OECD Nations Should Criminalize the Unexplained Wealth of Politically Exposed Persons

Today’s guest post is from Hamid Sharif, Managing Director, Compliance, Effectiveness and Integrity, for the Asian Infrastructure Investment Bank.  Writing in his personal capacity, he urges OECD countries to enact laws like that giving the British government the power to demand public officials from another nation explain how they acquired assets held in Britain.  If the official cannot show the assets were purchased with honestly-obtained monies, they are confiscated.  The laws Mr. Sharif advocates would provide that if the official were from a developing country, the seized assets would go to development projects in the victim state.  The views expressed in no way reflect or represent those of AIIB, its Board, or Management.

Since 1996, when then World Bank President James Wolfensohn condemned corruption as a “cancer” which stood “as a major barrier to sound and equitable development,” combating corruption has figured prominently on the international development agenda. In 1997, the OECD nations agreed to make it a crime to bribe a foreign public official, and in the early 2000s the World Bank, the African Development Bank, and the other multilateral development banks (MDBs) introduced corruption prevention policies into their procurement rules, adopted anti-corruption policies, established procedures for investigating corruption in their operations, and instituted systems for sanctioning firms and individuals found to have engaged corruption. Beyond ring-fencing their own projects against corruption, both the MDBs and bilateral development agencies have worked to strengthen institutions to prevent corruption in developing countries. Civil society in both developing and developed states has also stepped up its efforts to fight corruption.

Both the MDBs and bilateral donors have urged developing nations to operate with greater transparency and accountability and funded projects to strengthen anticorruption agencies, judiciaries, and other domestic institutions responsible for combatting corruption. Today there is far more information on corruption and how to fight it available to citizens of the developing world than 20 years ago. The result has been a multitude of reforms aimed at preventing or deterring corruption, from the spread of right to information laws to more effective anticorruption laws and agencies.

Despite this progress, in most developing countries institutions are not yet strong enough to investigate and successfully prosecute the corrupt acts of senior government officials whether elected or appointed, individuals who in antimoney laundering parlance are, along with their relatives and close associates termed “politically exposed persons” or “PEPs.”  In many countries, investigating and prosecution agencies as well as courts lack the independence, security, and institutional capacity to instill public confidence in their ability to deal with high-level political corruption perpetrated by PEPs.

One consequence is that the proceeds of a significant amount of developing state PEP-corruption is still destined for developed countries. As the Marcos example from the Philippines illustrates, recovery of such proceeds of corruption remains a challenge even though there is now better international collaboration, especially following the adoption of the UN Convention Against Corruption.

While civil society, including journalists, are playing a significant role in the fight against corruption, the last few years have seen shrinking of space for developing country anticorruption advocates. Indeed, the murder of journalists reporting on corruption has thrown a chill over important efforts to expose corruption. Civil society also remains starved of the resources required to gather evidence for successful prosecution.

Weak national institutions in developing countries and the slow pace of international collaboration to recover looted wealth from developed countries leaves citizens of developing countries without effective remedies to recover such wealth and punish the wrongdoers. These conditions also create a culture of impunity, hopelessness, and further plunder.

It will take decades for local institutions to develop the institutional capacity and trust to curb corruption in developing countries. The plunder of national wealth through corruption in many developing countries will thus likely continue for decades and rob generations of more effective service delivery and relief from abject poverty. We clearly need to develop more effective tools in the fight against corruption.

Stashing stolen wealth in developed countries creates a dilemma for policy makers in these countries. Some may be reluctant to take stern measures against flow of such illicit funds for the fear that this may affect all inward flow of funds. Any unintended curbing of legitimate funds would adversely affect these counties. Yet preventing the flow of illicit funds creates asset bubbles that present dangers to host economies. Owners of such funds further present a risk that they may engage in illicit behavior in these countries too.

Deterring corruption in developing countries, especially by plugging the hole that allows such funds to be ferreted away in developed jurisdictions, is in the interest of the developed countries. Corruption undermines legitimate investment in developing countries and thereby deprives these countries of jobs so desperately needed to lift people out of poverty. It also seriously undercuts delivery of quality infrastructure and social services. As institutions are corroded through corruption, citizens trust in the state falls and they look for alternatives abroad.

The current exodus of hundreds of thousands of people to reach developed jurisdictions, even at immense personal risk, reflects this hopelessness. Developed countries make this problem worse by allowing developing nation PEPs to bring stolen wealth into their countries, facilitating the villainous cycle of corruption in developing countries. This undercuts the development agenda of many developed countries that aspire to curb corruption and build the institutions crucial to economic prosperity. It is, therefore, time to take timely steps to curb the in-flow of illicit funds into developed jurisdictions by leveraging the institutional capacity of their criminal justice systems and the power of civil society to tackle this menace. The sums identified and recovered by developed countries could be returned to the countries from which they were looted and earmarked for development projects or programs, including capacity building of institutions in developing countries. Expending resources from budgets earmarked for development to facilitate recovery of looted money and its repatriation for development should become a part of the development agenda of developed countries.

The Proposal

Modeled on the U.K law allowing the confiscation of unexplained wealth (described on this blog here and here), I propose that that the world’s wealthiest nations, all OECD members, criminalize the holding of unexplained wealth in their jurisdiction by PEPs from a country outside of their jurisdiction.  Apart from punishing such PEPs, they should recover the unexplained wealth and return it to the countries from where it was stolen and earmark it for development. The presence of stolen wealth in their countries presents an excellent opportunity for the recovery of such wealth and its use for development expenditures agreed with the government of the country from where such wealth was looted.

I propose a law that would also allow citizens in developed countries as well as those from the PEP’s country to bring a case against the criminal justice agencies charged with the investigation and prosecution of such crimes if timely action is not taken to investigate and confiscate illicit wealth. This could prove to be a powerful tool to catalyze the prosecution of such crimes and would incentivize the building of powerful cross-country anticorruption citizen networks. This is important given the slow progress in the UK in implementing the law concerning unexplained wealth. Modest resources from development budgets can be made available to empower civil society.

The proposal is premised on the following:

  • Developed jurisdictions have better institutions that can unearth these assets, especially as these are in their jurisdiction.
  • Courts in developed jurisdictions have greater capacity.
  • Development agencies of the developed counties can support prosecution of such crimes by providing upfront resources to their investigation and prosecution agencies so that these crimes are given priority.
  • Development funds can also be made available by the development agencies in developed countries to civil society in their countries to assist them to link up with and support civil society groups in developing countries to identify PEPs that may have brought wealth to developing countries.

The scheme should also provide for a process through which the development agency of the developed country reaches an agreement with the developing country on use of any recovered funds for development projects.

The effort could be based on a treaty among OECD nations. Eventually or even simultaneously large emerging countries, especially the BRICS and emerging financial centers such as Singapore, Dubai and Hong Kong, should also become members to such a treaty as the corrupt are likely to transfer wealth to their economies after the proposed treaty comes into force.

Modalities

On the country-level, civil society could lobby for the treaty and national laws to implement it. At the international level, a campaign for adoption of such laws could be launched. This could be an important objective of the next International Anticorruption Conference in Korea in 2020. Prior to, or just after that, the OECD could be pressed to work on developing an International Treaty for Confiscation of Unexplained Wealth of Politically Affiliated Persons. Such a treaty would be a logical complement to the OECD Antibribery Convention, and by criminalizing the holding of unexplained wealth in their jurisdictions, OECD nations would send a powerful message to corrupt officials that proceeds of corruption are not welcome in their country.

The treaty should provide for sufficient resources to investigating and prosecuting agencies in these countries to enforce the new laws. Development agencies in these countries should be empowered to support these agencies as well as, as mentioned above, civil society organizations. A monitoring mechanism modeled on the OECD Antibribery Convention should be established.

The recommended law would avoid one pitfall associated with the international criminal court (ICC). Some countries, notably the United States, firmly oppose submitting to the jurisdiction the ICC for fear its personnel would be exposed to unfounded, politicized prosecutions. As the laws would criminalize only unexplained wealth held in a treaty partner’s jurisdiction, that should eliminate the concerns of the U.S. government and any other government worried about an overly broad reach. Only the property of an American PEP held in the treaty partner’s country would be at risk, and were it found to have been acquired with money from corrupt activities, it would be returned to the U.S. government.

Despite the efforts of the international development community, corruption continues to be, as Jim Wolfensohn put it so well in 1996, a “cancer” that creates “a major barrier to sound and equitable development.” A concerted effort by the OECD nations to find and return wealth hidden in the jurisdictions by the political elites of developing nations would an important step forward in dismantling the barrier.

2 thoughts on “OECD Nations Should Criminalize the Unexplained Wealth of Politically Exposed Persons

  1. I am from a country that has criminalized illicit enrichment as well – Lithuania passed relevant amendments of its Criminal Code in 2010. Therefore, the practitioners and academics in the country had enough time to discuss it. Over time, quite a few prominent criminal law experts have expressed concerns that such a law is against the fundamental principles of criminal law (and potentially even the Constitution). The argumentation is complex, but the essence is that criminal law should not allow sentencing people for not being able to defend themselves (i.e. collect and present the documents explaining the sources of wealth). According to the critics, it goes against the fundamental principles of criminal law, which declare that the state should collect evidence about a crime beyond reasonable doubt, instead of casting a doubt (that an asset was potentially acquired from illegal sources of wealth) and then requesting the accused to defend himself / herself. To the best of my knowledge, this criticism is not unique to Lithuania.

    I have mixed feelings about the law. I have seen it bring positive changes, but at the same time I think I understand the criticism.

    Therefore, I would like to see more proposals to criminalize illicit enrichment addressing this specific criticism. I believe there are points to be made to address this and it would benefit the proposal itself.

  2. This article looks like a pray to GOD, or a teacher explaining the students what should be for the wealthy persons who are blackers.
    And it also conveying that the anti-corruption movement so helpless without corrupt sponsors who are the culprits.

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