Guest Post: Do Governments Have a Clue About the Money Laundering Risks They Face?

Today’s guest post summarizes an April World Bank study of money laundering risk assessments. The first step in preventing money laundering is identifying where it occurs and how likely it is to occur. In short, the risks of money laundering. The Bank study evaluated risk assessments eight governments had conducted in accordance with the methodology prescribed by the Financial Action Task Force. For reasons that will become plain, the post’s author has chosen to remain anonymous.

The title from a new World Bank report on money laundering risks could scarcely be blander: National Assessments of Money Laundering Risks: Learning from Eight Advanced Countries’ NRAs.  The content is anything but. Authored by Joras Ferwerda of Utrecht University and Peter Reuter of the University of Maryland, the report concludes that not a one of the eight money laundering risk assessments examined, all done as the report’s title advertises by “advanced” countries, is worth a damn. Not a one merits a passing grade from the two professors, both highly regarded money laundering experts. What’s worse, despite close to a decade of experience doing such assessments, the two find that no government seems to have learned a thing from the mistakes of others.

This raises a fundamental question about the existing AML regime. How can it be effective if national authorities lack an understanding of the money laundering risks their countries face?

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Guest Post: The Government Defence Integrity Index — Assessing Corruption in Defence

Stephanie Trapnell, Senior Advisor on Defence and Security at Transparency International, and Matthew Steadman, Research Officer at Transparency International UK’s Defence and Security Programme, authored today’s post on the UK Programme’s Government Defence Integrity Index. The Index evaluates corruption risks across defence financing, operations, personnel, political, and procurement for 87 countries using data on 77 defence-related areas. (As the index was produced by TI Defence & Security, a program housed within the TI-UK chapter, the British spelling is followed throughout.)

Corruption in the defence sector poses grave risks for security in both national and international contexts. Transparency International’s flagship report for the Government Defence Integrity Index (GDI) shows 86% of global arms exports between 2016-2020 (worth US$1439.6 billion) originated from countries at a moderate to very high risk of corruption in their defence sectors. The top five exporters – the United States (overall score of 55/100), Russia (36/100), France (50/100), Germany (70/100) and China (28/100) – accounted for 76% of the global total. Meanwhile, 49% of global arms imports are arriving in counties facing a high to critical risk of defence corruption.

Although President Biden’s new anticorruption strategy outlines a “whole-of-government approach” to countering corruption, it stresses the importance of addressing corruption specifically in defence and security. Indeed, the strategy is a critical and welcome acknowledgment, by a global power and major provider of security assistance, that corruption plays a considerable role in destabilising democracy. In Strategic Objective 5.5, emphasis is placed on assessment of corruption risk, causes of corruption, and political will for reform. Specifically for the security sector, there is a call for greater transparency in military budgets, whistle-blower protections, and oversight.

Not only does corruption have a devastating impact on both the defence apparatus itself and on wider peace and security, it can undermine otherwise robust democracies, by serving as a type of statecraft for defence officials and military elites. Corruption undermines the efficiency of security forces, damages popular trust in state institutions, and feeds a sense of disillusionment, which threatens the social contract and the rule of law, and can empower non-state and extremist armed groups.

Given the distinct nature of governance in the defence sector, and the evolving understanding of how corruption operates, the question then turns to what can be done to counter or prevent corruption in a traditionally secretive yet critical sector like defence. The answer is not to measure corruption itself, which is inherently covert and difficult to capture, but instead to measure institutional resilience to it. The Government Defence Integrity Index (GDI) is the only tool that captures comprehensive information on the quality of institutional controls on corruption in the defence sector.

The GDI recognises that:

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Time to Make the OECD Antibribery Convention an Antikleptocracy Convention Too

Confiscating assets acquired through corruption is a critical part of the fight against corruption. If those who would profit from corruption know they will be denied the benefit of their wrongdoing, there is no incentive to be corrupt.

As Justin explained Monday, Russia’s invasion of Ukraine has given asset confiscation a major boost. Many of Putin’s superrich backers, oligarchs or kleptocrats, became wealthy through corrupt deals, and the seizure of their mega-yachts, mansions and other properties now located outside Russian territory offer the West a way, albeit indirectly, to pressure Putin to end the aggression. Italian, German, and other Western prosecutors are thus now aggressively invoking domestic forfeiture statutes to confiscate them.

But as the Washington Post reports today, with the help of pricey lawyers and other enablers (here and here), the oligarchs have hidden their assets inside complex legal thickets of offshore companies that make confiscation hard if not impossible. In response, last Thursday President Biden asked Congress to give U.S. prosecutors new powers to cut through this underbrush (here).

The President’s initiative is welcome. But it also invites the obvious question: Why shouldn’t other Western nations follow suit?  All are united in their opposition to the war and desire to make Putin’s associates suffer consequences. Why shouldn’t every Western state ease the task their prosecutors face to the rapid seizure of oligarchs’ assets? And indeed to the seizure of any asset corruptly obtained or unlawfully possessed found in their territory?

The most straightforward way to realize this goal would be to amend the OECD Antibribery Convention.

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Guest Post: Fighting Corruption Through Social Audits in India: How Far Can Voice Get Without Teeth?

Today’s Guest Post is from Suchi Pande, Scholar in Residence at American University’s Accountability Research Center and Center Founder and Director AU Professor Jonathan Fox.

India’s National Rural Employment Guarantee became a lifeline for migrant labor arbitrarily expelled from cities and left stranded and broke due to COVID-19 lockdowns. One of the largest employment safety net program in the world, it comes with a mandate for state governments to carry out “social audits,” a procedure empowering its beneficiaries to monitor leakages and the denial of rights resulting from the arbitrary exercise of power across India’s 600,000 villages. In short, to spotlight corruption.

How? With a social audit, program beneficiaries publicly scrutinize its implementation and government actors must respond to shortcomings in officially convened public forums and redress grievances. The audits date to a 2005 law driven by a combination of a grassroots advocacy campaign and a reform-minded government.  Social audits can engage populations directly in the fight against corruption where:

  1. the audit reveals corruption in some form, such as the leakage (embezzlement) of program funds, demands for bribes to release the funds, or the outright denial of participants rights to the funds;
  2. those conducting the audit have the capacity to communicate their findings clearly and understandably to the affected individuals or group;
  3. those affected are informed of the findings and understand the violation of the law or policy that led to the losses; and
  4. a third party — government agency or civil society group — convenes a public forum where government officials and elected representatives discuss the audit findings in an atmosphere free from reprisal, where the affected persons can participate and vouch for the accuracy of findings.
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Fighting Corruption in the Water Sector: Comments Please

A mark of progress in the fight against corruption is the growing attention corruption fighters are paying to its nuts and bolts.  A bribe is a bribe: whether paid to rig a bid on a public works contract or duck sanctions for polluting a stream. And laws against bribery and appeals to those in both sectors to refrain from taking a bribe have their place.

But a strategy for preventing bribery in public works contracts, the water sector, or indeed any sector of the economy demands more. Where in the sector is bribery most common? Why do some public servants take them while others refuse? What are the economic incentives public servants and their private sector counterparts face? What social norms operate in the background? What’s the legal regime governing sector operations? In short, what makes the sector tick? 

Only when corruption fighters understand a sector can they devise means for preventing corruption in it and identify indicators (“red flags”) for when it may be present. Teaming an expert corruption fighter with an authority on the sector is the obvious approach, and that is exactly what the U.K.’s CurbingCorruption has done on producing 15 sector-level studies of corruption — from agriculture to education to health to local government to shipping and telecommunications.

A 16th, on corruption in water, is now in progress. The project team comprises Mark Pyman, co-founder of CurbingCorruption, and Laura Jean Palmer Moloney, a hydro-geographer, expert in coastal resources management now with Visual Teaching Technologies. Mark and Laura Jean are soliciting comments on a briefing paper listing what they believe are the key corruption issues across the range of issues in the water sector. Readers can leave a comment below or to write them directly: jean@visualteachingtechnologies.com and mark.pyman@curbingcorruption.com

Guest Post: The Millennium Challenge Corporation’s Approach to Curbing Corruption in Development Projects

Today’s Guest Post is by Chris Williams, Senior Director for Anti-Fraud and Corruption at the Millennium Challenge Corporation, a U.S. development agency. Chris explains the measures MCC takes to prevent corruption from infecting the projects it supports and reviews some lessons it has learned about preventing corruption in large infrastructure projects.  (Full disclosure. I consult with the MCC on corruption prevention although its prevention policies long pre-date my consultancy. I have hounded Chris for some time to write this post, for whatever bias I may have, I think MCC’s corruption prevention efforts provide a model for others in the development community.)

The Millennium Challenge Corporation is an independent U.S. government development agency working to reduce global poverty through economic growth. Created in 2004, MCC provides time-limited grants that pair investments in infrastructure with policy and institutional reforms to countries that meet rigorous standards for good governance, fighting corruption and respecting democratic rights. MCC provides an example of “smart” development assistance, using competitive selection of grant recipients, country-led solutions, country led implementation, and a focus on results to prioritize the use of U.S. taxpayer funds.

A central feature of MCC’s approach, country ownership, is that each partner government receiving a grant from MCC must identify a legal entity to which the government will delegate the responsibility for the projects funded by the MCC. A sign of the importance MCC places on fighting fraud and corruption is that this entity is formally designated the “accountable entity” (generally referred to as an “MCA,” as many are named Millennium Challenge Account Moldova, Millennium Challenge Account Senegal, etc.). This underlines the MCA’s responsibility for ensuring MCC funds are used only for the purposes intended.

MCC doesn’t just assign responsibility for managing fraud and corruption risks to the MCAs, however. Upon establishment of the MCA, MCC immediately begins working with it to put in place financial controls and other standard safeguards to prevent funds from being lost through fraud or corruption.

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NGOs Call Italian Judiciary to Account for Not Enforcing the Antibribery Law

The Italian judiciary is threatening to upset the global norm against bribing officials of another nation.  As party to both the OECD Antibribery Convention and the UN Convention Against Corruption, Italy is obliged to sanction Italian companies and nationals that bribe the public servants of other nations.  Yet despite overwhelming evidence that oil and gas giant Eni S.p.A, the country’s largest company, bribed Nigerian officials to secure a lucrative oil block, a Milan trial court recently acquitted Eni and codefendant Royal Dutch (decision here.)

Acknowledging the prosecution had presented strong circumstantial evidence of bribery — what it termed “conduct implementing the agreement” to pay Nigerian officials in return for “the unlawful act of the public official” — the court nonetheless held this was not enough. Following earlier appeals court decisions in foreign bribery cases, it ruled the prosecution must also show an actual “agreement between clearly identified parties” Hence, it concluded, “even the proof of the bribe or the unlawfulness of the act committed by the official” is not enough to warrant conviction.

Officials from the U.S. Department of Justice and Germany’s Ministry of Justice will shortly review Italy’s compliance with its obligations under the OECD Antibribery Convention. The Italian NGO ReCommon, Nigeria’s Human and Environmental Agenda, and Corner House from the United Kingdom have prepared this thorough and damning critique of the decision in the ENI case and earlier ones where Italian courts have held that absent an express agreement to pay a bribe to a foreign official, defendants must be acquitted.

As the three NGOs explain in their analysis, those negotiating the OECD Convention recognized that requiring the prosecution to show an express agreement to bribe set an impossibly high hurdle. They settled instead on allowing courts to infer an agreement from the surrounding circumstances, circumstances such as those the prosecution presented in the ENI-Shell case. Indeed, American courts long ago recognized that requiring the prosecution to produce an express, written agreement to pay a bribe rendered the antibribery law a nullity.

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Summary of Third Annual AML Research Conference. Announcement of Fourth

Thanks to Jason Sharman of Cambridge University and dodging shopping fame, those who didn’t attend last January’s conference “Empirical Approaches to Anti-Money Laundering and Financial Crime” are in luck. He has produced an excellent summary of the papers presented at this, the now third annual AML conference jointly sponsored by the Bahamas Central Bank and the Inter-American Development Bank.  

There are dozens if not hundreds of other AML conferences held each year. At these, bankers and their lawyers, accountants, and consultants flyspeck the latest rules, court decisions, and other matters germane to complying with AML laws and regulations. As well they should, for as AML Penalties chronicles in their weekly bulletin, fines for violations are beginning to creep upwards. Conference attendees are also constantly on watch for cheaper ways to meet their legal obligations; AML compliance costs for all financial institutions are currently estimated to exceed $200 billion per year.

Like the first two conferences, last January’s had a much different agenda than those devoted to compliance. Rather than asking “what are the rules” and “how can we comply,” it asked more fundamental ones: “Are the current anti-money laundering rules worth cost?” “Are they keeping dirty money out of the system?” “Are there more cost-effective ways of doing so?”

It is now clear that Russian oligarchs have had little trouble evading the current AML regime. Might this suggest the sponsors of the Bahamas conference are on to something? That the questions they are posing deserve at least as much attention as those discussed at the many compliance conferences?

Next year’s conference will be held January 19 and 20 in Nassau. The announcement is here.

The Maldives: No Safe Haven for Oligarchs’ Yachts

Contrary to recent reports (here, here), Russian oligarchs’ yachts harbored in the Maldives are by no means safe from confiscation. As a party to the United Nations Convention Against Corruption (UNCAC), the Maldives has made bribery, embezzlement, and money laundering crimes under its domestic law (here).  Pursuant to article 46, it pledges “to afford [other UNCAC parties] the widest measure of legal assistance in investigations, prosecutions and judicial proceedings” to enforce their laws against bribery, embezzlement, and money laundering.

These provisions put the oligarchs’ yachts at risk of confiscation in two ways. 

One, Maldivian authorities could initiate an action under the domestic antimoney laundering law. Given the evidence on the public record, there is certainly reason (what American law terms “probable cause”) to believe that the yachts were acquired with the proceeds of a crime, likely embezzlement from the Russian state. (Remember, there need not be a conviction for embezzlement in Russia or elsewhere to launch the related prosecution for money laundering.) The yachts’ presence in the Maldives appears to be more than sufficient grounds for its courts to assert jurisdiction under article 13 of the penal code and therefore to issue a “freeze” order which would prevent the yachts from pulling anchor until a final decision on a seizure action issued.

Alternatively, Maldivian courts have the power under UNCAC and domestic law to issue a freeze order at the request of another UNCAC party.  A country where one was built, for example, could open a case to see whether the shipbuilder was paid with the proceeds of a crime, a money laundering offense, and request that the Maldives prevent the yacht from leaving until its case were concluded. 

Some say will say that whatever the law, the Maldives is a small island nation without the guts to stand up to Russia.  Not so. During the UN General Assembly debate on the resolution denouncing Russian aggression, the government not only backed the resolution but its ambassador left no doubts where its stood: “The Maldives has always taken a principled stand on violations of the territorial integrity of a sovereign country, [a] position based on a bedrock belief in the equality of all States and unconditional respect for the principles of the United Nations Charter.”

Others will be claim that confiscating the oligarchs’ yachts is not possible legally for ownership is obscured by layer upon layer of shell of corporations headquartered in countries.  But those layers can be stripped away by the determined efforts of police and prosecutors, a determination surely stiffened by magnitudes given the yacht owners’ complicity in the appalling events daily unfolding in Ukraine.

The UK’s Promised War on Kleptocracy: Reinforcements Needed

Putin’s invasion of Ukraine has created a new-found resolve among the world’s financial centers. They are now committed to seizing the money Putin and oligarchic cronies have stolen from the Russian people and hidden in their territories. Given the enormous media attention on where it is stashed (examples here, here, and here), that may sound straightforward.

It is not.  Even bad guys have rights, and as Radha Ivory reminds, that includes the right to their property. To confiscate the assets Putin and cronies have squirrelled away outside Russia will require proof that (a) no matter what ownership records show, the assets really do belong to one of them and (b) the assets were acquired with the proceeds of corruption or other criminal activity.

London has been one of the premier destinations of dirty Russian money. James Mather, a barrister of the U. K’s Serle Court, explains below what the British government must do to fulfill its pledge to confiscate every shilling of stolen Russian money hidden in its territory.

The gloves have come off in the United Kingdom’s effort to cleanse itself of ‘dirty money’, or so we are told.  To signal its commitment, the UK government has sped up new legislation, but its contents seem unlikely to advance matters very far.  There is amendment of the legislation for Unexplained Wealth Orders (totemic but misunderstood powers that are of quite limited practical use) and new requirements to register the beneficial ownership of property (as always easily evaded by clever structuring or simple lies).  What has really been lacking all these past years is harder to legislate for: the adequate enforcement of the asset recovery laws that exist. 

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