Who Can Commit Honest Services Fraud? The U.S. Supreme Court Will Soon Decide

One of the most potent anticorruption tools for U.S. prosecutors is the “honest services” fraud statute. In essence, the statute makes it illegal for someone to violate their fiduciary duty to the public by participating in a bribery or kickback scheme. The idea behind this law is that when someone owes a fiduciary duty to the public, engaging in corruption deprives the public of their right to “honest services” and thus constitutes a violation of that duty.

Yet while it is relatively clear what activities violate this statute, it is less clear who can violate it. Some cases are obvious: Public officials, for instance, hold a position of power that has been entrusted to them by the public, and in turn must act on behalf of the public when wielding that power. They clearly are the sorts of public fiduciaries to whom the honest services fraud statute can apply. At the other end of the spectrum are ordinary private citizens who have no connection whatsoever to government office. Such people may have a general moral responsibility to behave honestly, but they do not owe fiduciary duties to the public. But between those easy cases at either end of the spectrum are more challenging cases. Consider a person who does not formally hold office but who, by virtue of some relationship to public office or to a public official, have significant influence over government decisionmaking. Do those people owe a fiduciary duty to the public? Are they subject to conviction under the honest services fraud statute? This is the difficult problem that the U.S. Supreme Court will soon address in Percoco v. United States.

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A U.S. Court Just Opened a Huge Loophole in Anticorruption Campaign Finance Laws

A New Jersey election law prohibits any “corporation carrying on the business of a bank” from donating to political parties. The New Jersey Bankers Association (NJBA), a trade group representing the interests of 88 banks in the state, challenged that law as unconstitutional. For those who follow disputes over U.S. campaign finance law, one might have expected that this case would be decided within a familiar framework: Under the Supreme Court’s well-established principle that campaign contributions are a constitutionally protected form of political speech, the restriction would only be permitted if it is narrowly tailored to advance the government’s compelling interest in preventing corruption or the appearance of corruption.

The federal appeals court’s surprising decision in this case, though, sidestepped that usual inquiry entirely. Instead, the court determined that the law in question did not apply to the NJBA in the first place. The court reasoned that the law applies only to “corporation[s] carrying on the business of a bank,” and because the banks’ trade association (the NJBA) does not itself make loans and receive deposits, the NJBA is not a “bank,” meaning the law does not prohibit the NJBA (as distinct from its member banks) from making political donations.

That reasoning is at least questionable as a purely linguistic matter. To “carry[] on” a business activity can mean both “to engage in or conduct” business oneself and “to develop [a business] beyond a stage already attained.” While a bank trade association does not do the former, it arguably does do the latter—for example, by lobbying against capital constraints that would impede the loan-making capacity of banks. But more importantly, the court’s narrow, literalist reading of the statute is inappropriate in light of its dangerous consequences for New Jersey’s efforts to restrict corruption and the appearance of corruption in the campaign finance system. The court’s ruling permits (at least for now) New Jersey to restrict banks’ campaign contributions, but allows the representative of those banks to make contributions on their behalf. That’s like saying your child isn’t allowed to reach in the cookie jar, but his friend can grab the cookie for him. This misguided decision has thus created a potentially gaping loophole, one allowing affluent industry groups to engage in campaign-related spending that would ordinarily be deemed to present such a high risk of corruption (or its appearance) that government regulation is justified.

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Money for Something: Do Remittances Have an Anticorruption Effect?

Remittances—the money or goods that migrants send home to support their families and friends—have become increasingly important in developing countries. In nations like Haiti, Honduras, and Tajikistan, remittances account for more than 20% of their respective GDPs. Interestingly, many of these top recipient countries also rank among the most corrupt in the world, at least according to Transparency International’s Corruption Perceptions Index. While that correlation does not by itself establish causation, it does invite the question of whether large flows of remittances have any meaningful impact on corruption within the recipient country.

Surprisingly, this question has been “virtually ignored” in academic literature. Only a few studies investigate the connection between remittances and corruption, and the handful of papers on this topic come to quite different conclusions.

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The U.S. Supreme Court Has an Appearance Problem: What FEC v. Cruz Got Wrong

According to the U.S. Supreme Court, campaign contributions are a form of political “speech” and are therefore protected by the First Amendment of the U.S. Constitution. As a result, the government may restrict such contributions only if doing so serves a compelling state interest. Currently, the only interests that the Court has recognized as sufficiently compelling to justify restrictions on political spending are preventing corruption or the appearance of corruption.

Though sometimes presented as a single interest, the prevention of actual corruption and the prevention of the appearance of corruption are not the same. The reason the government has an interest in preventing actual corruption is obvious. The Court has explained the related but distinct interest in preventing the appearance of corruption by appealing to the importance of maintaining public confidence in the electoral process. If a certain campaign finance activity creates the appearance of corruption, then ordinary citizens may start to view their political participation as futile, and may lose faith in the integrity of elections. Because Congress has an interest in preventing this erosion of public trust, the government can regulate campaign finance activities that the public perceives as corrupt, even when those activities are not associated with actual corruption.

At least that’s what the Court has said. In practice, however, the Court has often failed to apply the appearance of corruption standard in a way that serves these objectives. This is nowhere clearer than in the Court’s recent decision in Federal Election Commission (FEC) v. Cruz. The case concerned a federal law that prohibited a candidate from using post-election campaign donations to repay more than $250,000 of personal loans that the candidate made to his or her campaign prior to the election. The government justified this law partly on the grounds that it prevented the appearance of corruption. After all, when a candidate uses donations to repay personal loans, the donor’s contributions go straight into the candidate’s pockets; the public could easily view such payments as fostering corruption. In support of this argument, the government pointed to a public opinion poll in which 81% of respondents thought it was “likely” or “very likely” that donors who make post-election contributions expect a “political favor” in return. Additionally, the government cited an academic study that found—on the basis of over three decades of empirical evidence—that politicians with campaign debts are “significantly more likely” than debt-free politicians to switch their votes after receiving contributions from special interests.

This evidence, on its face, would seem to support the government’s claim that the limit on using post-election donations to repay a candidate’s large personal loans furthers its compelling interest in preventing the appearance of corruption. However, the Court’s majority opinion dismissed the government’s appearance-based argument in a brief passage with relatively little sustained analysis, apparently treating the flaws in the government’s arguments as self-evident. The Court’s dismissive attitude to the government’s evidence in this case indicates a worrisome approach to the appearance-of-corruption issue more generally.

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U.S. States Have Failed to Address Charter School Corruption. It’s Time for Federal Intervention.

In the United States, charter schools are publicly-funded, tuition-free institutions that operate largely independent from the traditional public school system. Charter schools are established through a contract, or charter, between the school and an “authorizer,” which is the school district, state education agency, or other entity that a state has sanctioned to approve these charters. Once approved, charter schools do not have to follow the same regulations as traditional public schools but instead are required to operate under the terms and academic standards set by their authorizing contract.

Proponents tout charter schools’ autonomy and flexibility: free from burdensome education laws and local regulations, these schools can be innovative in their curricula and management, and can compete with one another and with traditional public schools in the education “market.” Parents will then have the opportunity to “vote with their feet,” and they—along with the public funding designated for their children—will flow into better schools, leaving the poorly performing charter schools to shut down.

Or so the argument goes. In reality, thanks to rampant corruption that has come to plague the charter school industry, this public funding often flows not into the best schools but rather into the pockets of dubious school officials and their affiliates. There have been numerous charter school corruption scandals: self-dealing real estate leases, exorbitant salaries for school executives, and kickbacks from inflated purchases of school equipment and supplies, to name a few.

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