Author Archives: Michael Maruca

About Michael Maruca

Student at Harvard Law School who's interested in responsible international development, social enterprise, energy and environmental issues.

Model Language for an Anticorruption Citizen Suit Provision in Community Development Agreements

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Community Development Agreements (CDAs) are contracts between extractive companies and the local communities that reside near their operations. The contracts are designed to funnel some of the financial and non-financial benefits of the project to those who are most likely to be negatively impacted by their inherent destructiveness. Some developing states require CDAs from extractive companies as a precondition for granting permits, and the World Bank publishes model regulations for CDAs—recommendations that hold significant sway for many developing states. The World Bank’s model regulations are often referenced, or adopted wholesale, by countries with capacity constraints.

The World Bank model CDA, and many of the existing national laws which govern CDAs, include required, substantive terms such as monitoring components, dispute resolution systems, etc. However, CDAs have not traditionally included provisions that might allow the contracts to be operationalized in the anticorruption fight. Building on the work of Abiola Makinwa and James Gathii, I have argued that CDAs should include anticorruption clauses that would give recognized community members the right to sue as third party beneficiaries in the case of corruption, and that the World Bank should amend its model CDA to include a third party beneficiary cause of action for corruption in the making or execution of a CDA.

While my previous post advocated for this reform in general terms, my objective here is to suggest specific language that the World Bank should incorporate into its model regulations. These provisions derive in part from recommendations of the Columbia Center on Sustainable Investment’s (CCSI) analysis of Emerging Practices in Community Development Agreements and transform the CDA into an anticorruption tool. The recommended provisions are as follows:

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Shareholder Proposals as a Response to Trump’s Conflicts of Interest

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Donald Trump’s continuing failure to place his assets in a blind trust creates an opportunity for him to abuse the public office of the Presidency for private gain—his own and his family’s. The Trumps have shown themselves willing to work with blatantly corrupt business partners in the past; now, with the awesome power of the Presidency, Trump is in a unique position to do significant damage to the anticorruption agenda. People who, like me, are bothered by the conflicts of interest have sought ways to fight back. While my last post discussed the viability of the Trump anticorruption boycotts, here I discuss a different but potentially complementary approach: shareholder proposals.

What is a shareholder proposal? Every year, each shareholder receives a long booklet of information, called a proxy statement, from every company in which he or she holds stock. These proxy statements are compiled by corporate leadership and distributed to shareholders, who are asked to vote on certain matters: electing directors to the board, hiring the corporate accounting firm, and approving executive compensation. At the end of the proxy statement come the shareholder proposals, short recommendations for the board of directors. Shareholders are asked to vote for or against those proposals.

Under SEC Rule 14a-8, any shareholder (or group of shareholders) who holds $2,000 or 1% (whichever is less) of the company for at least one year may submit a proposal. (There are a few other procedural requirements as well, but they are not too onerous.) Although shareholder proposals are merely advisory—the directors and management retain their power to make decisions on behalf of the corporation—shareholder proposals in the past have been used to advance social and political goals. For example, social activists used shareholder proposals to urge divesting from South Africa during the apartheid era. Last year Exxon Mobile included shareholder proposals to place a climate expert on the Board and to report on compensation for women. A shareholder proposal for Coca-Cola asked the company to report on its operations in high-risk regions with poor human rights records.

In this vein, anticorruption activists who hold stock in corporations that do business with the Trump family brands (such as Amazon, Macy’s, or Zappos) could submit shareholder proposals urging those companies to report on or cease all such business. To be sure, shareholder proposals are merely recommendations to the board. But shareholder proposals are nonetheless a low-cost tool in the anticorruption advocate’s toolbox that can help keep public attention on the issue and prevent the normalization of Trump’s conflicts.

An anti-Trumpian-conflicts-of-interest shareholder proposal, cast in the formalistic style typical of such proposals, might look something like the following:

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Jared Kushner, Ivanka Trump, Anti-Nepotism, and Conflicts of Interest

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On the same day as President Trump’s swearing in, the Department of Justice’s (DOJ) Office of Legal Counsel (OLC) released a memorandum elaborating upon why President Trump’s appointment of his son-in-law Jared Kushner as a Senior White House Advisor did not violate the federal anti-nepotism statute (5 U.S.C. § 3110). That statute prohibits a public official (including the President) from appointing or employing a relative (which the statute defines as including a son-in-law or daughter-in-law). The OLC reasoned that despite the seemingly clear prohibition in 5 U.S.C § 3110, another federal statute, 3 U.S.C. § 105(a), exempted positions in the White House Office from the anti-nepotism law. The OLC recognized this conclusion was a departure from its own precedent, but with the aid of some selective reading of legislative history, the OLC argued that lawmakers intended to allow the president “total discretion” in employment matters when it passed 3 U.S.C. § 105(a). (For non-specialists, see this primer for an explanation of these and other federal laws and regulations which could be relevant for addressing corruption in the Trump Administration.)

Somewhat predictably, the OLC memo generated debate among legal commentators (see here, here, here, and here). Yet even if the legal arguments were not entirely convincing, the OLC ended with a practical point that was echoed by many of the commentaries: given that President Trump will seek Mr. Kushner’s advice, regardless of whether he is a formal employee, it would be better for Mr. Kushner to be formally employed as a White House advisor, and thus subject to the applicable conflict-of-interest (COI) and financial disclosure rules. The same argument applies to Ivanka Trump, who also recently became an employee of the White House.

Some anticorruption advocates, myself included, were persuaded at the time by the OLC’s practical point. It would be best if the President did not make major policy decisions on the advice of radically unqualified relatives. But unfortunately, he is going to turn to them for advice. Given that baseline, we should prefer those family members occupy formal appointments, where at least they will be constrained by the COI statute and disclosure rules. However, with the benefit of hindsight, we should never have been persuaded. The COI statute and the disclosure rules turn out to be ineffective devices for preventing corruption in the Trump era. While the disclosure rules did encourage Mr. Kushner to make some divestments, they do not contain enough details to identify potential conflicts. And when there are conflicts, the COI statute is unlikely to be enforced, either because Attorney General Jeff Sessions will choose not to, or because the White House will grant a waiver.

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Targeting Trump Businesses as a Response to Conflicts of Interest

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Many people, myself included, believe Donald Trump’s failure to place his assets in a blind trust is more than just problematic. The full extent to which President Trump may be abusing public power for private gain—that is, engaging in corruption—is unknowable, so long as his business empire remains opaque and his tax returns stay buried. Even where Trump’s business interests are out in the open, a “shadow of corruption” hangs over the actions he takes as an ostensible public servant.

Some of the people who share these concerns are exploring ways in which they might engage in consumer activism as a response to Trump’s conflicts of interest. Consider two organizations that are leading broad boycotts against the Trump Administration. Don’t Pay Trump is a web browser extension that allows one to, in their words, “keep your money out of Trump’s tiny hands.” It alerts the consumer when he or she is making an online purchase from a business that sells Trump products. A second initiative, #grabyourwallet, is a more established and exceedingly low-tech enterprise which also calls for “flexing consumer power.” #grabyourwallet maintains what looks like an excel spreadsheet that displays companies ripe for a Trump boycott. It provides the necessary tools to the activist consumer: name and number of the company, reason it should be boycotted, suggested sample of what to say, and updates on successes. #grabyourwallet received credit for the recent Nordstroms decision to drop Ivanka Trump’s produces from its stores, which earned Nordstroms a Presidential tweeted complaint on February 8th.

Both of these organizations attempt to decrease the profitability of Trump businesses, albeit for different reasons. Don’t Pay Trump seeks to weaponize consumer power to affect administration policy, while #grabyourwallet is explicitly motivated by the Trump family’s conflicts. It is difficult to say how effective the anti-Trump boycotts might be, given the absence of direct analogies to the current situation. Nonetheless, we might be able to draw some lessons from past corporate boycott efforts:

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Cash Crunch: How Will India’s Supreme Court Respond to Modi’s Radical Move?

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Last November 8th, the same day the United States elected a kleptocrat to its highest office, an executive on the other side of the world—Indian Prime Minister Narendra Modi—launched what Larry Summers called “the most sweeping change in currency policy that has occurred anywhere in the world for decades.” Prime Minister Modi’s surprise “demonetization” drive gave citizens fifty days to exchange all 500 and 1000 rupee notes (valued at about 8 and 15 USD respectively). Modi’s radical move, which will remove approximately 86% of all currency in circulation, is an attempt to combat endemic petty corruption, money laundering, terrorist financing, and tax   evasion (only 2% of Indians pay income tax). Prime Minister Modi was elected on an anticorruption platform in 2014, and pledged during his campaign to target hidden cash (so-called “black money”). Yet the demonetization campaign came as a surprise. Indeed, it probably had to be a surprise, lest those hiding fortunes in cash would have been able to prepare for the policy change.

While the Indian public generally supports aggressive anticorruption efforts, it would be hard to exaggerate the disruption resulting from demonetization. The real estate and wedding industries run largely on cash, as do most small businesses. And the demonetization program has hit regular citizens hard: People have been waiting in lines for hours to exchange their cash, which can be especially difficult for the four-fifths of women who don’t have a bank account. In the short term, consumption, the stock market, and growth forecasts have all plummeted and the agricultural sector is expected to suffer as well. Prime Minister Modi acknowledged the campaign would cause pain for many honest people, but believed it was worth it, stating that black money and “corruption are the biggest obstacles in eradicating poverty.” (Since then, the official justification for the campaign appears to have shifted to an attack on the cash economy as a whole, rather than a campaign against black money specifically.)

The fate of the demonetization program now lies with India’s judiciary: Continue reading →

Equitable Sharing, Not Deference: How US FCPA Enforcers Should Accommodate Foreign Interests

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Frederick Davis recently published two guest posts (see here and here) emphasizing some of the risks that arise when the US government pursues FCPA prosecutions against foreign corporations. He notes that European anticorruption administrators are regularly irritated by aggressive US action in this field and by the apparent discrepancy in the treatment of US and non-US corporations. He also notes that foreign corporations are reasonably worried about being charged twice for the same transgression: While European countries have addressed this concern through an international version of the double jeopardy bar (also known as ne bis in idem), that bar does not protect a corporation against a subsequent US prosecution. Moreover, as Mr. Davis notes, US enforcement agencies (as compared to their counterparts in Europe) have wider authority to charge, are more willing to assert power abroad, wield more procedural tools, and are less subject to judicial supervision in their charging and settlement decisions. To address these problems, Mr. Davis recommends, among other measures, that the US DOJ issue guidelines for when to defer to foreign judgments.

However, US deference to foreign judgments may not be the best solution. It could be true, as Mr. Davis worries, that US prosecutors are “becoming the ultimate arbiters” of foreign bribery cases (at least those involving multinational corporations). But if the US standard is indeed more stringent, then US hegemony could lead to more aggressive anticorruption prosecution across the board, a boon for anticorruption advocates. Since in certain situations competition among administrative and enforcement agencies can create a de facto “race to the top” in terms of standards, it might not be such a good idea for the US to adopt a more deferential posture toward foreign judgments in transnational bribery cases.

That’s not to ignore the significant problems that Mr. Davis describes. Given that the fines and other monetary penalties for corrupt business behavior can be enormous, US FCPA counterparts in other nations would be rightly dismayed if they lost out on the potential recoveries. If a Danish corporation listed on a US exchange bribes an official in Gambia, all three countries should be able to penalize the wrongdoers and share—though not necessarily equally—in the fines and other penalties recovered. If the penalties are appropriately distributed, we need not sacrifice the aggressive anticorruption regime of US hegemony. My response to Mr. Davis is that we need guidelines for distribution of recoveries, not necessarily guidelines for deferral to foreign judgments operating under differing, and less aggressive, standards.

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Community Development Agreements: A New Anticorruption Tool?

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Projects in the extractive industries are often enormous, long-lasting, multi-billion dollar affairs. Given the disruption, potential for environmental disaster, and permanent changes in the state of the land, these projects tend to generate conflict and controversy, especially in low-income countries, where citizens may enjoy fewer legal protections. As a way to mitigate these risks, some nations require extractive firms to enter into “Community Development Agreements” (CDAs) with local communities. (CDAs—which are also sometimes known as Benefit Sharing Agreements, Impact Benefit Agreements, or Community Joint Ventures—are sometimes voluntary corporate social responsibility initiatives, but my focus here is on CDAs that are required by, and incorporated into, national regulatory frameworks.) At the most general level, CDAs are created through a process that engages local populations in important decision-making about the project and its profits. The process varies, but usually includes the following steps:

  • Identify the people who will be affected
  • Allow those identified to determine what the community could gain from the project (whether that be jobs, money, education, infrastructure, long-term benefits, etc.)
  • Write a CDA that encompasses the demands of the community and aligns with regulatory requirements
  • Provide monitoring tools to the affected population
  • Set up dispute resolution systems
  • Strategize for how to prepare the population for the end of the project’s lifespan.

This process takes time and can be expensive. But extractive projects typically last for decades, and so building a sustainable relationship with the local population is vital to the project’s success. After all, many corporations fund similar stakeholder engagement processes without being required by law to do so. That is because CDAs can be a good business decision: empowering the community allows the company to avoid violent conflict and signaling that the firm is a good corporate citizen.

For those countries that do require a CDA for extractive projects, the law also regulates the substantive terms, requiring CDA contracts to contain certain clauses–typically monitoring components, dispute resolution mechanisms, and local spending or employment quotas. However, one thing that is never included in a CDA is an anticorruption clause. The words “bribery” or “corruption” appear nowhere in the World Bank’s model CDA agreement, and the Columbia Center on Sustainable Investment (CCSI) is silent on the issue. Building on recent work by Abiola Makinwa and James Gathii, I posit that CDAs should include anticorruption clauses, to empower private citizens in fighting corruption in public contracts. The basic idea is to allow the recognized community members—those covered by the CDAs—as “third party beneficiaries” to the contract between the government and the extractive company. The community members would then be entitled to sue if there was corruption in the making or execution of the contract.
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Can U.S. Efforts To Fight Vote Buying Offer Lessons for Others?

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Vote buying—the practice of providing or promising cash, gifts, jobs, or other things of value to voters to induce them to support a candidate in an election—is illegal in 163 countries, yet it is a widespread and seemingly intractable problem in many parts of the developing world. In Ghana, for example, incumbents distribute outboard motors to fishermen and food to the rural electorate. In the Philippines, politicians distribute cash and plum short-term jobs. In 2015, Nigerian incumbents delivered bags of rice with images of the president ahead of the election. And Werner Herzog’s 2010 documentary film Happy People shows a politician cheerfully delivering dried goods along with musical entertainment to an utterly isolated village of trappers in Siberia (49 minutes into the film). Thus, recent instances of vote buying are more varied than the simple cash for vote exchange; they include awarding patronage jobs and purposefully targeting social spending as a reward for political support.

Vote buying not only distorts the outcomes of elections, but it also hurts the (usually poor) communities where this practice is rampant. It might be tempting to say that at least those who sell their votes receive something from their government, but in fact, once these citizens are bought off, their broader interests are left out of the government’s decision-making process, as the incentive to provide public goods to that group disappears. A study in the Philippines, for example, found that vote buying correlates with lower public investments in health and higher rates of malnourishment in children.

While some commentators occasionally (and condescendingly) suggest that vote buying is a product of non-Western political norms and expectations, this could not be further from the truth. Although wealthy democracies like the United States today experience very little crude vote buying, vote buying in the U.S. was once just as severe as anything we see today in the developing world. In fact, during George Washington’s first campaign for public office in 1758, he spent his entire campaign budget on alcohol in an effort to woo voters to the polls. By the 19th century, cash and food occasionally supplemented the booze, particularly in times of depression. Even as late as 1948, a future president won his senate campaign through vote buying and outright fraud.

Yet while U.S. politics today is certainly not corruption-free (see here, here, and here), it has managed to (mostly) solve the particular problem of vote buying. Does the relative success of certain U.S. efforts hold any lessons for younger democracies? One must always be cautious in drawing lessons from the historical experience of countries like the U.S. for modern postcolonial states, both because the contexts are quite different and because suggesting that other countries can learn from the U.S. experience can sometimes come off as patronizing. Nevertheless, certain aspects of the United States’ historical strategy to combat vote buying might be relevant to those countries struggling with the problem today. Let me highlight a few of them: Continue reading →