Corruption Reform in Ukraine: Too Much, Too Soon?

On October 26, Ukrainians headed to the polls to vote in parliamentary elections that international observers labeled free and fair. On the eve of this election, the Economist nicely summed up the precariously fragmented Ukrainian state in a cartoon: a Ukrainian maiden, in the grips of a snake labeled corruption, fending off a menacing Russian bear. Indeed, corruption has plagued the functioning of the Ukrainian government on multiple fronts. Aleksandr Lapko wrote about corruption in procurement that leaves conscripted Ukrainian soldiers without the proper equipment to fight the separatists: in his words, “corruption can be as deadly as a bullet.” Former President Viktor Yanukovych’s ill-managed estate stands as a monument to both the corruption that riddled his former government and to the hopelessness of many Ukranians, Lapko included, in solving this seemingly intractable problem.

Ukraine’s leadership is eager to shed this troubled legacy of corruption and remake its government in a new, more European image. Obama hailed the October 26 elections as a positive step in that direction. President Petroshenko called out corruption as the nation’s central concern in his inaugural address to the new Parliament on November 26. Unfortunately, Ukraine seems to be following in Russia’s and other corruption-plagued countries’ ill-fated footsteps in its quest to distance itself from the post-Soviet corruption plague. By attempting to do too much to fight corruption with untested, newly created institutions, Ukraine may ultimately end up doing too little. Continue reading

Confronting Russian Oligarchs in the West: A Call for Moderation

Miami University Professor Karen Dawisha recently published a scathing indictment of the United States and Europe’s complicity in the Russian ruling regime’s wrongdoing, particularly its corruption at the elite level. Professor Dawisha argues that Putin and his supporters treat the West like an “a la carte menu” by protecting and multiplying their wealth abroad under the safe haven of Western rule of law, while avoiding the consequences of being held accountable for their “marauding” within Russia. This is damaging not only for Russia, but for the West as well. According to Professor Dawisha, the “presence [of Russian oligarchs] strengthens the worst aspects of our system, and weakens the best.”

One of Dashiwa’s central examples for this claim is Russian companies’ presence in Western stock markets. She argues that Russian companies’ foray into foreign stock markets has failed to “improv[e] the quality of Russian corporate governance and transparency” and should be lamented. While I will not attempt here to evaluate Professor Dawisha’s broader argument, I do believe that this particular example does nothing to support her broader point–and may ultimately illustrate its weaknesses–for two reasons:

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Sua Sponte Corruption Inquiries by Arbitral Tribunals: Causing More Harm than Good?

As several prior posts on this blog have discussed (see here, here, and here), corruption has emerged as a significant and controversial issue in international investor-state arbitration proceedings, with a number high-profile cases in which the tribunal refuses to provide relief on the grounds that the underlying contract was procured through corruption. In these cases, corruption allegations usually surface at the initiative of one of the parties. For example, this summer, Djibouti filed an arbitration against Dubai-owned port operator DP World, seeking annulment of a port concession because DP World allegedly formed its contract with Djibouti for the operation of Africa’s largest container terminal through corrupt means. However, in rare instances, corruption can enter the picture without either party raising the issue during the proceedings. In these cases, the arbitral tribunal considers the issue of corruption sua sponte, even when neither party alleges corruption by the other.

Perhaps the most prominent example of this is the tribunal’s decision in Metal-Tech v. Uzbekistan. In Metal-Tech, the ICSID tribunal, in its words, “required explanations” from the parties for suspicious facts that “emerged in the course of the arbitration”–in particular the fact that Metal-Tech had paid exorbitant, seemingly unjustifiable sums for consulting services to an Uzbeki government official and individuals with close ties to Uzbeki leadership. The ICSID tribunal then essentially placed the burden of disproving corruption in light of this circumstantial evidence on Metal-Tech, which could not come up with enough evidence to overcome the tribunal’s presumption. The ICSID tribunal held it did not have jurisdiction and dismissed Metal-Tech’s claim.

On the surface, sua sponte efforts by tribunals to address corruption may seem like a positive step in the anticorruption fight. Indeed, it might seem irresponsible for the tribunal to stick its head in the sand given such facially suspicious facts. As Michael Hwang and Kevin Lim assert in a recent paper endorsing this sua sponte practice, “Tribunals must remain vigilant and alert to the possibility of corrupt dealings being hidden by one or both parties, otherwise they may become unwitting accessories to heinous acts.” But in fact, the approach adopted by the tribunal in Metal-Tech, might do more harm than good. Indeed, by engaging in sua sponte considerations of corruption, arbitral tribunals might unwittingly perpetuate corruption under several different scenarios: Continue reading

Investment Arbitration as a Check on Corruption: The Yukos Award

In a previous post on this blog, Sam raised the possibility that under the logic of World Duty Free v. Kenya, investment treaty arbitration rules might actually encourage state officials to engage in corruption, because corrupt acts by an investor (even when the state is also implicated) can be used to escape state liability in investment arbitration. Even if Sam’s point is true, however, it is important to acknowledge that investment arbitration can be a check on corruption in many instances. In fact, as the Yukos v. Russian Federation award issued against the Russian government this past summer demonstrates, Sam may be pointing out the exception, not the rule. Indeed, this $50 billion award – the largest international arbitration award in history – demonstrates the power of investment arbitration to bring corruption to light and act as an outside check on corrupt states. Continue reading

Corruption as Culture and Health Care Fraud in Brooklyn

The astonishing prevalence of health care fraud in the Russian-speaking communities of Brighton Beach and Coney Island in New York City presents an interesting case study on the causes of corruption. The Brighton Beach-Coney Island area is populated by people who immigrated from one of the most corrupt countries in the world to one of the least. You can take the person out of the corrupt system, but does this remove the propensity to engage in corrupt acts from the person?

In the wake of a recent spate of health care fraud scandals in Russian-speaking New York City communities (as well as a scheme to defraud Medicaid perpetuated by dozens of Russian diplomats), the facts and some commentators suggest no. Brighton Beach has the second highest rate of Medicaid and Medicare-related malfeasance in the United States. In February 2012, federal authorities uncovered the largest no-fault insurance fraud scheme in United States history, which was operated out of Brighton Beach-based clinics. A law-enforcement official drew a direct link between “the Russian mind-set” that “if you’re not scamming the government…you’re looked upon as a patsy” and this widespread fraud. Professor Mark Galeotti expanded on this point, suggesting that “from cradle to grave” Russians have been inculcated to “bureaucratic systems that are parasitic and hostile, almost designed to make you pay bribes.”

I think “old habits die hard” as an explanation is too simplistic and uncomfortably resembles notions (discussed elsewhere on this blog) that corruption is an inherent cultural touchstone in certain societies. Furthermore, emerging evidence shows that Russians within Russia are developing a moral aversion to bribery.

An alternative explanation for the puzzle of the Brighton Beach health care fraud phenomenon is below. Under this model, culture is not the only, and perhaps not the first, link in the chain of causation. Continue reading

Putin’s “Power Vertical”: Blanchard and Shleifer Revisited

In 2000, Olivier Blanchard and Andrei Shleifer wrote a seminal paper comparing the impact of federalism on economic development in Russia and China. Blanchard and Shleifer aimed to solve the puzzle of why federalism–and, in particular, inter-jurisdictional competition–fostered economic growth in China but hampered it in Russia. Simplifying somewhat, their key conclusion was that the absence of political centralization in Russia was the culprit. With no strong national government to act as a disciplinarian, Russian localities were prone to a particular form of corruption–capture by local special interests–and localities competed for rents instead of competing for firms by making improvements we associate with open governments and economies. In Meng’s recent post about political decentralization in China, she endorses Blanchard & Shleifer’s analysis, and advises against granting Chinese regional and local governments more autonomy from the center. Implicitly, her post is a caution against moves that would make China in 2014 look like Russia looked in 2000.

But what about Russia? Fourteen years after Blanchard & Shleifer wrote their paper, political centralization is a reality in Russia — in terms of the strength of the ruling party, Russia resembles China much more closely now than it did in 2000.  So one might expect, if Blanchard & Shleifer’s analysis were correct, that local corruption in Russia should have abated, and competition between Russia’s different regions should now be growth-promoting rather than growth-retarding.  Alas, Russia’s experience over the past 14 years suggests that this has not come to pass.

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Bharara and the Moreland Commission: Federal Overstep or Legitimate Intervention?

As a reaction to widespread corruption in New York state government, Governor Andrew Cuomo and Attorney General Eric Scheiderman appointed the Moreland Commission to Investigate Public Corruption in July of last year. The members of the Commission were deputy attorneys general with broad powers to investigate violations of bribery, campaign finance, lobbying and election laws. Governor Cuomo disbanded the Moreland Commission last March, purportedly as part of a bargain to pass stricter anticorruption laws made in a larger budget deal. Two weeks later, the federal government stepped in, in a very public way. Preet Bharara, the U.S. Attorney for the Southern District of New York, opened an investigation into Cuomo’s decision to prematurely shut down the Commission and openly questioned Cuomo’s justification for the decision. Last week, the New York Times reported that subpoenas may have been served on the Commission’s former counsel, possibly to root out evidence of interference by the governor’s office in the workings of the Commission.

The federal investigation raises an important question: how involved should federal prosecutors be in corruption at the state and local level? Cuomo’s defensive response to Bharara’s announcement suggests that Cuomo believes involvement in this case is undesirable. However, any umbrage-taking on the part of the governor would be misplaced. For two reasons, Bharara’s intervention stands out as a uniquely well-founded and legitimate example of the increasingly commonplace practice of federal prosecution of state and local corruption.

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