This past February, the United Nation’s cumbersomely-named “High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda”—which, thankfully, everyone simply refers to as the FACTI Panel—released its report on Financial Integrity for Sustainable Development. The report (which was accompanied by a briefer executive summary and an interactive webpage) laid out a series of recommendation for dealing with the problem of illicit international financial flows. Though the report states that it contains 14 recommendations, most of these have multiple subparts, which are really distinct proposals, so by my count the report actually lays out a total of 35 recommendations.
I had the opportunity to interview one of the FACTI panelists, Thomas Stelzer—currently the Dean of the International Anti-Corruption Academy—for the KickBack podcast, in an episode that aired last week. Our conversation touched on several of the report’s recommendations. But this seems like a sufficiently important topic, and the FACTI Panel report like a sufficiently important contribution to the debates over that topic, that it made sense to follow up with a more extensive analysis of and engagement with the FACTI Panel’s recommendations.
Of the 35 distinct recommendations in the report, eight of them (Recommendations 2, 3B, 4A, 4B, 4C, 8A, 11A, and 14B) all deal with tax matters (such as tax fairness, anti-evasion measures, information sharing among tax authorities, etc.). While this is an important topic, it is both less directly related to anticorruption and well outside my areas of expertise. So, I won’t address these recommendations. That leaves 27 recommendations. That’s too much for one post, so I’ll talk about 13 recommendations in this post and the other 14 in my next post.
I should say at the outset that, while some of my comments below are critical, overall I am hugely grateful to the members of the FACTI Panel for their important work on this topic. The Panel’s report should, and I hope will, prompt further discussion and careful consideration both of the general problem and the Panel’s specific recommendation. Part of that process is critical engagement, which includes a willingness to raise concerns and objections, and to probe at weak or underdeveloped parts of the arguments. I emphasize this because I don’t want my criticisms below to be mistaken for an attack on the Panel or its report. Rather, I intend those criticisms in a constructive spirit, and I hope they will be so interpreted.
With that important clarification out of the way, let’s dig in, taking each recommendation in sequence.
- Recommendation 1A: All countries should enact legislation providing for the widest possible range of legal tools to pursue cross-border financial crimes. The bare text of this recommendation is not by itself all that helpful or informative, as it sounds like a fairly banal statement that countries should enact effective legislation for addressing cross-border financial crimes—and who could argue with that? But the report’s explanatory text makes clear that the Panel has in mind some specific legal tools that are most definitely controversial, including “illicit enrichment laws” and “non-conviction-based [asset] confiscation systems.” (There’s also a somewhat less precise call for “a broad scope of money-laundering offenses.”) This is potentially a big deal, because not all countries have such mechanisms, and indeed some countries believe that at least some of these mechanisms are inconsistent with fundamental principles of their legal system. For example, the United States only joined the Inter-American Convention Against Corruption with a reservation that it would not comply with the Convention’s requirement that countries criminalize illicit enrichment, because, the U.S. negotiators asserted, such an offense would be inconsistent with the presumption of innocence as that concept is understood in U.S. law. (An aside: I think that this assertion is simply wrong as a matter of U.S. law, and others have made similar arguments.) And a couple years ago, the Ukrainian Supreme Court struck down a similar illicit enrichment law. So there is definitely some controversy here. I tend to side with the FACTI Panel’s recommendation, and my main criticism is that I wish the Panel had included the call for illicit enrichment laws and non-conviction-based forfeiture in the text of the recommendation, since many people won’t dig into the full report.
- Recommendation 1B: The international community should develop and agree on common international standards for settlements in cross-border corruption cases. I’m much less sure about this recommendation, partly because I’m not quite sure what it means. On one interpretation, the Panel is not only urging the international community to agree, in general terms, that settlements in cross-border corruption cases should be fair, that penalties should be sufficient to deter, etc., but that the Panel means to embrace the call, advanced in the past by various advocacy groups, for a more specific set of binding international standards that would mandate, for example, a particular degree or type of judicial oversight of settlement negotiations, a specific approach to victim compensation (including requirements that a certain portion of penalties be transferred to “victim countries,” etc.). If that’s what the Panel means to say—that there should be some sort of standard international approach to settlements—then I’m deeply skeptical, for reasons that I’ve articulated before (and so won’t belabor here). The short version of my concern is that countries are sufficiently different in terms of their prosecutorial and judicial institutions, practices, etc., that imposing a common approach on all of them would likely be a political non-starter and as well as a bad idea. When I pressed Dean Stelzer about this in our podcast interview, though, he seemed to indicate that the “common international standards” that the panel had in mind here were more in the nature of a broad commitment to a fair and effective process. That’s all well and good, but if that’s all this means, then “common international standards” already exist (for example, under instruments like the OECD Anti-Bribery Convention and the UN Convention Against Corruption (UNCAC)), and the Panel’s recommendation is fairly banal. I suspect that there may have been something of a division of opinion within the panel, with some pushing for a genuine “common settlement standards” approach, and others reluctant, so in the end they split the difference and drafted some ambiguous and somewhat equivocal text. That’s a bit disappointing, though better (in my view) than embracing the well-intentioned but misguided call for set of more specific common standards for settlements in these sorts of cases.
- Recommendation 1C: Businesses should hold accountable all executives, staff and board members who foster or tolerate illicit financial flows in the name of their businesses. As with recommendation 1A, the text of this recommendation on its own seems banal (who wouldn’t endorse, as a general matter, the proposition that businesses shouldn’t tolerate illegal activity?), but if one looks at the explanatory text in the report itself, one finds much more specific and potentially controversial proposals. For instance, the report suggests that governments can give businesses stronger incentives to take anticorruption seriously by “hold[ing] companies liable for failing to prevent bribery”—which I interpret as an endorsement of the “strict liability” approach that is embraced by, for example, the UK Bribery Act (UKBA), and that may be the effective standard under the U.S. Foreign Corrupt Practices Act (FCPA) as well, given background U.S. law on legal liability of corporations for the acts of their employees. One thing that the report does not address is whether this strict liability approach should be coupled with an “adequate compliance system” defense. As folks who work in this area know, there is a vigorous debate about whether such a defense (which does exist under the UKBA but not under the FCPA) would strengthen or weaken firms’ incentives to adopt the sort of compliance measures that the FACTI Panel wants to see. While there’s only so much a report like this can or should do, I feel like this was a bit of a missed opportunity, and also something of an odd oversight. It’s also worth noting that in many countries, an offense of “failing to prevent bribery” would (allegedly) be inconsistent with the legal system’s usual approach to corporate liability. I’m surprised that the report didn’t even mention, let alone engage with, this potential objection.
- Recommendation 3A: International anti-money-laundering standards should require that all countries create a centralised registry for holding beneficial ownership information on all legal vehicles. The standards should encourage countries to make the information public. The first sentence in this recommendation is, or at least should be, uncontroversial. There’s no good argument against creating a centralized registry of beneficial ownership information and requiring companies and similar legal entities to supply adequately documented information on their true owners. The U.S. finally got around to doing this earlier this year, and hopefully other laggards will follow suit. The harder question—one that divides experts—is whether this beneficial ownership information must be made public (as it is in the UK) or whether the information remains mostly confidential, available only to government agencies conducting investigations or financial institutions conducting customer due diligence (as is the case under the new U.S. law). The FACTI Panel report’s treatment of this important issue is, to my mind, odd and unsatisfying, because while the text of the report seems to come down so firmly on the side of making this information public (describing “transparency to outsiders” as the “turning point” that would “incentivize ethical business conduct, rebuild public trust and strengthen the social contract”), the recommendation itself says that international anti-money laundering standards should merely “encourage” making this information public. Why did the report shy away from simply recommending that countries should adopt public beneficial ownership registries? In other sections, after all, the report is not shy about recommending very specific policies that have little chance of being adopted in the short term. That said, it’s possible that the Panel concluded that in certain national contexts a public registry would be inappropriate. But if that’s the case, why doesn’t the Panel report articulate that concern and explain why it justifies softening the language? I think perhaps here we’re seeing evidence of the fact that the Panel report is the product of a group of people who might not see entirely eye-to-eye, and maybe the staffers assigned to draft the report had views that didn’t perfectly match what the Panelists themselves were willing to embrace. Whatever the reason, this recommendation, though helpful, seemed to me something of a missed opportunity, because it equivocates on the key question.
- Recommendation 3C: Building on existing voluntary efforts, all countries should strengthen public procurement and contracting transparency, including transparency of emergency measures taken to respond to COVID-19. I don’t have too much to say about this one, because it’s a sound and sensible recommendation, and one that I would endorse. I only wish that the recommendation itself had included some of the material contained in the explanatory text in the report, especially the recommendations that governments should refuse to contract with firms that don’t disclose their beneficial ownership information, and that governments should insist on greater contracting transparency in the extractive industry. (On the latter, it might have been nice if the Panel had explicitly embraced publish-what-you-pay rules, disaggregated at the project level.)
- Recommendation 5A: Create a multilateral mediation mechanism to fairly assist countries in resolving difficulties on international asset recovery and return, and to strengthen compensation. I confess that this one baffled me. There is, to be sure, a genuine problem (actually, many problems) with the international asset recovery system. Very often, the countries seeking return of assets are frustrated with the slow pace of the process in the jurisdictions where the allegedly stolen assets are located. Those latter jurisdictions, though, often insist that due process requires that, before they confiscate assets and transfer them to another party, they need to ascertain that the assets are indeed more likely than not the proceeds of illegal activity, and that the party seeking return in fact has the legal right to those assets. And this can lead to conflict. Yet the panel’s proposed solution, though unobjectionable, struck me as not very useful. A voluntary mediation mechanism might help in some cases, but doesn’t really get at the heart of the problem. Also, much of the delay in recovering stolen assets is due not to the intransigence of the jurisdictions where the assets are located (though this can certainly be an issue), but rather with the sheer difficulty of locating the assets, and the great expense (in lawyers’ fees and other items) required to successfully pursue an asset recovery action, even if the host jurisdiction is entirely cooperative. So on this point, it seemed to me that the Panel was addressing relatively small items while avoiding the larger problems. Oh, and speaking of larger problems, another important issue in the asset-recovery field that the Panel report seems to mostly ignore (other than a brief passing reference) is the concern that returning assets to a corrupt jurisdiction, where the original thieves or their cronies are still in charge of the government, will serve no useful purpose, and might actually be counterproductive. The Panel report, frustratingly, doesn’t engage this hard issue, or have much to say about the design of alternative mechanisms (such as funneling returned assets to NGOs or directly to citizens). And I have one other beef with how the report itself discusses this issue: As is all too common in these discussions, the report conflates the return of stolen assets (which are the property of the government or other entity from which they were stolen) from the sharing of fines or other penalties with (alleged) “victims countries.” The report, like other reports in this area, is needlessly sloppy in its failure to appropriately distinguish these matters and the legal standards and institutions that apply to each.
- Recommendation 5B: Escrow accounts, managed by regional development banks, should be used to manage frozen/seized assets until they can be legally returned. If I found the previous recommendation on addressing asset return issues somewhat baffling, I find this one downright silly. OK, maybe “silly” is too harsh and too dismissive. But this seems like an unnecessarily cumbersome solution to a mostly non-existent problem. When assets are suspected of being the proceeds of crime, they are initially frozen. That is, they remain where they are (for example, in an account at a particular bank), but the owner of the assets can’t access or move them. Once there’s a determination, pursuant to the appropriate legal standard, that the assets are subject to forfeit, then they are transferred to the government, which then (again following an appropriate legal process) transfers them to their rightful owner. What, exactly, is the point of replacing this system with one in which frozen assets are transferred to an escrow account with a regional development bank? There are two possibilities. One, suggested by the Panel report, is that the financial institution that holds the assets—and which, according to the report, “enabled the wrongdoing in the first place”—shouldn’t be able to earn “fees for the management of [those] assets” while they are frozen. There are a couple problems here. First, it’s not always the case that the financial institution where the assets are located in fact “enabled the wrongdoing.” That may be true some of the time, but not always. Second, if we’re really upset by the idea that the bank will earn administrative fees on a frozen account between the period when the assets are frozen and when they’re returned, there’s a much simpler solution: just prohibit financial institutions from earning management fees on frozen accounts. Another possibility, which Dean Stelzer suggested in our interview, is that if the assets remain with a financial institution in the host jurisdiction, that host jurisdiction may have an incentive to slow down the asset return process, so that its bank can continue to earn fees on the frozen account. With all due respect to Dean Stelzer, that strikes me as a contrived and implausible justification. I know of no evidence that, say, the U.S. Department of Justice processes asset return cases more slowly because the frozen accounts earn profits for U.S. banks. Those profits are tiny from the bank’s perspective, and miniscule relative to the U.S. government budget. And again, if you’re really all up in arms that banks continue to earn modest administrative fees on frozen accounts, you could just change the rules so that banks can’t assess fees or earn profits on frozen accounts. In addition to addressing a mostly non-existent problem, this recommendation also doesn’t seem to take into account the hassles and administrative burdens that this would create, not only for the financial institutions in the host countries but for the regional development banks, which would now presumably need to have staff and systems in place to deal with managing these accounts and the associated transfers. In sum, I don’t know what the Panel was thinking when they decided, of all the possible recommendations they could issue with respect to the very real and challenging problems of the international asset recovery system, to focus on this one. It comes across as the pet idea of some low-level staffer (or, worse, the musings of some high-level political type) that got thrown into the report without much thought. I hope and expect everyone will just ignore it. But the real disappointment here is the failure of the report to offer more useful, well-thought-out analysis and recommendations for improving the asset recovery process.
- Recommendation 6A: Governments should develop and agree on global standards/guidelines for financial, legal, accounting and other relevant professionals, with input of the international community. This is basically sensible, but hard to evaluate because it’s so general. And unlike some of the recommendations discussed above—where the recommendation itself is very general but the explanatory text in the report is more detailed and helpful—in this case the explanatory text is also pretty broad and hortatory, so it’s hard to figure out exactly what the Panel thinks should be done, or what position it means to take on the more controversial aspects of this issue. And to the extent that the recommendation does stake out a potentially controversial claim, it does so indirectly and without fully and forthrightly acknowledging and addressing the hard questions. For example, the text of the recommendation (though not the explanatory text in the report) specifically mentions legal professionals, while the text of the report (though not the recommendation itself) calls for standards that obligate “all professionals to report suspicious activities or transactions to authorities.” Does that mean that the panel endorses the view that lawyers ought to be obligated to report their clients’ suspicious activities or transactions to the authorities? That is, to say the least, a contestable view—though not a crazy one, at least if the reporting requirements are appropriately limited. How should such a reporting obligation be reconciled with traditional principles of attorney-client confidentiality, and the attorney’s duty of loyalty to her client? I know the report can’t get into all the details, but at the same time much of the value of reports like this one—issued by such experienced and distinguished panelists—turns on the willingness to take and defend clear positions. And here I wish the report had at least acknowledged some of the challenges more forthrightly.
- Recommendation 6B: Governments should adapt global standards for professionals into appropriate national regulation and supervision frameworks. I don’t have much to say about this one, because it’s basically a call for effective and appropriate enforcement of the standards called for by Recommendation 6A. I do very much agree with the statement in the explanatory text that “[i]international financial integrity peer reviews should check the actual implementation of  provisions [on professional integrity] by reviewing data on the volume and circumstances of relevant prosecutions and highlighting non-cooperative professional bodies.”
- Recommendation 7A: The international community should develop minimum standards of protection for human right defenders, anti-corruption advocates, investigative journalists and whistle-blowers. States should consider incorporating these standards in a legally binding international instrument. Yes yes yes. This is a great recommendation – one that has little chance of winning broad international support in the near term (no way Russia or China would go for it, obviously, to say nothing of other smaller countries), but I do hope the panelists, and others inspired by the panel report, find a way to carry this forward.
- Recommendation 7B: Civil society should be included in international policy making forums in an effective and efficient manner. Sure. As the explanatory text notes, “the usual practice at many United Nations bodies” is to give civil society access to those forums, and that same approach should be adopted, as appropriate, with respect to bodies that address international financial integrity issues.
- Recommendation 8B: Enable free exchange of information at the national level as standard practice to combat all varieties of illicit flows. This is basically a good idea, though the hard questions concern how to balance the interest in facilitating law enforcement (and other government regulatory efforts) with privacy interests, especially given that countries vary with respect to their degree of protection for personal financial data. The report’s explanatory text calls for “removing any national restrictions on information sharing among government entities,” but then goes on to emphasize that “[c]ountries should continue to respect relevant privacy and data confidentiality controls[.]” I wish the report had done just a bit more to acknowledge the potential tension between these two statements, and had said a bit about how to manage that tension appropriately. I admit that might be asking too much in a report like this, though, and I do think the report is right to emphasize the importance of cross-border information sharing.
- Recommendation 8C: Promote exchange of information internationally among law enforcement, customs and other authorities. Amen. I particularly appreciate the report’s acknowledgment and endorsement of forums like the OECD Working Group on Bribery and regional networks of anticorruption authorities. Over-reliance on the formal—and often cumbersome and inefficient—mutual legal assistance process can inhibit effective cross-border cooperation, and finding ways to strengthen informal networks of law enforcement agencies in different jurisdictions, and by doing so to foster more trust and understanding, may be just as important to facilitating effective international cooperation as changes to formal rules and standards. I’m very glad that the FACTI Panel report recognized this.
OK, with that, I’m through the first 13 of 27 Panel recommendations (excluding, again, the eight that are focused specifically on tax). I’ll review the remaining 14 recommendations in my next post.