Are Financial Declaration Systems Creating Opportunities for Corrupt Extortion?

One of the most popular reform measures for combating public corruption is the establishment or strengthening of requirements that public officials regularly file declarations of assets and income sources. Mandatory financial disclosure rules are not exclusively about fighting corruption, of course, but anticorruption is certainly one of their principal justifications. Requiring public officials to formally submit and update income and asset declarations, and attaching meaningful penalties for false or misleading declarations, is thought to help suppress corruption in at least three ways:

  • First, identifying assets and income sources makes it easier to identify, and hopefully to avoid, conflicts of interest.
  • Second, public officials who report suspicious asset growth during their time in office might attract unwanted scrutiny from law enforcement investigators—and also, if the declarations are public, from journalists and activists. Submitting false reports or finding clever ways to hide assets are of course possible, but are costly and risky.
  • Third, precisely because corrupt public officials will often lie on their financial declarations in order to avoid scrutiny, these mandatory disclosure laws can sometimes provide the hook to hold corrupt officials legally or politically accountable even when it is impossible to prove the underlying corruption. We might not be able to nail the corrupt official for bribe-taking or embezzlement, but if we can show that he owns substantial undeclared assets, we can still nail him for lying on his financial declarations.

There are important ongoing debates about the appropriate design of financial disclosure systems, including questions about whether the disclosures should be public or kept confidential, who should be required to submit disclosures (and how often), what sort of information should be required (and at what level of detail), whether and how declarations should be independently verified, the appropriate institution to manage the system, and the appropriate penalties for noncompliance (see also here). And the efficacy of mandatory financial disclosures in reducing corruption is still unsettled (see here, here, here, here, and here). Nevertheless, the basic anticorruption case for some form of mandatory financial disclosure system seems strong. Both domestic anticorruption activists and the international community therefore regularly push for the creation of such systems where they do not already exist, as well as for the strengthening and expansion of existing systems.

While acknowledging the uncertainties and complexities of the issue, I find the basic case for some form of (strong) mandatory financial declaration system persuasive. That said, I’ve recently had some interesting conversations with a couple of experts who have highlighted a potential problem that I confess I hadn’t previously thought about or seen discussed in the published literature: In countries where corruption is widespread and institutional checks are weak, the government agents who administer the financial disclosure system could abuse their power to extort bribes from the public officials who are subject to the declaration requirements.

The crude version of the scenario would look like this: A mid-level public servant submits her financial declaration form to the Ethics Office (the agency, in this example, with responsibility for administering the declaration system). An Ethics Office official gets in touch and says there’s a problem with the declaration. (Maybe the claim is bogus, or maybe there is some technical error or irregularity, a possibility that is heightened when the declaration requirements are complicated.) The declarant protests that the declaration is accurate, or that any mistake is an innocent oversight, but the Ethics Office official warns the declarant that filing a false declaration is a very serious infraction, and hints that resolving the issue will require the start of a long, cumbersome, and disruptive process—maybe something like a full audit—but that maybe there’s a way to make the problem go away…. You get the idea. This form of the extortion is not so different from other familiar forms of petty corruption in the regulatory context—think building inspectors or health inspectors. And of course there’s the closely related worry about corrupt politicization of the office responsible for reviewing financial declarations: Party loyalists get a free pass (or advance warning of any possible problem), while opponents get exacting scrutiny.

I have no idea how serious a problem this is in practice, and so one of the things I’d like to do in this post is to invite readers who may have some insight or experience to weigh in. As I mentioned above, while I’m no expert on financial disclosure systems, I’ve read a fair bit in the literature and hadn’t come across any sustained discussion of corruption within the systems themselves. The two experts I mentioned earlier, who clued me into this issue, both have substantial professional experience in governance and anticorruption reform programs in developing and transition countries, and they gave a couple of specific examples where they’d seen something like what I just described. But the issue is sensitive enough that I don’t feel comfortable identifying publicly my sources, their institutional affiliations, or the specific countries they referenced. I have no doubt that this sort of corruption sometimes occurs, but I don’t have any sense of how widespread or serious it is. So, again, I’m hoping that some of our readers out there can weigh in with their own experiences and observations, and perhaps also references to published sources that address this topic.

Assuming for the moment that this is indeed a serious problem, the natural next question is what to do about it. I don’t think the answer is to abandon mandatory financial disclosures for public officials, any more than the answer to the problem of corrupt health inspectors is to do away with health codes. (Of course, if it turned out that mandatory asset disclosure systems did not have any substantial benefit, and were only a tool for extortion, then the conclusion would be different—but I’m not persuaded that’s the case.) A fuller treatment of this issue will have to wait, but let me throw out some preliminary thoughts, more in the hopes of stimulating further discussion than anything else:

  • First, to state the obvious, ensuring the integrity and accountability of the office that administers the financial declaration system is crucial. That office should be politically insulated, but there also need to be effective accountability mechanisms in place, including some sort of internal appeal or complaint mechanism. In countries where corruption is so deeply entrenched that it is hard to identify any institution that can be trusted to administer the financial declaration system with fairness and integrity, then it may not be worth putting such a system in place.
  • Second, where the sort of extortive corruption described above is a significant concern, it may make sense to narrow the set of officials required to file declarations, to err on the side of simpler rather than more complex declaration requirements, and to allow declarants to update their submissions in case the administering office identifies errors or other concerns (at least if the errors are not egregious or deliberate). These choices would have costs, and might not be the right choice in a setting where concerns about the sorts of corrupt abuses described above are not significant. But if and when those concerns are significant, adjusting the system in ways that make corrupt extortion harder might be worth the costs.
  • Third, where local capacity permits, automating as much of the process as possible might be advisable.

I’m sure there are more and better ways to approach the problem, if it is indeed a problem, and I do hope some of our readers will offer their own suggestions. And I’ll do a bit more digging and see if I can come up with anything more useful to say.

2 thoughts on “Are Financial Declaration Systems Creating Opportunities for Corrupt Extortion?

  1. Thanks for your post. I believe your article describes the problem and potential solutions very well and there is not much else to add. However, I wanted to share two thoughts that constantly came to mind while reading it:
    1) In countries where corruption is widespread and institutional checks are weak, anything can happen, including extortion and political misuse of any tools available. While I am sure the situations described are real and they are by all means wrong, the question is; was the problem the financial disclosure system? Probably not, as we seem to be referring to cases with systemic rule of law problems. That said, should the financial disclosure, as well as for instance the tax systems, which handle personal information, have more safeguards in these type of contexts? Undoubtedly. You mention a few solutions, an additional one is public access to asset declarations. People generally see public access as a threat to public officials’ and do not realize it can also protect them.
    2) Financial disclosures systems, unlike other anti corruption efforts, are not as widely ‘liked’. Public officials question it because it is unavoidably uncomfortable to them, and some experts question it, sometimes based on anecdotal evidence. A few questions to the critics are: is there an anti-corruption tool that always succeeds? when we criticize the disclosure regime in a country, are we taking into consideration if it is a well-designed and well-implemented system? Are we taking into consideration other systemic factors that could impact its outcomes? Etc…
    The fight against corruption is complex and we need all tools available. It is impossible to predict what is the specific combination of efforts that will produce change in a country, but we are probably better off trying as many as we can. So, while constructive criticism helps improve, it may be time for the anti corruption community to focus first on strengthening financial disclosure systems so that they can reach their potential. It may be imperfect but it is the only effort that truly focuses on public officials. And let’s not forget, public officials are a fundamental ingredient in every corruption recipe.

  2. Thank you for this thoughtful post.

    I wonder if there might be a role for international organizations to facilitate this financial disclosure process, at the request of state governments. For example, imagine if the President or Vice President of every country disclosed their financial assets to the financial action task force (FATF), as opposed to their local government? Seeing as most FATF members must disclose progress reports on a host of legislation, it doesn’t seem like that much of a stretch to administer financial disclosure statements as well.

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