Monthly Archives: January 2017

Guest Post: Why Disclosures in Foreign Settlements Don’t Spur Domestic Prosecutions in Argentina

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Natalia Volosin, a doctoral candidate at Yale Law School and clerk in the Asset Recovery Unit at Argentina’s Attorney General’s Office, contributes the following guest post (adapted and from an op-ed previously published in Spanish in the Argentine newspaper Infobae):

The so-called “Lavo Jato” investigation into bribery and money laundering at Brazil’s state-owned oil company Petrobras led to the biggest transnational bribery settlement in history: In December 2016, the Brazilian construction conglomerate Odebrecht reached a settlement with law enforcement authorities in the United States, Brazil, and Switzerland; in exchange for its guilty plea, Odebrecht and its affiliate Braskem agreed to pay the three countries a total of $3.5 billion, of which the first firm alone will pay $2.6 billion. (Odebrecht agreed that the total criminal penalty amounts to $4.5 billion, but the final number will be determined according to its ability to pay, though it will be no less than $2.6 billion.) According to the agreement, Brazil will get 80 per cent of the penalty, while the United States and Switzerland will get 10 per cent each.

Some hope that the Odebrecht settlement will provide a boost to anticorruption investigations in other countries. After all, in the settlement documents, the firm acknowledged to having made illegal payments worth $788 million between 2001 and 2016, not only in Brazil, but in a dozen countries including Angola, Argentina, Colombia, Mexico, and Venezuela. In Argentina specifically, Odebrecht admitted that between 2007 and 2014, in three separate infrastructure projects, it paid intermediaries a total of $35 million knowing that they would be partially transferred to government officials. These criminal practices earned the company a $278 million benefit—a return on “investment” of over 694% (the highest among all the recipient countries). Will these revelations have significant consequences for the prosecution of corruption cases in Argentina?

The answer is probably no, at least not in the short term. Continue reading →

The Aid-Corruption Paradox: How Should the U.S. Allocate Foreign Aid?

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The United States spends about $34 billion annually on foreign aid, frequently to countries that have abysmal corruption track records (see the exact allocations here). Although a portion of that money, almost $6 billion, goes to humanitarian aid, the remainder is intended for development purposes. There has been a great deal of discussion about whether the United States should continue giving this aid, exemplified by the debate between Jeffrey Sachs and William Easterly: Professor Sachs argues that the West can eliminate African poverty if it increases the amount of aid, while Professor Easterly insists that foreign aid thus far has not only been ineffective, but has actually caused greater harm to aid-receiving countries, in part due to corruption. Easterly-like skepticism of foreign aid due to corruption (a topic that has been discussed previously on this blog) seems to have permeated public opinion, resulting in what has been labeled “aid fatigue.” Such fatigue endangers the foreign aid system, as taxpayer support is necessary if the U.S. hopes to continue or increase its aid programs.

Unfortunately, choosing to withhold aid from corrupt countries altogether would be to deny aid from the majority of the world’s poorest countries. Corruption and poverty are correlated, resulting in an “aid-corruption paradox”: often the countries that are in the greatest need of foreign aid also have extremely corrupt governments. Thus there will inevitably be a trade-off when giving development aid: either we will be ignoring the countries in greatest need, or we will give to those countries but accept that a portion of the funds may not serve their intended purposes. How then should countries such as the United States determine where to allocate their development aid? Continue reading →

Guest Post: The US and Afghanistan Need a New, Long-Term Anticorruption Strategy

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Ahmad Shah Katawazai, Defense Liaison at the Embassy of Afghanistan to the United States, contributes the following guest post:

President-elect Trump has declared that he will stop American taxpayers’ money from being squandered abroad. This position poses a threat to a continued US presence in Afghanistan, in light of Afghanistan’s endemic corruption. Retired Lt. Gen. Michael Flynn, President-Elect Trump’s pick to be National Security Advisor, has been arguing from a long time that abetting corrupt officials–“backing thugs”–would tarnish the U.S. military’s reputation. Thus Trump might threaten Afghan officials that the US will cut off foreign aid if the Afghan government fails to crack down on corruption.

The U.S.-led coalition mission in Afghanistan laid the foundations for systemic corruption right from the start of the war in 2001. The U.S. provided millions of dollars in cash to the so-called warlords, as well as opium and arms smugglers. These warlords and criminals needed to protect themselves, and they found that the best way to do so was to secure high-level governmental positions. It is these people who are mainly responsible for running the mafia-style corruption machine in Afghanistan.

Yet Western policymakers neglected this problem, largely because they were focusing more on security as their top priority. What these policymakers failed to grasp was the fact that corruption could turn into a serious security threat in Afghanistan. For too long the focus was solely on fighting the insurgents, but corruption undermined this fight by fueling grievances against the Afghan government and the West. Corruption, including the diversion of Afghan resources and donor aid for the private gain of the political elite, impoverished and alienated the common people. Public anger over massive graft and corruption in the country turned people against the government and the West, thus strengthening the ranks of Taliban. Moreover, according to the Special Inspector General for Afghanistan Reconstruction (SIGAR)‘s recent report, “U.S. money was flowing to the insurgency via corruption.” Corruption in Afghanistan cuts across all aspects of the society, with 90% of Afghans saying that corruption is a problem in their daily lives, and this endemic corruption threatens the legitimacy of Afghanistan’s government.

What has been achieved in the past 15 years in Afghanistan—at the cost of billions of dollars and the sacrifices of thousands of lives—today remains at jeopardy. The country is in a fragile and vulnerable position. Yet it would be shortsighted for the US to simply disengage, or threaten to cut off aid if the Afghan government fails to crack down sufficiently. What is needed both from the Afghan government and the new U.S. administration is a unified, long-term, practical, results-oriented strategy that could produce solid outcomes. It would be wise for the Trump administration to come up with such a strategy. Afghanistan should remain a priority because of its geo-strategic location and an important U.S. ally in the region. Given the existing circumstances and the need to bolster Afghanistan’s security and economy, and to prevent the country from becoming a safe haven for terrorists and insurgents, a long-term commitment and a coherent strategy to get corruption under control would be in the interests of both the U.S. and Afghan governments.

How Much Should FCPA Hawks Worry About Trump’s Pick for SEC Chair?

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Every time I write about the impact that the Trump Administration will have on FCPA enforcement, I’m reminded of the old joke about the actor hired to play the gravedigger in a production of Hamlet: When his wife asks what the play is about, he replies, “Well, it’s about this gravedigger, who meets a prince….” Even if we limit our focus to corruption-related issues, FCPA enforcement might not crack the top-5 in terms of high-priority concerns in the Trump Administration. Nonetheless, since the FCPA is one of the things I follow, and one of the things that a big chunk of the US anticorruption community spends a lot of time thinking about, I suppose it’s worth continuing to comment on this issue from time to time.

As regular GAB readers likely know, I’m both something of an “FCPA Hawk” (see here and here), and something of a pessimist when it comes to the likely consequences of a Trump presidency for FCPA enforcement (see here and here). Now that we know President-Elect Trump’s picks to head the two agencies responsible for FCPA enforcement—the Department of Justice and the Securities & Exchange Commission—how much should FCPA Hawks like me worry that these appointees will significantly scale back and/or politicize FCPA enforcement efforts?

The confirmation hearings for Jeff Sessions, Trump’s nominee for Attorney General, are going on today, and for now I don’t have much to say about how his appointment might impact FCPA enforcement. (With respect to the DOJ, I’m actually much more interested in, and concerned about, who’s appointed to head the DOJ’s Criminal Division and the Fraud Section.) Let me instead say a few words about Trump’s pick for SEC Chair, Jay Clayton, currently a partner at Sullivan & Cromwell, a prestigious US law firm.

There’s already been quite a bit of commentary about the Clayton pick, both generally and with respect to the FCPA specifically. I’ll confess right up front that I know very little about Mr. Clayton; I’d never heard of him before Trump picked him for SEC Chair, and I haven’t yet had time to do any detailed research. Based solely on preliminary media reports and some of the discussion that’s already happened, I’d say there’s (1) at least one good reason that FCPA Hawks should be concerned about the choice; (2) at least one not-good reason that some FCPA Hawks (and others) are concerned about the choice; and (3) at least one reason to be maybe cautiously optimistic, or at least relieved. Let me touch on each in turn: Continue reading →

Reducing Corruption in the Use of Development Aid: The Payment by Results Model

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Corrupt diversion of development aid in recipient countries affects both the efficacy of the intended development programs and the willingness to supply aid in donor countries. Mismanagement of development funds has spurred debate over the ability of our current aid models to achieve development goals (improved healthcare, poverty alleviation, etc.). Many possible solutions for reducing corruption’s effect on development have been tested over the years with varying degrees of success. Various approaches have been tried, including conditioning aid or loans on “good governance” policy reforms, allocating development aid to local governments or local NGOs rather than national institutions, improving oversight and tracking of aid money, and supplying loans exclusively to countries that already have relatively favorable corruption scores (called performance-based lending). Each of these models has its own limitations: Conditionality is often viewed as an affront to sovereignty and has not been terribly effective. The local approach does not address governance issues, and local actors have not always proved to be less corrupt. Oversight of funds is important but costly and imperfect. Performance-based lending seems to leave behind many poor countries that cannot jump the corruption “hurdle.”

In searching for alternative models for distributing aid in light of the aid-corruption paradox, some donors have turned to yet another approach: payments by results (PbR). PbR has been supported by the Center for Global Development (see here and here) and has gained significant traction in the past two years by bilateral donors, such as the UK and Norway, and multilateral donors, such as the World Bank. The basic premise of PbR is that payment to the recipient depends on achieved results. The donor and recipient first define the desired outcomes (e.g., increased TB vaccinations, construction of an infrastructure project, etc.) and determine the amount that the donor will give once the desired outcome is met. The donor may provide some money up front to implement the program, but the rest of the payment is contingent upon performance: The recipient carries out the project independently, the donor measures the results, and, if the results meet the agreed-upon objective, the donor releases the remaining funds. This approach stands in contrast to the traditional input model, in which a donor gives the recipient money for inputs and provides a detailed action plan along with significant oversight for achieving results. Continue reading →

Cash Crunch: How Will India’s Supreme Court Respond to Modi’s Radical Move?

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Last November 8th, the same day the United States elected a kleptocrat to its highest office, an executive on the other side of the world—Indian Prime Minister Narendra Modi—launched what Larry Summers called “the most sweeping change in currency policy that has occurred anywhere in the world for decades.” Prime Minister Modi’s surprise “demonetization” drive gave citizens fifty days to exchange all 500 and 1000 rupee notes (valued at about 8 and 15 USD respectively). Modi’s radical move, which will remove approximately 86% of all currency in circulation, is an attempt to combat endemic petty corruption, money laundering, terrorist financing, and tax   evasion (only 2% of Indians pay income tax). Prime Minister Modi was elected on an anticorruption platform in 2014, and pledged during his campaign to target hidden cash (so-called “black money”). Yet the demonetization campaign came as a surprise. Indeed, it probably had to be a surprise, lest those hiding fortunes in cash would have been able to prepare for the policy change.

While the Indian public generally supports aggressive anticorruption efforts, it would be hard to exaggerate the disruption resulting from demonetization. The real estate and wedding industries run largely on cash, as do most small businesses. And the demonetization program has hit regular citizens hard: People have been waiting in lines for hours to exchange their cash, which can be especially difficult for the four-fifths of women who don’t have a bank account. In the short term, consumption, the stock market, and growth forecasts have all plummeted and the agricultural sector is expected to suffer as well. Prime Minister Modi acknowledged the campaign would cause pain for many honest people, but believed it was worth it, stating that black money and “corruption are the biggest obstacles in eradicating poverty.” (Since then, the official justification for the campaign appears to have shifted to an attack on the cash economy as a whole, rather than a campaign against black money specifically.)

The fate of the demonetization program now lies with India’s judiciary: Continue reading →

Guest Post: Corporate or Individual Liability? Converging Approaches to Fighting Corruption

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GAB is delighted to welcome back Gönenç Gürkaynak (Managing Partner at ELIG Attorneys-at-Law in Istanbul and 2015 Co-Chair of the B20 Anti-Corruption Task Force), who, along with his colleagues Ç. Olgu Kama (ELIG partner and B20 Anti-Corruption Task Force Deputy Co-Chair) and Burcu Ergün (ELIG associate), contributes the following guest post:

Combating international corruption has come a long way in the last decade. More and more jurisdictions are adapting and updating their legal systems in an effort to eradicate impunity for corruption crimes. Yet an important question persists: Who should be held primarily liable for corruption crimes, the individual or the company? The US and European countries have traditionally provided diverging answers to this question, but there now seems to be some evidence of an emerging convergence, though a consensus is yet to be reached.

In the United States—the pioneering legal system in terms of fighting international corruption—although individuals can be charged with violations of the Foreign Corrupt Practices Act (FCPA), it is the companies that are primarily held liable for FCPA violations. The US embraces a broad notion of corporate criminal liability, based on the principle of respondeat superior (the employer is responsible for the acts or omissions of its employees) and the US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have employed this theory as the basis for FCPA settlements with scores of corporations, raking in hundreds of millions of dollars in fines. However, there have been relatively few FCPA cases brought against individuals. This may be due in part to the fact that it is often difficult to attribute a corrupt act to any one specific individual, though it may also be due to the DOJ’s and the SEC’s traditional focus on going after the “deep pockets” of the corporations that come under their scrutiny.

In contrast to the US, the focus of criminal law in continental European systems has typically been on the culpability of individuals; thus, the introduction of the concept of “corporate criminal liability” is a relatively new development. Traditionally, the continental European systems have taken the view that criminal punishment can only be imposed on grounds of personal culpability, and that organizations cannot be held liable under criminal law (societas delinquere non potest). To that end, some European jurisdictions have preferred imposing administrative liability on corporations for actions that are considered to be administrative (rather than criminal) offenses.

In terms of deterring corrupt acts, a broad notion of corporate criminal liability goes a long way. The willingness of US authorities to impose significant fines on corporations provides powerful incentives for corporations to self-police. Furthermore, the threat of criminal FCPA sanctions—and the associated “moral sanctioning” of criminal liability—may have a more powerful effect on corporations than would similar fines imposed as administrative sanctions. On the other hand, the threat of corporate criminal liability is likely not sufficient, on its own, to foster a compliance culture within an organization. In a legal environment in which individuals face a credible threat of prosecution for their personal roles in organizational corruption, corporations could maintain a stronger culture of compliance as the employees themselves would be legally responsible for their misconduct and therefore less likely to engage in (or turn a blind eye to) corrupt practices.

Even though significant differences remain among jurisdictions, it is an encouraging development that there now seems to be gradually converging views regarding corporate criminal liability among these different legal systems. Continue reading →

Donald Trump: Ethics Champion?

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Seeing the President-elect as a champion of ethics would be one way to interpret the comedic events of the past 36 hours in the upside-down world of what was once termed the capital of the free world.  The comedy opened Monday evening, January 2, with Republican members of the incoming House of Representatives voting (in secret and without prior notice) to curb the Office of Congressional Ethics, the independent body which hears allegations of ethical transgressions by House members and staff.  The vote met with immediate and sustained outrage by citizens, media commentators, and government reform groups.  Criticism was also voiced from a source many found unlikely.  In a pair of messages (here and here) Tuesday morning President-elect Trump tweeted that:

“With all that Congress has to work on, do they really have to make the weakening of the Independent Ethics Watchdog, as unfair as it may be, their number one act and priority. Focus on tax reform, healthcare and so many other things of far greater importance! #DTS”

Within hours of the Trump tweets, the comedy ended.  Chastened, on-the-defensive, with even their allies questioning their political competence, House Republicans reversed course and left the congressional ethics office’s powers intact.      Continue reading →

Specialized Anticorruption Courts: An Overview

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I’m going to take a quick break from agonizing about the impending Trumpocalypse to share some news about a new U4 Issue Paper, which I coauthored with Sofie Schütte, on specialized anticorruption courts in countries around the world. (This paper builds on an earlier series of case studies.) Here’s the abstract:

Frustration with the capacity of the ordinary machinery of justice to deal adequately with corruption has prompted many countries to develop specialised anti-corruption institutions. While anti-corruption agencies with investigative and/or prosecutorial powers have attracted more attention, judicial specialisation is an increasingly common feature of national anti-corruption reform strategies. The most common argument for the creation of special anti-corruption courts is the need for greater efficiency in resolving corruption cases promptly and the associated need to signal to various domestic and international audiences that the country takes the fight against corruption seriously. In some countries, concerns about the ability of the ordinary courts to handle corruption cases impartially, and without being corrupted themselves, have also played an important role in the decision to create special anti-corruption courts. Existing specialised anti-corruption courts differ along a number of dimensions, including their size, their place in the judicial hierarchy, mechanisms for selection and removal of judges, the substantive scope of the courts’ jurisdiction, trial and appellate procedures, and their relationship with anti-corruption prosecutors. These institutional design choices imply a number of difficult trade-offs: while there are no definitive “best practices” for specialised anti-corruption courts, existing models and experience may provide some guidance to reformers considering similar institutions. They must decide whether such a court should adopt procedures that are substantially different from those of other criminal courts, and/or special provisions for the selection, removal, or working conditions of the anti-corruption court judges.