How to Crack Down on Cryptocurrencies

Bitcoin and other cryptocurrencies are electronic currencies that rely on a technological innovation called a “blockchain”—essentially, a complete transaction record, or “ledger,” stored across a network of computers rather than on a single site. Because of the transparency and alleged incorruptibility of the blockchain ledger, many anticorruption advocates have welcomed the possibility that blockchain technology might be an effective technology to combat corruption in a variety of ways, from ensuring transparency and accuracy in land records to helping to fight money laundering. Whether that optimism is justified remains to be seen. Unfortunately, the most popular application of blockchain to date—Bitcoin—is proving to be a major problem for the fight against corruption, money laundering, and a whole range of other black-market transactions.

Bitcoin is an unregulated currency and is fundamentally difficult to track. Bitcoin allows for the transmission of large amounts of money without the need to go through the traditional, and heavily regulated, financial service providers. Unlike cash, which is also difficult to trace, bitcoins are easy to hide, as the information necessary to stash hundreds of millions of dollars can be kept on a small USB thumb drive. And despite the vaunted transparency and incorruptibility of the Bitcoin “ledger,” which does indeed record all Bitcoin transactions, there is no easy way to establish the real-world identities of Bitcoin users. Nor is there any easy way to generate a record of individuals’ bitcoin holdings, which would have to be reconstructed from hundreds of thousands of transactions. Laundering money with bitcoins is further facilitated through the use “mixing” technologies that pool bitcoins and forward them onward to other accounts, thwarting the transparent blockchain.

Government efforts to address these problems have so far fallen short. China has begun to crack down on domestic Bitcoin exchanges, and some countries such as Bolivia have outright outlawed the use of Bitcoin. But these efforts have largely failed because the storage and exchange of bitcoins requires so little information; you can send bitcoins using protocols as simple as email or text message. Many governments have financial disclosure laws that require public officials to declare all their assets, including bitcoins. And sometimes officials do: three Ukrainian ministers recently disclosed, pursuant to Ukraine’s new asset declaration law, holdings of a combined US$45 million worth of bitcoins. But if corrupt government officials chose to violate the law by failing to disclose their Bitcoin holdings, it would be all too easy for them to do so without getting caught. Governments could also crack down on the services that make bitcoins easier to use—the digital exchanges and apps—but all this would likely do is cause the providers of those electronic services to shift their operations to other jurisdictions, as has happened with digital torrenting sites (which facilitate the pirating of digital content) after the US cracked down.

There is, however, an alternative regulatory strategy that holds more promise:  Continue reading

Regulatory Discretion and Corruption in the FDA

In the United States, the regulatory agency responsible for ensuring safe food and medicine, the Food and Drug Administration (FDA), has been marred by numerous scandals – from a 2016 insider trading prosecution to a 2009 politicized medical device approval to a 2013 ProPublica investigation that found the FDA overlooked fraudulent research and let potentially unsafe drugs stay on the market. These scandals have, understandably, undermined public confidence in the FDA. What’s the explanation for these problems? Why is there such a large public perception of corruption, and so many questionable incidents, at the FDA?

Much of the explanation has to do with institutional design: Corruption blooms where transparency and accountability are lacking, yet the FDA has vast discretion over the regulations it sets, incredibly loose restrictions on the money it can receive from industry, and little public accountability. The following steps can be taken to reform the FDA, in the interest of rooting out corruption and restoring public confidence in the agency:

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Improper Payments and American Financial Mismanagement

Sound government fiscal management requires, among other things, ensuring that government payments are made accurately—to the right payee, in the correct amount, and with sufficient documentation. Failure to implement effective systems to prevent improper payments leaves the government checkbook at risk of fraud, corruption, and other forms of abuse. Alas, the magnitude of improper payments in the United States is astounding: in 2016, the US reported $144 billion in improper payments—nearly the double the budget for the Department of Education. Improper payments for Medicaid alone are more than ten times the total size of the Community Development Block Grants that the Trump Administration intends to cut – allegedly to save money, even though eliminating this program would have disastrous consequences for programs such as Meals on Wheels.

While improper payments in other contexts are part of corruption schemes, such as the “ghost soldiers” in Afghanistan that Sarah his discussed in this post, improper payments under domestic U.S. programs like Medicaid are more likely to be the result of fraud or simple mismanagement than public corruption. That said, we have no idea how much corruption contributes to the massive improper payments problem. In either case, the most effective policy responses are largely similar, regardless of the underlying cause of the problem.  However, the U.S. response to the improper payments problem has so far been inadequate.

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Stealing a City: Lessons from Bell, California

In 2010, a corruption scandal rocked the city of Bell, California, as eight top city officials were arrested for what the Los Angeles Country District Attorney called “corruption on steroids.” The officials were charged with misappropriating funds from city government to the tune of $5.5 million, and garnering salaries as high $800,000, more than quadruple the California governor’s salary. In a series of trials that stretched on for more than three years, the mayor ultimately pled no contest to 69 felonies, and the trials of the various city officials have been riddled with allegations of voter fraud, extortion of local businesses, taking of illegal loans from the city, and manipulation of the pension system. Bell officials even used (and likely tampered with) a referendum to change the city’s legal structure to a chartered city which allowed them to raise their own salaries.

The United States generally experiences very low levels of corruption convictions, around 1,000 per year across the nation. One might expect that some level of state, federal, or citizen oversight would have prevented the Bell incident. Yet this massive scandal was only uncovered due to quality investigative journalism by the Los Angeles Times, and only after five full years of consistent wrongdoing by city officials. How did this happen, and how can similar misconduct be prevented in the future?

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The 2016 CPI and the Value of Corruption Perceptions

Last month, Transparency International released its annual Corruption Perceptions Index (CPI). As usual, the release of the CPI has generated widespread discussion and analysis. Previous GAB posts have discussed many of the benefits and challenges of the CPI, with particular attention to the validity of the measurement and the flagrant misreporting of its results. The release of this year’s CPI, and all the media attention it has received, provides an occasion to revisit important questions about how the CPI should and should not be used by researchers, policymakers, and others.

As past posts have discussed, it’s a mistake to focus on the change in each country’s CPI score from the previous year. These changes are often due to changes in the sources used to calculate the score, and most of these changes are not statistically meaningful. As a quick check, I compared the confidence intervals for the 2015 and 2016 CPIs and found that, for each country included in both years, the confidence intervals overlap. (While this doesn’t rule out the possibility of statistically significant changes for some countries, it suggests that a more rigorous statistical test is required to see if the changes are meaningful.) Moreover, even though a few changes each year usually pass the conventional thresholds for statistical significance, with 176 countries in the data, we should expect some of them to exhibit statistical significance, even if in fact all changes are driven by random error. Nevertheless, international newspapers have already begun analyses that compare annual rankings, with headlines such as “Pakistan’s score improves on Corruption Perception Index 2016” from The News International, and “Demonetisation effect? Corruption index ranking improves but a long way to go” from the Hidustan Times. Alas, Transparency International sometimes seems to encourage this style of reporting, both by showing the CPI annual results in a table, and with language such as “more countries declined than improved in this year’s results.” After all, “no change” is no headline.

Although certain uses of the CPI are inappropriate, such as comparing each country’s movement from one year to the next, this does not mean that the CPI is not useful. Indeed, some critics have the unfortunate tendency to dismiss the CPI out of hand, often emphasizing that corruption perceptions are not the same as corruption reality. That is certainly true—TI goes out of its way to emphasize this point with each release of a new CPI— but there are at least two reasons why measuring corruption perceptions is valuable: Continue reading