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

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:

Continue reading

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.

Continue reading