An updated version of my anticorruption bibliography is available from my faculty webpage. A direct link to the pdf of the full bibliography is here, and a list of the new sources added in this update is here. As always, I welcome suggestions for other sources that are not yet included, including any papers GAB readers have written.
In my last post, I imagined what a frustrated U.S. official might have to say about the ever-increasing drumbeat of demands for the United States to “return” (that is, transfer) the “proceeds of crime” (that is, the fines collected from corporate defendants in Foreign Corrupt Practices Act (FCPA) cases) to the “victim countries” (that is, the governments whose officials took the bribes that gave rise to the FCPA violations). My imaginary rant was deliberately over-the-top, intended to be provocative and to stir up some more honest debate on this topic by cutting through the circumspection and diplomatic niceties that usually accompany pushback against the “give the settlement money to the victim countries” position. In this post, I want to continue on the same general topic, and in the same provocateur’s spirit, by asking the following question:
When (or if) demand-side countries start collecting serious fines against bribe-taking public officials and/or bribe-paying companies, does the logic of compensating “victims” dictate that these countries transfer some of the money they recover to the United States?
At the risk of seeming totally bonkers, I’m going to assert that the answer might well be yes if one accepts the logic for making transfer payments in the other direction (from the U.S. government to the governments of the countries whose officials took the bribes) in FCPA cases. Here’s the argument: Continue reading
Roger Henke, Chairman of the Board of the Southeast Asia Development Program (SADP), a development grantmaker based in Cambodia, contributes the following guest post (the third in a three-part series):
Previous posts on development NGO corruption described a survey tool and its results in Cambodia and the conundrum of using the upward accountability relationship between local NGOs (LNGOs) and the grantmakers funding them for remedial action. The analysis of the report which underlies much of those contributions includes another foundational premise: Given the systemic functioning of Cambodia’s (and other countries’) LNGO sectors, anticorruption action to hold these LNGOs to account needs to be collective in order to be effective.
The characterization of the sector as “systemic” is meant to capture fact that nearly all LNGOs are funded by more than one, often five or more, grantmakers, while these grantmakers in turn, each fund many (sometimes more than 25) LNGO partners. To see why this matters for upward accountability, suppose for the moment that a given Grantmaker X takes seriously its responsibilities to diligently oversee LNGO Partner Y, and suppose further that Grantmaker X uncovers a problem. What happens next? The best case scenario is that the LNGO acknowledges the problem and fixes it, while the worst-case scenario is that both the LNGO and the grantmaker ignore the problem. Both of those happen sometimes. But the more common outcome is this: The LNGO fails to deal with the problem, and eventually Grantmaker X decides to stop funding it. But this affects LNGO Y only temporarily, because it has (or can find) other funders, many of which may not exercise the same degree of diligence as Grantmaker X. So nothing much changes. Even when Grantmaker X communicates with other co-funders about the problems, and more of them decide to question their support of LNGO Y, it takes a fair level of coordinated grantmaker disinvestment to put an LNGO out of business. That level of coordination is rare even in cases of obvious crisis, and absent during more mundane times.
What is needed, then, is more collective action. Many grantmaker staffs would agree with this in principle, but the dominant response is generally not action but resignation, dressed up as “realism”: “Why waste time on beating a dead horse? Even if local grantmaker offices were all willing to collaborate, aligning the diverse requirements regarding reporting, auditing, etc. of all the headquarters….forget it.” I reject this defeatism. One rarely knows that something won’t work until one tries, and my experience in Cambodia is that practical pilots are very rare. So, what would proper collective diligence regarding financial management imply in practice? Continue reading
As the United States continues to settle Foreign Corrupt Practices Act (FCPA) cases with corporate defendants for large sums, the issue of whether the U.S. and other “supply-side” enforcers should transfer a portion of these settlement proceeds to the countries where the bribery took place has continued to attract attention and discussion. (This question is often framed as whether the U.S. should “return” some of these settlement proceeds to the “victim countries,” but that formulation is highly misleading, both because criminal fines were never the property of another government, and so cannot be “returned,” and because in many cases referring to these countries as “victims” is problematic, to put it mildly. So I’ll refer to this as “transferring settlement proceeds to demand-side countries.”) The push for transferring settlement proceeds to demand-side countries has gotten a bit more traction over the past year, and has become something of a talking point for certain demand-side governments, especially those in Africa, along with supporting NGOs. So, for example, a Nigeria-sponsored resolution at last year’s UN Convention Against Corruption Conference of States Parties (Resolution 6/2) called for “urgent attention” to the (utterly bogus and misleading) statistic that although US$6.2 billion has been recovered through settlements in foreign bribery cases, only 3% of this amount “has been returned to States whose officials were bribed and where corrupt transactions took place, which is a key aim of chapter V of the contention,” and further called on states that use settlements to conclude foreign bribery cases to “give due consideration to the involvement of the jurisdictions … where foreign officials were bribed.” (The original proposed language was far stronger, “noting with concern the prevailing narrow interpretation of the terms ‘proceeds of crime’ in settlements … that excludes … fines in order to avoid such proceeds from being returned to States and, by so doing, using settlements to create an artificial category of victims of corruption, thereby reducing the potency of chapter V of the Convention.”) One sees this push in several of the country statements coming out of last month’s London Anticorruption Summit, especially those of Nigeria and Tanzania.
Unsurprisingly, the United States has resisted these calls. Generally, U.S. officials have done so (at least in public) tactfully and diplomatically, emphasizing the U.S. government’s commitment to helping the victims of cooperation, its willingness to work with other countries to cooperate in ongoing investigations and improve the mutual legal assistance process, etc. But I’m beginning to sense a growing undercurrent of frustration on the U.S. side, as an increasing number of demand-side countries and NGOs are making the call for transfer of settlement proceeds to demand-side governments (which, again, they often characterize as “returning assets to victim countries”) a central theme of their presentations and diplomatic efforts. (And perhaps, I should acknowledge, some of the frustration I’m sensing is a reflection of my own skepticism – see here, here, and here.) Now, when I say I sense growing frustration or irritation on the U.S. side, I should be clear that I’m speculating. Though I’ve met a few officials from the U.S. Departments of State and Justice, and Treasury who work on corruption issues, I’m certainly no insider, and nothing in the rest of this post should be interpreted is reflecting any actual conversations or statements from current or former U.S. government officials, because it doesn’t. Nor should this be taken as fully reflecting my own views, even though part of what I’m going to write below is generated by introspection.
With those caveats, I’d like to try to imagine what’s going on in the heads of U.S. government officials as they smile politely while listening to the sorts of criticisms I noted above, and when they express, in measured language, their reservations about the proposals that the U.S. transfer FCPA settlement proceeds to demand-side countries. Just for fun, and to be a bit provocative, I’ll present this as a kind of unhinged rant – the sort of thing I imagine that a hypothetical U.S. official’s id might be screaming internally, behind the polite smiles and diplomatic language imposed by her superego. The imaginary rant, in response to demands that the U.S. transfer FCPA settlement proceeds to demand-side countries, might run something like this: Continue reading
Roger Henke, Chairman of the Board of the Southeast Asia Development Program (SADP), a development grantmaker based in Cambodia, contributes the following guest post (the second in a three-part series):
My previous post in this series described the results of a survey that estimated the incidence of fraud and associated problems within the Cambodian NGO sector. The survey utilized a relatively independent source, the grantmakers that fund local NGOs (LNGOs), and triangulated the results with information supplied by the firms that perform external audits for LNGOs. The basic idea was that grantmakers are likely to have an evidence-based opinion of the quality of their LNGO partners’ financial management, governance, and fraud risk (and fraud incidence). After all, grantmakers assess organizational soundness before awarding a first grant to a potential partner LNGO, periodically monitor the work being funded by that grant, and require extensive, often cumbersomely regular, results and financial reporting, as well as yearly or project-based external audits. To put it simply: Grantmakers conduct regular due diligence (in the broad sense of the term) on LNGOs.
It seems strange that such an obvious source of objective data on NGO corruption and some of its correlates had, to my knowledge, never been considered before. Why not? My guess would be that the strained and ambivalent relationship that the aid community has with concept of so-called upward accountability is to blame. The engagement is strained in at least the following two aspects: Continue reading
Under the “Know Your Customer”-oriented regulatory regime endorsed by organizations like the Financial Action Task Force (FATF), financial institutions and similar entities must apply heightened scrutiny to so-called “politically-exposed persons” (PEPs), as well as their family members and close associates. FATF defines PEPs as individuals who are or have been entrusted with prominent public positions (such as heads of state or government, senior politicians, senior government, judicial, or military officials, senior executives of state-owned companies, and important political party officials), as well as their family members and close associates. (For simplicity, here I’ll use the term PEP to include both the PEPs themselves, and their family members and close associates, as the FATF recommendations make clear that the latter should be covered by the same heightened due diligence rules.) The rationale behind FATF’s recommendation of more stringent due diligence for PEPs is the idea that PEPs are higher-risk customers, because they have more opportunities than ordinary citizens to acquire assets through unlawful means like embezzlement and bribe-taking. Thus, FATF’s Recommendation 12 (which many countries have adopted) advises that countries should require financial institutions to employ additional due diligence measures for foreign PEPs in order to establish the source of the PEP’s assets, and to conduct enhanced ongoing monitoring of the business relationship with the PEP.
That all seems like a good idea. But how, exactly, is a bank supposed to determine whether a prospective client is a PEP? Here, the FATF recommendations say only that financial institutions should “have appropriate risk-management systems to determine” whether a prospective customer is a foreign PEP. In practice, financial institutions rely on a relatively small number of private providers—like World Check (Thompson Reuters), World Compliance (Lexis-Nexis), and a handful of others—to screen prospective clients to see if they are in a database (generated and maintained by the private service providers) of known PEPs. Presumably (though I haven’t been able to figure out whether this is true) financial regulators in countries that have adopted the FATF recommendations on PEP screening will treat a bank’s use of one of these reputable services as satisfying the bank’s responsibility to take reasonable measures to determine whether a client is a PEP, even if in fact the service failed to accurately identify a given customer as a foreign PEP—though the bank might still be on the hook for other legal violations in connection with the PEP’s account.
So, keeping track of who’s a PEP has been entrusted to the private market. There is no “official” PEP list maintained by any national government or inter-governmental organization like FATF, nor does any government (to the best of my knowledge) directly monitor or regulate the private providers like World Check and World Compliance to ensure their PEP lists are accurate and up to date. Is this a problem? Should we be happy leaving PEP screening entirely to the private market, or should there be greater government and/or civil society involvement in generating, maintaining, and revising PEP lists?
This issue came up last month at the “Tackling Corruption Together” conference held the day before the London Anticorruption Summit. David Lewis, the Executive Secretary of FATF, gave a presentation that emphasized (among other things) the importance of due diligence on PEPs. During the Q&A someone from the G20 Research Group (whose name I didn’t catch) asked Mr. Lewis about whether there was the need (and political will) to create public PEP registries, noting both the importance of accurate PEP lists, as well as the inefficiency of individual banks paying private services for screening individual names one at a time. Mr. Lewis replied, quite forcefully, that the creation of public PEP registries would be a “terrible idea.” He knows far more about this issue than I do, and I don’t know nearly enough to come out in favor of public PEP registries, but I have to say, I didn’t really find Mr. Lewis’s reasoning all that persuasive. Continue reading
Roger Henke, Chairman of the Board of the Southeast Asia Development Program (SADP), a development grantmaker based in Cambodia, contributes the following guest post (the first in a three-part series):
Compared with media attention to corruption among public officials and corporate interests, corruption in the non-profit sector is virtually ignored (though a recent GAB post on NGO corruption in India is a notable exception). This lack of interest is matched by the absence of sustained substantive debates about the sources of NGO sector corruption and the effectiveness of remedial interventions. My own experience with these issues derives from my involvement with the NGO sector in Cambodia. Corruption within our own house is a regular topic of informal conversation, and also makes it into our periodic sectoral assessments (though often through oblique references to concerns like “weak financial systems” and the “lack of checks and balances”). However, there are no efforts at all to go beyond these anecdotes and self-reported “weaknesses” to gather systematic, externally validated evidence about levels of corruption, let alone about issues like costs of corruption or the way it correlates with characteristics of the NGO sector that would offer entry points for positive change.
Given the comparative importance of development aid channeled through the NGO sector in countries like Cambodia, this lack of attention to NGO corruption is unfortunate. Admittedly, gathering information on local NGO (LNGO) corruption is challenging. Yet there are potentially useful sources of information that have not been exploited. For example, LNGOs are funded by grantmakers, and these grantmakers (often criticized by LNGOs for their cumbersome administrative requirements and time-consuming monitoring visits) are a possible source of data about LNGO fraud and its correlates. Additionally, the audit firms with an LNGO client base are another possible source of information.
In 2014, to test the willingness of grantmakers and audit firms to share information on their LNGO partners and NGO client base, we at SADP piloted a grantmaker and audit firm survey. The results were promising enough to repeat and expand the exercise in 2015. In this second grantmaker survey, 18 out of 26 grantmakers approached agreed to participate, and 13 of those 18 shared LNGO partner-level information (for a sample of 93 LNGOs). The grantmaker survey queried incidence and seriousness of (1) financial management problems, (2) governance problems, and (3) fraud. (In order to maximize participation, the survey prioritized brevity and simplicity over depth of information.) The audit firm survey (in which four of the five firms approached agreed to participate) asked only for some aggregate data (total number of LNGO audited, number of audits that identified fraud, number of audits that flagged serious financial system issues, etc.). Admittedly, neither the sample of grantmakers nor the sample of LNGOs is statistically representative of Cambodia’s NGO sector, but the surveys provide more valid information about corruption in development NGOs in Cambodia than has previously been available. And the quantitative picture emerging from the combination of these two data-sources about the organizational quality of Cambodian LNGOs is both revealing and disheartening. Interested readers should check out the full report; the most important findings are as follows: Continue reading
The leak of the so-called “Panama Papers”—the roughly 11 million documents from the Panama-based international law firm Mossack Fonseca, provided to the International Consortium of Investigative Journalists (ICIJ) by an anonymous whistleblower—has generated an enormous amount of coverage and commentary (including on this blog: see here, here, here, and here). The identity of the person who leaked the documents is still unknown, but (as many readers are already no doubt aware), this individual posted a “manifesto” last month under the name “John Doe,” explaining his motives in leaking the documents and advocating the sorts of reforms he or she believes are necessary to combat the evils that the Panama Papers reveal and represent. I’m not sure how many of our readers have already read the manifesto, but if you haven’t, I highly recommend that you do. It’s a fascinating document, obviously written by somebody who is both passionate and very well-informed. I’m not sure whether I agree with everything in it—the spirit of the manifesto is radical, even revolutionary, while by nature I tend to be more cautious and incremental—but I think that everyone ought to read the manifesto and take it seriously.
In terms of specific policy reforms, much of what the manifesto proposes has been widely discussed elsewhere: a call public corporate registers (including calls for the UK to extend its domestic initiatives in this area to its overseas territories and dependencies, and for the US to impose transparency and disclosure requirements on individual states); demand for reform of America’s “broken campaign finance system”; and the criticism of the “revolving door” between regulatory agencies and the financial institutions they regulate. (On this last point, by the way, I think John Doe’s analysis is both overly simplistic and overly nasty. He singles out Jennifer Shasky Calvery, the former director of the US Treasury’s Financial Crimes Enforcement Network (FinCEN), calls her “spineless” and castigates her for going to work for HSBC, “one of the most notorious banks on the planet.” I think the general criticism of the revolving door is too simple for reasons I have laid out previously, and it’s unfair in this context in particular because Ms. Calvery in fact had a reputation for aggressive enforcement. Maybe John Doe knows something about Ms. Calvery’s tenure at FinCEN that I don’t, but I found that this petty name-calling, not backed up by any evidence beyond vague insinuations and guilt-by-association, to be both off-putting and out of character with the rest of the manifesto.)
But in addition to these fairly familiar themes, John Doe’s manifesto lays out two radical policy proposals that, so far as I can tell, have gotten very little attention in the discussions of the Panama Papers, or even in discussions of the manifesto specifically. Both are worth taking seriously, though both make me uncomfortable: Continue reading
GAB is pleased to welcome back Professor Jason Sharman, Deputy Director of the Centre for Governance and Public Policy at Griffith University, Australia, who contributes the following guest post:
After the initial flurry of media attention to the Panama Papers, Matthew Stephenson rightly asks how much, if anything, we have really learned from this affair beyond the celebrity gossip.
A notable degree of modesty is in order here, as what we have seen so far is a tiny, almost certainly unrepresentative sample of the vast quantity of information leaked to International Consortium of Investigative Journalists (ICIJ). The initial wave of media coverage related to 140 individuals, including 12 heads of state or government. Since the ICIJ database became searchable on May 9th, we have a few more names, mostly small-time crooks, and it is possible to run individual name searches to your heart’s content. Nevertheless, given that Mossack Fonseca had created 214,000 shell companies, what we have seems to be less than 1% of their clientele, and presumably the most sensational and outrageous cases. If you looked at your average big international bank, took the records of 214,000 accounts, and subjected them to a detailed financial audit, you probably would find at least a few hundred people engaged in crime or some other seriously shady business (putting banks’ own criminal conspiracies like rigging the LIBOR and Forex markets and sanctions-busting to one side).
Matthew’s earlier post asked about the structure of the offshore shell company industry–in particular, whether it was dominated by a few major providers, or whether it was a highly fragmented market with many firms, each with small market share. The answer is both: There are a few big wholesalers of shell companies, four or five, plus a couple in the US. The wholesalers sell to thousands of intermediary retailers, who then sell to the end-users, i.e. the beneficial owners. I was surprised by how many retailers Mossack Fonseca dealt with (14,000), given that the other wholesalers of equivalent size engage with 2,000-3,000 intermediaries. The difficulty keeping track of this number of retailers, let alone their customers, might explain Mossack Fonseca’s otherwise-puzzling suicidal indiscretion in transacting with customers who brought a huge amount of risk for a fairly trivial sum of money, e.g. those on US government sanctions lists.
What does the structure of the industry mean for regulatory solutions? The retailers could take up the slack if the wholesalers were put out of business, although the process of forming shell companies would be less efficient and more expensive. More importantly, the more concentrated the industry, the easier it is to regulate, compared to the whack-a-mole situation of thousands of independent retailers. As Rick Messick rightly points out, for this regulation to work, however, it is necessary for the Eligible Introducer system between wholesalers and retailers to work in identifying beneficial owners. Despite a litany of earlier high-profile failures, a Guardian piece actually suggests that the British Virgin Islands authorities had recently got on top of this problem: in 2015, 90 requests from the local Financial Intelligence Unit to Mossack Fonseca turned up the names of 89 beneficial owners. However, because customer identity documents are now almost always scans rather than paper, there seems to be no good reason why they can’t be held in the jurisdiction of incorporation.
More broadly, with the Panama Papers and the earlier April 2013 offshore leak, we (or at least the ICIJ) now have information on just over 320,000 offshore shell companies, which probably represents something like 15-20% of all the offshore shell companies ever created. You can work out the total number in that BVI has about 40-45% of the worldwide market. It currently has 450,000 active companies, and 950,000 formed in total since the creation of its registry. If we could draw a random sample of these companies and the associated documentation, rather than cherry-picking the worst of the worst, then we could form a much more accurate and robust conclusion on what the typical uses of offshore shell companies actually are.
In just looking at the information we do have from the Panama Papers, two things are fairly apparent, yet don’t seem to have attracted much comment so far: Continue reading
In my two posts last week (here and here), I attempted to go through all of the 41 country statements submitted by the participants in the London Anticorruption Summit held earlier this month, to see what those statements had to say about four specific issue areas highlighted by the Summit’s joint Communique: (1) accessibility (and possibly transparency) of beneficial ownership information for companies and other legal entities, (2) public procurement transparency, (3) independence, effectiveness, and transparency of national audit institutions, and (4) whistleblower protection (and encouragement). I didn’t originally intend to say much more about this, other than putting the information out there for others to examine, but on writing up the summaries, I was struck by the following observation:
Of the four issue areas I picked out–all of which, again, were prominently featured in the Communique–I would characterize two (beneficial ownership and, to a somewhat lesser extent, procurement transparency) as relatively “new” topics that have generated a lot of excitement. (This is clearly the case for beneficial ownership; public procurement transparency has been on the agenda for much longer, though I put it in this category because a lot of the focus of discussion in this area has been on relatively new initiatives like e-procurement and the Open Contracting Data Standard.) The other two issues I chose to highlight–independent and competent audits of government programs, and adequate protection of (and, preferably, affirmative encouragement for) whistleblowers–have been part of the conversation for considerably longer, though that doesn’t mean we’ve yet seen anywhere near as much movement on either of those issues as we’d like. And, compared to the newness and (relative) sexiness of topics like beneficial ownership registries and e-procurement initiatives, whistleblower protection and audits seem a bit humdrum. (Audits especially. Even I get bored when I hear the word “audit,” and I happen to think they’re really important.)
The thing that struck me, when going through the country statements, was the dramatic lopsidedness of the attention lavished on beneficial ownership and procurement transparency (to say nothing of other topics I didn’t cover, like corruption in sports and improved asset recovery mechanisms), compared to the relative neglect of country commitments in the areas of improving national audit institutions and whistleblower protections. Continue reading
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