Monthly Archives: March 2018

The Missing Piece in UK’s Unexplained Wealth Order Mechanism

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All of a sudden politicians, public figures, and oligarchs – such as Russian First Deputy Prime Minister Ignor Shuvalov and former Nigerian Oil Minister Diezani Alison-Madueke – have to explain how they are able to afford the swanky apartments in London’s posh Mayfair neighborhood on their modest official salaries. This is due to the UK’s new Criminal Finances Act (CFA), which came into force in February and is meant to crack down on the flow of dirty money into the UK—a flow that has given London in particular a reputation as a “Death Star” of global kleptocracy. Most notably, the CFA adds a new investigative tool, the Unexplained Wealth Order (UWO), into the civil recovery regime. Originally proposed by Transparency International UK a few years ago, a UWO is an order granted by the High Court in cases where there are reasonable grounds to believe (1) the respondent owns some property worth more than £50,000; (2) either the respondent is a politically exposed person (PEP), or the respondent or a person connected to the respondent has been involved in a serious crime; and (3) respondent’s lawfully earned income would not be sufficient to obtain the property in question. If there are reasonable grounds to believe that each of these three conditions is satisfied, the High Court may issue an order requiring the respondent to provide information regarding the nature of her interests in the property in question and how she was able to lawfully obtained such property. If the respondent is unable to provide a reasonable explanation, the UK Government can subsequently initiate the civil forfeiture process and seize these assets.

Lauded as “a powerful new weapon in[] the anti-corruption arsenal,” UWOs are expected to be particularly helpful when there is no conviction against the respondents in their countries of origin, or when efforts to get a corrupt foreign government to cooperate with investigations have led to naught. Moreover, even though UWOs are a civil enforcement mechanism, the information they uncover may be useful in pursuing criminal investigations, and if respondents recklessly or knowingly make false statements or mislead the enforcement body in responding to an order, they may be criminally prosecuted. There’s already some evidence that the new law will make a difference: In March, a month after the promulgation of the CFA, two UWOs were issued requiring a tycoon in Central Asia to explain how he is able to afford real properties in the UK totaling £22 million.

Yet notwithstanding the enthusiasm for UWOs in some quarters, the effectiveness of the UFO mechanism is likely to be hampered by an important missing piece in the UK’s anticorruption framework, namely an effective means for ensuring genuine transparency regarding the beneficial ownership of real and movable property. Without knowing who really owns what, the new law is unlikely to realize its full potential, and indeed may not make much difference outside of a handful of cases involving particularly careless criminals.

Continue reading →

Guest Post: Tackling Health Sector Corruption—Five Lessons from Afghanistan

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GAB welcomes back Mark Pyman, Senior Fellow at the London Institute for Statecraft, who previously served as Commissioner of the Afghanistan Joint Independent Anti-Corruption Monitoring and Evaluation Committee (MEC). He contributes this post together with Hussain Rezai, a researcher at MEC.

Despite the horror stories, interesting things are happening on tackling corruption in Afghanistan. Besides the progress (discussed in previous posts) on education and procurement, a major anticorruption initiative has been underway in the Afghanistan health system since June 2016. The initiative, which is another surprising (if qualified) anticorruption success story in a very difficult environment, offers five lessons for anticorruption practitioners and health ministers in other countries. Continue reading →

Report on the OECD’s 6th Global Anti-Corruption and Integrity Forum

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For the sixth year running the Organization for Economic and Cooperation is hosting a two-day conference on ethics and corruption.  This year’s theme is how corruption has eroded trust in government and is helping advance what Secretary General Gurria termed in his opening remarks the three destructive “isms” haunting the world today: populism, nationalism, and protectionism.

The organization’s members are 35 of the world’ s richest nations (all save Russia and the PRC), and despite extraordinary levels of wealth by any historical measure, and recent upbeat economic news, citizens across the 35 have soured on their governments.  Trust in government across the 35 is at a record low while cynicism and distrust in elected leaders is at an all-time high, and though the Secretary General put much of the blame for the current funk on the 2008 economic crisis and the still uneven and unbalanced recovery, corruption, he stressed, has done its part.  Revelations of wrong-doing at the highest levels of government coupled with the petty corruption that frustrates the delivery of basic government services has only deepened citizens’ suspicions in their government.  If OECD member states are to win back citizens’ confidence, and avoid those destructive “isms,” they cannot, he argued, ignore the corruption question.

For those unable to fund a trip to Paris or with a sponsor or client willing to foot the bill, the conference home page with the agenda is here.  Four things I found useful on day one: Continue reading →

More on the 2017 Corruption Perceptions Index, and the Relationship Between Media/Civil Society Freedom and Corruption

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The rest of the anticorruption commentariat (and the mainstream media) may have already moved on from the publication of Transparency International’s 2017 Corruption Perception Index (CPI), but I wanted to follow up on my other posts from earlier this month (here and here) to discuss one other aspect of the new CPI. The general overview, press release, and other supporting materials that accompanied the latest CPI stress as their main theme the importance of a free press and a robust, independent civil society in the fight against corruption. As TI states succinctly in the overview page for the 2017 CPI, “[A]nalysis of the [CPI] results indicates that countries with the least protection for press and non-governmental organisations (NGOs) also tend to have the worst rates of corruption.” And from this observation, TI argues that in order to make progress in the fight against corruption, governments should “do more to encourage free speech, independent media, political dissent and an open an engaged civil society,” and should “minimize regulations on media … and ensure that journalists can work without fear of repression or violence.” (TI also suggests that international donors should consider press freedom relevant to development aid or access to international organizations, a provocative suggestion that deserves fuller exploration elsewhere.)

Speaking in broad terms, I agree with TI’s position, and I’m heartened to see TI making an effort to use the publicity associated with the release of the CPI to push for concrete improvements on a particular area of importance, rather than simply stressing the bad effects of corruption (such as the alleged adverse impacts on inequality and poverty), or devoting undue attention to (statistically meaningless) movements in country scores from previous years. Whether TI succeeded in leveraging the CPI’s publicity into more attention to the freedom of the media and civil society is another story, but the effort is commendable.

That said, I spent a bit of time digging into the supporting research documents that TI provided on this issue, and I find myself in the uncomfortable position of finding the proffered evidentiary basis for the link between a free press/civil society and progress in the fight against corruption problematic, to put it mildly—even though my own reading of the larger academic literature on the topic makes me think the ultimate conclusion is likely correct, at least in broad terms. That latter fact, coupled with my recognition that the materials I’m evaluating are advocacy documents rather than academic research papers, makes me reluctant to criticize too harshly. Nonetheless, on the logic that it’s important to hold even our friends and allies accountable, and that in the long term promoting more careful and rigorous analysis will produce both more suitable policy prescriptions and better advocacy, I’m going to lay out my main difficulties with TI’s data analysis on the press freedom-corruption connection: Continue reading →

Are Jury Trials the Solution to Corruption in Armenian Courts?

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Judicial corruption should be a priority for anticorruption efforts in nearly every country, since so much anticorruption work relies on the judiciary. Yet many countries struggle to address judicial corruption. Armenia is one such country, as its citizens well know. In 2015, Transparency International reported that “70 percent of citizens in Armenia do not consider the judiciary free from influence.” The practice of bribery is so open and notorious that in 2013, Armenia’s human rights ombudsman published a “price list” that judges used to set the price required to obtain various outcomes. One official estimated that most bribes add up to 10% of the cost of the lawsuit, but could be higher for higher-level courts. And in 2017, four judges were arrested for taking bribes that ranged between $1,200 and $30,000. Corruption is not the only problem with Armenian courts—Armenia’s judiciary is weak and generally subservient to the executive branch, and the courts often struggle with institutional competence and public distrust—but all of these problems are compounded by corruption.

Some advocates, including the American Bar Association, have proposed that one solution to judicial corruption in Armenia is to introduce jury trials. In fact, the first post-Soviet Armenian constitution explicitly allowed jury trials, though in the end no jury trials were ever held due to the absence of implementing legislation and lack of political will. When the constitution was amended in 2005, the language allowing jury trials was removed. Nonetheless, there has been some recent public debate in Armenia about whether introducing jury trials would be a good idea (see, for example, here and here).

Could juries be part of the solution to judicial corruption? There are several reasons to think juries can fight judicial corruption in Armenia, and elsewhere as well:

Continue reading →

India’s Political Party Finance Reform Falls Short of Ensuring Complete Transparency—But Is Still a Step in the Right Direction

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On March 1, 2018, India began its latest effort to clean up the financing of political parties and elections. This efforts involves the sale of so-called “electoral bonds” at select state banks across the country. The term “electoral bonds” is a misnomer, for these “bonds” are not linked to elections, nor do they involve paying back a loan or yielding interest. Rather, these instruments are simply a new means to facilitate financial donations to political parties, and are intended to displace the undocumented cash transfers that form the lifeblood of Indian politics. As India’s Finance Minister argued, this cash-based system causes two problems: First, “unclean money from unidentifiable sources” facilitates corruption and money laundering. Second, the reliance on cash allows parties to underreport both their budgets and spending. These concerns led the government last year to reduce the limit on anonymous cash donations from $300 to $30. Electoral bonds intend to further disrupt the system and achieve at least some increases in transparency of political spending.

Announcement of the new system has generated significant commentary, with the few admirers crowded out by the numerous detractors (see, for example, here, here, and here). The main focus of criticism is the new scheme’s guarantee of donor anonymity: Electoral bonds will carry no name and nobody, other than the bank and donor, can know who made the donation unless the donor willingly discloses her identity. The government has defended the anonymity guarantee as a way to prevent reprisals against donors, but critics understandably argue that the lack of transparency means that much political financing will continue to come from “unidentifiable sources,” allowing big business to keep lobbing money in exchange for policy favors while the public remains in the dark. (Moreover, the government’s emphasis on fear of reprisals as the rationale for anonymity suggests the government is unduly concerned with protecting the only class of donors for whom this would be a significant concern, namely large capitalists.) The electoral bond scheme has thus been painted as a move that potentially strengthens the crony capitalism responsible for India’s dire economic situation.

This strong negative reaction to the electoral bond scheme is, in my view, overwrought. True, the new policy does not solve the deep and serious problems with political finance in India. But it does have some notable advantages over status quo. Additionally, critics of the electoral bond system sometimes seem to treat donor transparency as an unalloyed good, when in fact donor transparency may have some drawbacks as well (even if one doesn’t take too seriously the government’s official line on political reprisals). Let me elaborate on each of these points: Continue reading →

Guest Post: The Financial Secrecy Index Identifies the Countries Most Responsible for the Illicit Financial Flows that Facilitate Global Corruption

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Andres Knobel, an analyst at the Tax Justice Network, contributes today’s guest post:

Illicit financial flows have dreadful consequences across the world, not least because they facilitate kleptocracy and other forms of grand corruption. A crucial step toward addressing this issue is identifying those jurisdictions that are the most significant contributors to the problem, and offering specific, concrete recommendations for how they can improve. The Tax Justice Network aims to help do this through its Financial Secrecy Index (FSI), the latest edition of which was published this last January. The 2018 FSI includes a ranking of 112 countries and territories according to their global impact of their financial secrecy, measured by balancing the level of secrecy and the country’s weight in the international financial sector.

The FSI differs from standard “tax haven” lists in that it does not purport to single out a handful of jurisdictions for special opprobrium. Such lists tend to imply that only a few jurisdictions, often small countries, are responsible for all of the world’s illicit financial flows. The 2018 FSI, by contrast, covers 112 jurisdictions, and the next assessment will analyze 130. (The objective is to eventually cover all countries and territories.) Moreover, the FSI ranks countries not solely on the degree of financial secrecy that they allow, but rather on a combination of the degree of financial secrecy (the “Secrecy Score”) and the actual use of a jurisdiction’s financial services (the “Global Scale Weight”), in order to rank countries according to their overall contribution to the problem of illicit financial flows. In other words, the FSI ranking is not necessarily ranking the most secretive countries at the top; rather, the FSI identifies the biggest “problem countries”—those that have financial systems that are both secretive (even if not the most secretive) and that are large and used frequently by non-residents. According to this measure, the ten jurisdictions that make the largest contribution to global financial secrecy are (in order starting with the worst contributors): Switzerland, the United States, the Cayman Islands, Hong Kong, Singapore, Luxembourg, Germany, Taiwan, the United Arab Emirates, and Guernsey. These are the jurisdictions that bear the greatest share of responsibility for enabling global illicit financial flows, including those stemming from corruption and tax evasion, and these are therefore the jurisdictions that most urgently need to become more transparent if we are to see real progress in the fight against illicit global financial flows. While all jurisdictions should act to become transparency, starting with these ten jurisdictions would have the most significant impact in the short term.

Interestingly, and perhaps unsurprisingly for those who follow these issues, a “heat map” of the worst offenders on the FSI looks like the inverse of the more familiar heat map showing the countries perceived to be most corrupt, according to Transparency International’s Corruption Perception Index (CPI). One way to interpret this is the following: public officials and their private-sector cronies in the world’s most corrupt countries according to the CPI (such as Yemen, Sudan, Afghanistan, Venezuela, Libya, etc.) very likely take advantage of financial secrecy to hide the proceeds of corruptions in the countries that most contribute to financial secrecy according to the FSI. Put differently, the worst CPI countries depend on jurisdictions like the FSI’s top ten in order to launder the proceeds of illicit activities.

And what should these (and other) jurisdictions do? On this question, it is important to emphasize that the FSI is not just a ranking system. The FSI report also includes in-depth discussions of all relevant loopholes and sources of information related to financial secrecy in each jurisdiction. This enables researchers, government authorities, activists, and financial institutions to obtain relevant information to be used for risk assessment, policy decisions, or to advocate for specific transparency measures. (All these details are available online, for free and in open data format.) And while every country is different, most jurisdictions would do well to implement what the Tax Justice Network refers to as the “ABC of Fiscal Transparency”:

  • Automatic exchange of bank account information with all other countries, especially developing countries, pursuant to the OECD’s Common Reporting Standard;
  • Beneficial ownership registration in a central public register for companies, partnerships, trusts and foundations (for more specific information, see Tax Justice Network publications here, here, here, and here, as well as this recent paper I published with the Inter-American Development Bank) ; and
  • Country-by-Country reporting, where all multinational companies publish this information online.

Protecting the Rights of Countries Victimized by Corruption: the Swiss Approach

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One topic on the agenda at next week’s OECD Integrity Forum is “Settling Foreign Bribery Cases with Non-Trial Resolutions.”  As explained here, a principal reason for a session on settlements is the concern that developing countries are losing out on them.  When the bribe-taker is a developing country official and the bribe-payer employed by a transnational corporation, the case is most often resolved through a settlement in the country where the corporation is headquartered.  And the developing nation’s interests are often ignored.

A notorious example is the bribery of Nigerian officials by the American company Halliburton.  The company settled the case with U.S. authorities for $559 million; years later it settled with Nigeria for $35 million, just over six percent of what the U.S. extracted.  Yet which country suffered the most from the bribery?  And which one is more pressed for resources?

Countries with civil law legal systems offer a solution that common law nations would well advised to consider: allow the victim government to participate as a party to the criminal proceeding with the right to file a claim for damages and indeed to help in gathering evidence for the prosecution.  Swiss law provides one example employed by several countries which have been victimized by corruption.    Continue reading →

Adjusting Corruption Perception Index Scores for National Wealth

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My post two weeks ago discussed Transparency International’s newly-released 2017 Corruption Perceptions Index (CPI), focusing in particular on an old hobby-horse of mine: the hazards of trying to draw substantive conclusions from year-to-year changes in any individual country’s CPI score. Today I want to continue to discuss the 2017 CPI, with attention to a different issue: the relationship between a country’s wealth and its CPI score. It’s no secret that these variables are highly correlated. Indeed, per capita GDP remains the single strongest predictor of a country’s perceived corruption level, leading some critics to suggest that the CPI doesn’t really measure perceived corruption so much as it measures wealth—penalizing poor countries by portraying them as more corrupt, when in fact their corruption may be due more to their poverty than to deficiencies in their cultures, policies, and institutions.

This criticism isn’t entirely fair. Per capita income is a strong predictor of CPI scores, but they’re far from perfectly correlated. Furthermore, even if it’s true that worse (perceived) corruption is in large measure a product of worse economic conditions, that doesn’t mean there’s a problem with the CPI as such, any more than a measure of infant mortality is flawed because it is highly correlated with per capita income. (And of course because corruption may worsen economic outcomes, the correlation between wealth and CPI scores may be a partial reflection of corruption’s impact, though I doubt there are many who think that this relationship is so strong that the causal arrow runs predominantly from corruption to national wealth rather than from national wealth to perceived corruption.)

Yet the critics do have a point: When we look at the CPI results table, we see a lot of very rich countries clustered at the top, and a lot of very poor countries clustered at the bottom. That’s fine for some purposes, but we might also be interested in seeing which countries have notably higher or lower levels of perceived corruption than we would expect, given their per capita incomes. As a crude first cut at looking into this, I merged the 2017 CPI data table with data from the World Bank on 2016 purchasing-power-adjusted per capita GDP. After dropping the countries that appeared in one dataset but not the other, I had a 167 countries. I then ran a simple regression using CPI as the outcome variable and the natural log of per capita GDP as the sole explanatory variable. (I used the natural log partly to reduce the influence of extreme income outliers, and partly on the logic that the impact of GDP on perceived corruption likely declines at very high levels of income. But I admit it’s something of an arbitrary choice and I encourage others who are interested to play around with the data using alternative functional forms and specifications.)

This single variable, ln per capita GDP, explained about half of the total variance in the data (for stats nerds, the R2 value was about 0.51), meaning that while ln per capita GDP is a very powerful explanatory variable, there’s a lot of variation in the CPI that it doesn’t explain. The more interesting question, to my mind, concerns the countries that notably outperform or underperform the CPI score that one would predict given national wealth. To look into this, I simply ranked the 167 countries in my data by the size of the residuals from the simple regression described above. Here are some of the things that I found: Continue reading →

The Tax Cuts and Jobs Act: Corruption by Another Name? Or Just Ordinary Law-Making?

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Last December, the U.S. Congress passed, and President Trump signed, the Tax Cuts and Jobs Act. The debate over this law—characterized as the most “consequential tax legislation in three decades”—and the reaction to its passage was polarized and acrimonious. This is usually the case with tax debates, perhaps especially in the U.S. What was more notable and less typical, though, was the extent to which critics of the Act used the language of corruption to characterize both the Act’s substance and the process through which it was passed. (See here, here, here, and here). For example:

  • At several stages of the process, the votes of key Republican Senators seem to have been secured (some might say “purchased”) with special provisions. In fact, Texas Senator John Cornyn, the majority whip, openly admitted that provisions designed to appeal to individual Republican Senators were included in the final bill in an effort to “cobble together the votes we needed to get this bill passed.” That by itself may not be so unusual, even though many would find it distasteful. But in some cases, the special provisions were not only ones that these Senators favored on ideological grounds, or that would benefit their constituents (and hence the Senators’ re-election hopes); these special provisions also provided substantial personal financial benefits to the holdout Senators. For example, Wisconsin senator Ron Johnson was the first Republican to oppose the bill, on the basis that it would double the gap between corporate tax rates and the rates applicable to individuals receiving income from “pass-through entities”. Ultimately, the bill was amended to accommodate Senator Johnson’s concern by incorporating a 20% tax deduction for such entities. As it happens, Senator Johnson himself has millions of dollars invested in four such entities. Or consider Tennessee Senator Bob Corker, a critic of early versions of the bill who had asserted that he would not approve of adding even “one penny” to the “rapidly growing national debt.” Yet Corker ended up voting for a revised version of the bill that would add over $1 trillion to the deficit. What accounts for the change of heart? Critics point to the fact that the revised bill also included a new tax break that would increase Senator Corker’s personal income by up to $1.2 million every year (dubbed the #CorkerKickback on Twitter). Senator Corker claimed ignorance of how the bill would personally benefit him, though the fact that he reportedly earned a total of more than $8 million of income from the entities that were granted the tax break make this ignorance highly unlikely.
  • And then there’s President Trump. The Tax Cuts and Jobs Act could reduce President Trump’s personal tax bill by tens of millions of dollars. President Trump reportedly earned between $41 million and $68 million of income from 25 pass-through entities (which were granted the new tax break which also benefited Corker). He has not divested, in any meaningful way, from his investments. He has also refused to release his taxes on the pretext that he cannot do so as he is under audit, even though no such rule exists. The passage of a tax bill that confers such enormous benefits on the President seems to many like a form of “legalized corruption.”
  • In addition, Republican Party leaders admitted that passing the Tax Cuts and Jobs Act was necessary to ensure that the party continued to receive funding from its donors, who stood to gain millions of dollars in tax breaks—another quid pro quo of sorts. Indeed, the Republican Party has been unabashedly open about this, with Senator Lindsay Graham stating that if the party failed to push the tax bill through, “financial contributions will stop,” and Congressman Chris Collins justifying his support for the unpopular bill on the grounds that his “donors [were] basically saying, ‘Get this done or don’t ever call me again’.” That may not meet the legal definition of corruption in the United States, but to many voters and commentators it certainly seems corrupt.

Is “corruption” the right way to characterize the unsavory politics of the tax bill? Continue reading →