Hiding in Plain Sight: How the Federal Elections Commission Can Use Existing Disclosures To Detect Campaign Finance Fraud

Last August, U.S. Congressman Duncan Hunter was indicted for misuse of campaign funds for personal benefit. The Justice Department alleges that Hunter conspired with his wife, whom he appointed campaign manager, to steal from his campaign to support their lavish lifestyle: the campaign spent $15,000 on airline tickets and hotel rooms for Hunter’s children and relatives, a $14,000 Thanksgiving trip to Italy, and for other expenses like $700 for seven adult and five children’s tickets to see “How the Grinch Stole Christmas.”

Though Representative Hunter’s conduct is only now being investigated, the allegations of improper spending go back to 2009, and many of the expenses now under scrutiny were detailed in his campaign’s filings with the Federal Election Commission (FEC). FEC filings are public records, readily available and searchable (via simple keyword searches on the FEC’s webpage) to anyone interested in looking. For example, Representative Hunter is a “vaping” enthusiast (even smoking his e-cigarette in Congress). Using the FEC’s webpage and a simple search for the words “cigar,” “smoke,” and “tobacco,” I found that Representative Hunter’s  2015-16 campaign expenditures include hundreds of dollars of spending at a cigar lounge, smoke shop, and tobacco company in his home district. Similar search results through the FEC website show all sorts of eyebrow-raising transactions.

So why weren’t the problems detected earlier? The problem, in cases like this, is not that the FEC doesn’t have enough information to identify suspicious activity—it’s that it has too much information. The FEC has massive amounts of data, making the detection of fraud a needle-in-the-haystack problem. The FEC relies largely on complaints and referrals to guide its enforcement process, with the result that enforcement remains anemic.  In 2017, for example, the FEC levied administrative fines in 215 matters totaling under $2 million, despite having data on 23.4 million line-item disbursements and 34.5 million individual contributions, not even counting electioneering communication transactions and the massive data on political action committees (PACs).

Waiting for referrals, or screening data by hand, is not an effective way for the FEC’s roughly 300 employees to detect corruption or fraud in campaign finance. There are no silver-bullet solutions; fraud detection is a fundamentally difficult, especially when fraudsters take steps to cover their tracks. But there are some steps the FEC can take to better monitor fraudulent expenditures to identify suspicious cases early on:

Continue reading

The Guiding Principle for Anticorruption Policy Should Be Cost-Effectiveness, Not “Zero Tolerance”

In 2015, following indications that a few Canadian Senators had been using government money for disallowed personal expenses, the Canadian government launched a major investigation that cost approximately $23 million—but led to no convictions, and exposed corruption that cost the government less than $1 million. To many, me included, this seems like overkill, even if we acknowledge that corruption is a serious problem. Yet the “zero tolerance” ethos that motivated the Canadian Senate’s investigation is widely embraced. As previous posts have pointed out, zero tolerance policies fail to account for the fact that corruption might be expensive to root out, and that the extraordinary expenditures required to reduce corruption closer to zero might not, after a certain point, be justified.

This does not mean that corruption is good. But the efficient amount for the government to invest in corruption-reduction—which in turn determines the amount of corruption that will prevail—is that for which, as an economist would put it, marginal benefit equals marginal cost. Or to put this another way, “tolerance” of some corruption is efficient (and appropriate) once the costs of achieving further reductions in corruption are greater than the costs of the corruption that would be eliminated by those additional efforts.

The right amount of corruption, therefore, is probably not zero. Existing anticorruption policies neglect this point, leading to inefficient spending like that on the Canadian Senate probe. With that understanding, how can anticorruption policy be targeted to get the biggest bang for the buck?

Continue reading

Do Chinese Aid Projects in Africa Make Corruption Worse? And If So, Why?

Development aid is a potentially powerful tool for promoting economic growth among the world’s poor. However, development aid is plagued by corruption, in no small part because many of the poorest areas are also the most susceptible to corruption. In addition to that dilemma, some research suggests that the injection of outside funds into existing corrupt societies can actually exacerbate governance problems. Is this true? And does the impact of development aid on corruption (and development) depend on the source of the aid? An important new paper by Ann-Sofie Isaksson and Andreas Kotsadam suggests that the answers are yes and yes—in particular, they find that Chinese aid projects in Africa may worsen local corruption.

To investigate the question whether Chinese aid projects affect local corruption in Africa, the authors combine data from separate sources. For data on local corruption, the authors make use of the Afrobarometer surveys, with data on nearly 100,000 respondents in 29 countries, collected over a 12 year period (2000-2012) in four separate surveys. The authors focus in particular on respondents’ answer to questions about the frequency of paying bribes to avoid problems with the police or to obtain documents or permits. The authors use the geographic location of survey respondents, together with information on the geographic location of 227 Chinese-aid-supported projects in Africa, in order to identify those respondents who live geographically close to a project supported by Chinese development aid. The results are stark: African citizens who live in areas with Chinese-sponsored projects are 4 percentage points more likely to pay a bribe to police, and 2 percentage points more likely to pay a bribe for permits or documents. Given baseline reported bribery rates of about 13-14%, this means that citizens living near a Chinese aid project are about 30% more likely to report paying a bribe to the police, and about 15% more likely to report paying a bribe for a permit or document.

The most natural explanation is that Chinese aid projects tend to stimulate more corruption. There are, of course, a number of other possible explanations, which the authors address and for the most part rule out, or at least suggest are unlikely:

Continue reading

Government Donors Should Demand More Accountability and Integrity from International Aid Charities

Oxfam, the international aid organization with more than 10,000 staff worldwide and many hundreds of millions of dollars of income from donations alone, has been getting a lot of bad press recently. Many readers will likely be familiar with the Oxfam sex scandal, wherein Oxfam workers in Haiti had sex with victims of the 2010 earthquake, perhaps including child victims. In 2014, Oxfam’s former antifraud chief was arrested for embezzlement. And last February, the chairman of Oxfam International, Juan Alberto Fuentes, was arrested in Guatemala for his role in a corruption scandal that developed over his time as the finance minister of Guatemala. Although the arrest of Mr. Fuentes was for conduct that predated his work at Oxfam, the arrest sparked further questions about corruption and accountability in the organization, and called into question the reliability and credibility of Oxfam’s anticorruption advocacy work.

Of course, both sex scandals and corruption scandals happen in other organizations too, including governments and for-profit corporations. So far as I know, there’s no evidence that aid organizations are systematically more prone to such institutional failures than other entities. Yet these scandals feel particularly disturbing when they occur at an organization like Oxfam, perhaps because we implicitly hold do-gooder NGOs to a higher ethical standard. And in fact we should: both the legitimacy and effectiveness of the international work done by NGOs like Oxfam rests, at least to some degree, on some sense that these organizations have the moral authority to enter a country and change the way things are run. To retain that moral authority, aid organizations must take extra steps to ensure they remain above suspicion. The failure of the Oxfam board to conduct due diligence on Fuentes is a strike against Oxfam’s credibility, and this fundamentally hurts its mission.

The question is what Oxfam, or similar organizations, can do to increase the chances of meeting these high standards, and avoid similarly embarrassing scandals in the future. My answer: Oxfam should tie its own hands and mandate top-down, independent integrity oversight, supervised by donating governments.

Continue reading

Rewarding Whistleblowing to Fight Kleptocracy

Last February, Massachusetts Congressman Stephen Lynch introduced the Kleptocracy Asset Recovery Rewards Act (KARRA), which seeks to improve detection of stolen assets housed in American financial institutions by paying whistleblowers for reports that lead to the identification and seizure of these assets. The logic of paying rewards to whistleblowers is straightforward, and nicely summarized in the draft KARRA itself:

The individuals who come forward to expose foreign governmental corruption and klep­toc­ra­cy often do so at great risk to their own safety and that of their immediate family members and face retaliation from persons who exercise foreign political or governmental power. Monetary rewards and the potential award of asylum can provide a necessary incentive to expose such corruption and provide a financial means to provide for their well-being and avoid retribution.

Paying whistleblowers for information is a sound economic idea.  But in light of the cogent explanation for these rewards, the original draft of the KARRA legislation doesn’t go nearly far enough. Indeed, this original proposal provides much weaker incentives and protections for whistleblowers than several other existing US whistleblower rewards programs. It is unlikely that this bill has a real chance of being enacted in the current Congress, but if its introduction this year is a harbinger of a more sustained effort to enact legislation of this kind—and I hope it is—then I also hope that the next time around KARRA supporters will introduce a more ambitious bill, one that provides much higher potential rewards, fewer limitations on which whistleblowers are eligible for rewards, and more robust anti-retaliation protections.

There are many ways to design a whistleblowing program, as demonstrated by the spectrum of existing programs that use whistleblowing to tackle fraud in other domains. We can examine the effectiveness of the proposed legislation through comparison to existing whistleblowing programs:

Continue reading

The South African Turnover: Anticorruption or Political Consolidation?

Last February, South African President Jacob Zuma—who has been dogged for years by credible allegations of corruption and other serious malfeasance in office—finally resigned under pressure.  In April, only a couple of months later, Zuma went on trial; he faces 16 counts of corruption, fraud, money laundering, and racketeering related to arms deals that took place in the 1990s (before his election as president). Zuma fought these charges for years, but now it seems as if his political cover has run out.

Yet the story behind Zuma’s corruption trial may go deeper than Zuma’s past bad behavior finally catching up with him. It’s important also to note the political context. Zuma’s resignation came at the urging of his party, the African National Congress (ANC), after Deputy President Cyril Ramaphosa secured the leadership of the ANC in December 2017, igniting a power struggle that led to a planned vote of no confidence, brokered by Ramaphosa. Zuma resigned in order to avoid a vote he was likely to lose, and Deputy President Ramaphosa immediately took over. In his first few months in office, Ramaphosa has been shaking up the political establishment, but is himself also the subject of multiple corruption allegations. This leads one to question: Should the retrial of Zuma be understood principally as part of Ramaphosa strategy for political consolidation? More generally, has South Africa’s recent political shakeup set the country on a course for a better, less corrupt future?

Many have expressed precisely this hope, but I’m more pessimistic. True, President Ramaphosa has acknowledged South Africa’s serious corruption problem and pledged to address it, and that is in some ways welcome news. But Ramaphosa is not an immaculate outsider with the capacity to reform from a position of moral authority. He is a deep insider, enmeshed in the corrupt system he has pledged to reform. He has profited heavily from the relationship between the ANC and the wealthy (mostly white) elites, and his rise to power came not from a landslide toward a new party, but from a successful destabilization of the ANC from within. Moreover, while Ramaphosa’s government is cracking down on corruption, its investigations seem carefully and narrowly targeted, focusing mainly on those who might be a political threat or rival. Therefore, I worry that Ramaphosa may prove to be equally corrupt, and the latest string of crackdowns may be nothing more than a way of securing his position as leader of South Africa for the many years to come.

Continue reading

The Chinese Corruption Crackdown and Political Maneuvering

China’s broad anticorruption drive, spearheaded by President Xi Jinping, has been making splashy headlines over the last five years. The scale of this effort has been huge, with hundreds of thousands of Chinese Communist Party (CCP) officials punished in the first half of 2017 alone, and recent reports of nearly a million officials under supervision as of December 2017.  Yet while China’s anticorruption efforts have been met with some qualified praise from the beginning, many critics have been troubled by signs that the anticorruption crackdown is being used for political purposes. These purposes include consolidating President Xi’s power, particularly in light of rule changes that allow him to serve indefinitely, and also protecting the CCP’s reputation (see, for example, here and here). And because so many top Chinese officials have been involved in some kind of illicit activity (perhaps because in the current system bribery and patronage is essential to advancement), selective enforcement of anticorruption and related laws could allow President Xi to take out anyone sufficiently disloyal or threatening.

A recent example of the political considerations of the anticorruption campaign is found in the story of Guo Wengui, a Chinese billionaire currently residing in the US. Continue reading