered by the same heightened due diligence rules.) The rationale behind FATF’s recommendation of more stringent due diligence for PEPs is the idea that PEPs are higher-risk customers, because they have more opportunities than ordinary citizens to acquire assets through unlawful means like embezzlement and bribe-taking. Thus, FATF’s Recommendation 12 (which many countries have adopted) advises that countries should require financial institutions to employ additional due diligence measures for foreign PEPs in order to establish the source of the PEP’s assets, and to conduct enhanced ongoing monitoring of the business relationship with the PEP.

That all seems like a good idea. But how, exactly, is a bank supposed to determine whether a prospective client is a PEP? Here, the FATF recommendations say only that financial institutions should “have appropriate risk-management systems to determine” whether a prospective customer is a foreign PEP. In practice, financial institutions rely on a relatively small number of private providers—like World Check (Thompson Reuters), World Compliance (Lexis-Nexis), and a handful of others—to screen prospective clients to see if they are in a database (generated and maintained by the private service providers) of known PEPs. Presumably (though I haven’t been able to figure out whether this is true) financial regulators in countries that have adopted the FATF recommendations on PEP screening will treat a bank’s use of one of these reputable services as satisfying the bank’s responsibility to take reasonable measures to determine whether a client is a PEP, even if in fact the service failed to accurately identify a given customer as a foreign PEP—though the bank might still be on the hook for other legal violations in connection with the PEP’s account.

So, keeping track of who’s a PEP has been entrusted to the private market. There is no “official” PEP list maintained by any national government or inter-governmental organization like FATF, nor does any government (to the best of my knowledge) directly monitor or regulate the private providers like World Check and World Compliance to ensure their PEP lists are accurate and up to date. Is this a problem? Should we be happy leaving PEP screening entirely to the private market, or should there be greater government and/or civil society involvement in generating, maintaining, and revising PEP lists?

This issue came up last month at the “Tackling Corruption Together” conference held the day before the London Anticorruption Summit. David Lewis, the Executive Secretary of FATF, gave a presentation that emphasized (among other things) the importance of due diligence on PEPs. During the Q&A someone from the G20 Research Group (whose name I didn’t catch) asked Mr. Lewis about whether there was the need (and political will) to create public PEP registries, noting both the importance of accurate PEP lists, as well as the inefficiency of individual banks paying private services for screening individual names one at a time. Mr. Lewis replied, quite forcefully, that the creation of public PEP registries would be a “terrible idea.” He knows far more about this issue than I do, and I don’t know nearly enough to come out in favor of public PEP registries, but I have to say, I didn’t really find Mr. Lewis’s reasoning all that persuasive. Continue reading

To Fight Corruption, the Green Climate Fund Should Improve the Anticorruption Mechanisms in its Accreditation Process

The Green Climate Fund (GCF), which the UN created in 2010, seeks to marshal pledges of $100 billion per year by 2020 from wealthy nations (which have been disproportionately and primarily responsible for the world’s carbon emissions), as well as other private and public sources, to finance climate change mitigation and adaptation projects in developing nations, which bear the greater share of adverse effects from those emissions. Last March, the United States delivered $500 million to the GCF, the first installment of the $3 billion pledge the United States made as part of the COP 21 UN Climate Summit last December. Climate and development advocates hope that the GCF will support development that is both “low-emission” and “climate-resilient,” helping countries limit greenhouse gas emissions and adapt to impacts of climate change. The GCF operates principally through so-called “accredited entities”—private and public sector subnational, national, regional, and international entities, which will implement climate change programs using GCF funds. These entities are selected through an accreditation process (hence the name), which assesses their ability to manage resources against the GCF’s fiduciary principles, environmental and social safeguards, and gender policy. Specific projects are assessed against investment criteria, including impact potential, sustainable development potential, responsiveness to recipients’ needs, promotion of country ownership, and efficiency.

As with many humanitarian or development aid efforts, the GCF is not without corruption risks. Recognizing this, the GCF Board approved an Initial Monitoring & Accountability Framework for the accredited entities that manage and implement GCF projects. Yet the GCF should do more to ensure that its basic accreditation mechanisms themselves rigorously evaluate entities for their capacities not only to disburse climate funds but also to monitor and address corruption. This up front assessment would complement efforts to ensure that entities, once accredited, remain faithful to the Fund’s fiduciary principles. The following aspects of the GCF accreditation process raise potential corruption risks, and the GCF should take steps to address them: Continue reading

Mandatory Prison Corruption Report Looks for a Cure in Brazil

In a recent provisional measure (currently only in Spanish), the Inter-American Court of Human Rights ordered the Brazilian government to take a variety of steps to address human rights violations at the notorious Curado prison complex. Such violations are pervasive: Shockingly, the Curado guards, in exchange for kickbacks or other illicit benefits, essentially handed over control of the prison (and other prisoners) to certain inmates (often the most violent or feared), turned a blind eye to or participated in the complex’s massive drugs and weapons trade, and repeatedly failed to stop prison breaks and riots.

Notably, among the steps in the Court’s order is a demand that the government investigate and report back to the Court on corruption, particularly on weapons and drugs trafficking, among officials at the prison. The Court—like its companion institution, the Inter-American Commission on Human Rights (IACHR), which investigates and reports to the Court—is not directly tasked with addressing corruption. However, its mandate includes protecting the right to humane treatment. At Curado, the prison guards, as agents of Brazil, affirmatively jeopardized the safety of prisoners with their corruption, and the Brazilian government failed to protect prisoners from abuses stemming from those actions. The Court’s measure, drawing from the Commission’s recommendations, emphasizes that the widespread corruption of the guards and other prison officials was one of the factors that allowed the inhumane conditions in the prison to continue.

The Court’s ruling seems to be one of the first times an international judicial body has ordered a country to undertake a review of corruption within its borders and then be held directly accountable to that international body. Thus, beyond its immediate significance to the Curado situation, the Court’s decision is a milestone in more directly recognizing and addressing corruption as a proximate cause of human rights violations. While this recognition will not by itself resolve the dire situation at Curado, it is an important step forward, and is notable for several reasons:

Continue reading

Guest Post: Corruption Among Development NGOs, Part 1–Getting the Facts

Roger Henke, Chairman of the Board of the Southeast Asia Development Program (SADP), a development grantmaker based in Cambodia, contributes the following guest post (the first in a three-part series):

Compared with media attention to corruption among public officials and corporate interests, corruption in the non-profit sector is virtually ignored (though a recent GAB post on NGO corruption in India is a notable exception). This lack of interest is matched by the absence of sustained substantive debates about the sources of NGO sector corruption and the effectiveness of remedial interventions. My own experience with these issues derives from my involvement with the NGO sector in Cambodia. Corruption within our own house is a regular topic of informal conversation, and also makes it into our periodic sectoral assessments (though often through oblique references to concerns like “weak financial systems” and the “lack of checks and balances”). However, there are no efforts at all to go beyond these anecdotes and self-reported “weaknesses” to gather systematic, externally validated evidence about levels of corruption, let alone about issues like costs of corruption or the way it correlates with characteristics of the NGO sector that would offer entry points for positive change.

Given the comparative importance of development aid channeled through the NGO sector in countries like Cambodia, this lack of attention to NGO corruption is unfortunate. Admittedly, gathering information on local NGO (LNGO) corruption is challenging. Yet there are potentially useful sources of information that have not been exploited. For example, LNGOs are funded by grantmakers, and these grantmakers (often criticized by LNGOs for their cumbersome administrative requirements and time-consuming monitoring visits) are a possible source of data about LNGO fraud and its correlates. Additionally, the audit firms with an LNGO client base are another possible source of information.

In 2014, to test the willingness of grantmakers and audit firms to share information on their LNGO partners and NGO client base, we at SADP piloted a grantmaker and audit firm survey. The results were promising enough to repeat and expand the exercise in 2015. In this second grantmaker survey, 18 out of 26 grantmakers approached agreed to participate, and 13 of those 18 shared LNGO partner-level information (for a sample of 93 LNGOs). The grantmaker survey queried incidence and seriousness of (1) financial management problems, (2) governance problems, and (3) fraud. (In order to maximize participation, the survey prioritized brevity and simplicity over depth of information.) The audit firm survey (in which four of the five firms approached agreed to participate) asked only for some aggregate data (total number of LNGO audited, number of audits that identified fraud, number of audits that flagged serious financial system issues, etc.). Admittedly, neither the sample of grantmakers nor the sample of LNGOs is statistically representative of Cambodia’s NGO sector, but the surveys provide more valid information about corruption in development NGOs in Cambodia than has previously been available. And the quantitative picture emerging from the combination of these two data-sources about the organizational quality of Cambodian LNGOs is both revealing and disheartening. Interested readers should check out the full report; the most important findings are as follows: Continue reading