Author Archives: Richard Messick

Lessons from a Pathbreaking DfID Anticorruption Project in Tanzania

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Britain’s Department for International Development is funding thoughtful, ambitious projects in Ghana, Tanzania, and Uganda to help those governments step up the enforcement of national anticorruption laws.  What makes the three thoughtful is their recognition that improving anticorruption law enforcement requires the simultaneous strengthening of the entire criminal justice chain – from the entities that turn up possible corruption violations to the agencies which investigate these leads to prosecution services and courts – together with measures to improve  collaboration among them.  What makes the three projects ambitious is that they provide assistance from one end of the chain to another;  building capacity in a single agency can be challenge, building it in several simultaneously even more so.

Yet if developing countries are to do better at catching, prosecuting, and convicting corrupt officials and those who corrupt them, more programs like these three, whether donor- or self-funded, are needed.  It does no good to improve the ability of an anticorruption agency to investigate corruption if prosecutors don’t have the skill to present a convincing case.  And no matter how skilled the prosecution, it will be for naught if the courts don’t understand the law or the evidence.

The 4 ½ year, £11.3 million Tanzania project, dubbed “STACA” for Strengthening Tanzania’s Anticorruption Action, was the first of the three DfID projects to tackle the criminal justice chain in one fell swoop, and along with the U4 Anticorruption Resource Center and REPOA, a Tanzanian think-tank, I reviewed its progress at roughly the half- way mark in implementation.  While we trust close study of the review is merited, below I summarize three points that came out of it that I think are particularly critical, both for developing country policymakers looking for ways to enhance the enforcement of their nation’s anticorruption laws and for donor organizations wanting to help them. Continue reading →

Corruption in Health Aid: Escaping the Scandal Cycle

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William Savedoff, Amanda Glassman and Janeen Madan of the Center for Global Development, a Washington-based development policy think tank, originally wrote this post for CGD.  It is reprinted here with permission.

Health aid pays for life-saving medicines, products, and services in the poorest countries in the world. Funding for such uses needs to be smooth and uninterrupted. But when fraud is detected, funds are subject to sudden stops and starts—the result of a sequence of events set off by the scandal cycle in health aid depicted below. We examine this idea and offer ways to escape the cycle in a new CGD policy paper we summarize here.

The Scandal Cycle

 

To understand the scandal cycle, we looked at four cases of fraud and response involving the World Bank in India, USAID in Afghanistan, the Global Fund in Mali, Djibouti and Mauritania, and European donors in Zambia. While corruption is discovered in different ways, scandals tend to erupt when the press publicizes it or a funder reacts strongly. Once allegations are in the public eye, funders typically react by suspending aid. Then, they work with recipients to create action plans for improving financial management systems, and eventually resume funding.

This scandal cycle is, unfortunately, all too common. In May, the Global Fund published an investigation that tracked down $3.8 million in fraudulent expenditures at Nigeria’s Department of Health Planning, Research & Statistics. The Fund’s executive director issued a statement reaffirming the Fund’s “zero tolerance of corruption” policy, underscoring that the Fund had frozen disbursements to several Nigerian agencies, and calling for reforms to government control measures.

As with the cases we analyzed in our paper, the focus on fraud often comes at the expense of considering the scale of corruption and the impact of disruption on health programs. While $3.8 million is no small number, it represents less than one percent of the $889 million in grants to Nigeria that the Global Fund audited in a companion report on the Wamboo.org project. Furthermore, the impact of international support on improving health has been rather large; the Global Fund’s own statement indicates that international support has helped Nigeria reduce deaths from malaria by 62 percent since 2000.

Halting disbursements to health programs can have serious consequences for service delivery, health outcomes, and institutional development. In light of the scale of fraud and the potential health impact, is suspending aid an effective response? And without information on health impact, how would we know?

We argue that funders may be able to escape the scandal cycle—and reduce such disruptions—by paying greater attention to information on program achievements. Currently, funders pay a lot of attention to procedural issues. For example, a 2013 report from the Special Inspector General for Afghanistan Reconstruction (SIGAR) documented weak accounting systems at the Afghan Ministry of Health. Even though the report had no direct evidence of fraud and the health program was successfully delivering services, SIGAR recommended USAID suspend the program.

By contrast, the World Bank’s 2008 Detailed Implementation Review of the Indian health sector not only included evidence of procedural failures, such as bid rigging, but also documented results failures, like continuing high malaria rates and inoperative hospitals. If the World Bank and India had reported these results failures earlier, the cases where corruption was big enough to affect programs would have come to light much sooner.

We think results on service delivery, population health, and institutional development are the key piece of information that could change the dynamics of the scandal cycle. This kind of information can help funders communicate more effectively about why they are deciding to suspend or continue aid, set appropriate standards for when aid should be halted, and establish new funding mechanisms that make it more difficult to divert funds.

We recommend the following three steps to improve funder response:

  1. Communicate using results. When a scandal erupts, communicating the funder’s actions to control or prevent corruption to stakeholders, the media, and the broader public is important. But emphasizing whether health aid programs are achieving intended results is also an essential component of the communications strategy. If a program is achieving results, stakeholders and constituents would better understand a funder’s decision not to suspend aid when a scandal erupts (while investigating abuse and working with the recipient to address the problem).
  2. Differentiate responses by results. In addition to responding to corruption allegations (which typically come from whistleblowers), tracking program results could help funders detect corruption. If a program is falling short of achieving results, corruption might be a contributing factor and an investigation could help determine whether and how much. Moreover, results data would allow funders to determine whether corruption is—or is not—hampering program implementation, and to recalibrate anti-corruption controls accordingly.
  3. Disburse in proportion to results. Where feasible, paying for results in health could help ensure that funds are only paid out when results are achieved. This approach makes it harder to divert funds because payments only occur after the program’s impact is measured. In programs that pay for results, dishonest people can only skim off funds if they have been very efficient at generating impact. In practice, they are likely to simply set their sights elsewhere.

The Scandal Cycle

The Global Fund’s recent statement recognizes the importance of communicating the results of its health grants to Nigeria, but it doesn’t address whether it is helpful to suspend aid over a relatively small amount of fraud or lack of supporting documentation. Our paper encourages funders to incorporate information about program results into their risk management strategies so they can communicate better, detect corruption sooner, and make more considered choices about creating or responding to scandals.

Continue reading →

Fraud and Corruption Risks in Procurement: A Thumbnail Sketch

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Public procurement is the government activity perhaps most vulnerable to fraud and corruption.  Not only are the sums involved enormous, $9.5 trillion a year by one estimate, but at every point in the process decision-makers enjoy great discretion.  They must first decide if government needs to buy a good or service.  If the decision is to make a purchase, government personnel must determine how government should make it: through a sole source contract or by competitive bid.  If they choose the former, they must decide from whom to buy; if the decision is to use competitive bidding, decisions about where to advertise the request, for how long, what personnel should select the winning bidder, and what criteria they should use are also required.

Because there are so many places where fraud and corruption can creep into the process, it is hardly surprising that the internet is brimming with books, articles, and brochures of all sorts on how to combat fraud and corruption at each stage in the procurement cycle, and indeed a Google search for material on “government procurement corruption” returns 15 million documents in less than half a second.  This wealth of material is itself part of the problem.  Those tasked to participate in a procurement who want a summary of what to watch for may be so overwhelmed by what’s available that they give up their search and hope their “gut” or a better trained colleague will pick up any irregularity.

For those looking for a short description of the areas where fraud and corruption is most likely to seep into the procurement cycle, a place to begin a search for more detailed material on a particular point, I offer a thumbnail sketch of procurement risks.  I thank colleagues at the Millennium Challenge Corporation and elsewhere who have helped in compiling and simplifying the list.  Suggestions for areas missed — or better (but still succinct!) ways to express the risks — warmly welcomed.   Continue reading →

Contract Administration: A Step-Child of Anticorruption Policy?

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It is hard to imagine a more prosaic-sounding government job title than “contract administration.”  It is equally hard to imagine one more neglected, both by governments and the anticorruption community.  The House of Commons reports that British civil servants consider contract administration “mechanical and unimportant,” and with few exceptions those concerned with controlling corruption have paid the issue little attention.

But for those seeking to curb government corruption, contract administration is anything but prosaic or unimportant.  Once a firm has been awarded a contract to furnish goods, provide services, or build a building there are many ways it can cheat government: by delivering substandard goods, padding invoices or performing unneeded extra work to name but a few.  Zambia’s Auditor General found road construction companies had failed to provide the required cement, concrete, and gravel in all 18 roads projects it audited, meaning the roads will not last as long or carry as much traffic as the government contracted for. An IT firm New York City hired to computerize the city’s payroll system bilked it out of more than $600 million through inflated invoices and phantom extra work.  In India a medical equipment manufacturer supplied neonatal equipment that exposed babies and hospital staff to electrical shocks.

The bad news is that these are just a few examples of the ways government can be cheated during the execution of a public contract.  The good news is there are handful of steps governments can take to reduce if not eliminate corruption during contract performance.  They are: Continue reading →

Will the Panama Papers Lead to Criminal Prosecutions?

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“[T]housands of prosecutions could stem from the Panama Papers, if only law enforcement could access and evaluate the actual documents. [But] ICIJ and its partner publications have rightly stated that they will not provide them to law enforcement agencies.”

Manifesto of “John Doe,” the Panama Papers leaker, May 6, 2016

Is Mr. Doe correct?  Will thousands of tax cheats, corrupt politicians and other crooks get off scot free because prosecutors, anticorruption commissions, tax and customs authorities, and other law enforcement agencies can’t obtain the documents that constitute the Panama Papers?

This is surely a possibility.  In some countries the stories written on the Panama Papers do not identify who used the services of Panamanian law firm Mossack Fonseca to establish a corporation in the British Virgin Islands, Nevada, or other offshore jurisdiction.  The rules governing the opening of a criminal investigation in most countries are (with very good reason) quite stringent, and without knowing who actually opened an offshore corporation the authorities in some countries will be powerless to proceed.  Even in those countries where the owners of offshore corporations have been revealed, that may not be enough for a criminal investigation.  As Mossack Fonseca and its defenders have reminded the public (ad nauseam), owning a corporation in another country is not by itself illegal.

One tact authorities in these countries could take would be to focus on the law firms, banks, and other entities in their countries that introduced their nationals to Mossack Fonseca.  As explained in earlier posts (here, here and here), these “introducers” are the critical link in the chain of transactions that starts with a tax evader or corrupt politician’s need to hide money and ends with his or her ownership of an offshore corporation that cannot be traced to them. Moreover, not only are the introducers the critical link; they are the vulnerable link as well. Continue reading →

The Panama Papers & Eligible Introducers: Another Hole in Antimoney Laundering Laws

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More evidence of the ease with which corrupt officials can dodge the antimoney laundering laws, and thus hide money offshore, emerged from a recent Panama Papers story out of New Zealand.  It discloses how lax the standards are for becoming an “eligible introducer.” An eligible introducer is a law firm or other entity that under the antimony laundering laws can arrange for an offshore corporation to be established in a client’s name and for a bank account to be opened in the corporation’s name.  An offshore corporation with attached bank account is what all corrupt officials want. It gives them a covert way to accept and hold bribes and money from other illicit activities.

The antimoney laundering laws are supposed to make it virtually impossible for corrupt officials to get their hands on an offshore corporation with a bank account: first by requiring the firms that establish corporations to scrutinize the background of those wanting to create a corporation and second by requiring banks, before opening a corporate account, to know who the company’s owner is and what the owner plans to do with the company and its account.  If those providing incorporation services and the banks each conduct this “due diligence,” a corrupt official is very unlikely to slip through both screens.  That leaves the official with one of two decidedly inferior options: hide the illicit funds under the mattress or entrust them to a close relative or friend.

Enter the eligible introducer. Continue reading →

The Panama Papers and the “Eligible Introducer” Scam

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Contrary to what the name might suggest, an “eligible introducer” is not a licensed internet dating site.  Rather, as the Panama Papers reveal, it is what corrupt officials, drug lords, and other crooks use to skirt the laws meant to prevent them from concealing their wealth and how they got it.  In antimoney laundering law parlance, an “eligible introducer” is an intermediary willing to vouch for an individual’s honesty.  An earlier post explained how easy it is for corrupt politicians to establish a shell corporation in a place like the British Virgin Islands by paying an eligible introducer to attest to their character.  Here I show how hiring an eligible introducer makes it easy for corrupt officials to secure the real prize: a bank account in the shell’s name.

The post is prompted by a story Trinidad Express journalist Camini Marajh published April 30 recounting how an eligible introducer brokered the opening of an account for a shell company owned by a politically-connected Trinidadian.  The story suggests that what has long been rumored about the offshore industry is true: despite a massive legal edifice meant to keep corrupt money out of banks, with the “right” eligible introducer anyone can open a bank account no matter who they are and how they intend to use the account.  What’s more, as Marajh’s story shows, if it turns out later that the account was used to conceal questionable or illegal transactions, neither the introducer nor the bank is likely to be held responsible.     Continue reading →

Can Private Prosecution Fill the Corruption Enforcement Gap?

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A common lament within the anticorruption community is that too few corrupt officials are prosecuted.  The reasons offered are several: a lack of resources, the want of expertise, political pressure.  Whatever the case, for countries struggling to combat corruption, stepping up prosecutions is essential, for deterrence theory teaches that until public officials face a real threat of prosecution for raiding the public purse, corruption levels will continue to remain unacceptably high.

Where corruption prosecutions are lagging, it is often assumed that the only remedy is to strengthen government prosecution agencies, but this is in fact not always the case.  In many countries the public prosecutor is not the only one with the right to prosecute those accused of a crime.  Thailand, Taiwan, certain American states, and virtually all 53 members of the British Commonwealth allow private citizens to prosecute offenders, and there is no reason other countries couldn’t allow private prosecution as well.

In “Private Prosecutions: A Potential Anticorruption Tool in English Law,” British lawyers Tamlyn Edmonds and David Jugnarain explain the role private prosecution has played in the enforcement of the criminal law in England and Wales and argue it is one way to boost  corruption prosecutions in these jurisdictions and perhaps in others as well.  The Edmonds and Jugnarain paper is the fourth in the series of papers commissioned by the Open Society Justice Initiative on civil society and anticorruption litigation.  It follows earlier ones on standing by GAB editor-in-chief Matthew Stephenson, on civil society litigation in India by Vidhi Centre for Legal Policy Director Arghya Sengupta, and on the American experience with the False Claims Act by Houston Law Center Professor David Kwok.  As with the papers by Matthew, Arghya, and David, Tamlyn and David’s contribution provides civil society activists and policymakers wanting to bolster the enforcement of anticorruption laws in their country much to consider.

Canada’s Supreme Court Hands Corruption Fighters a Victory Worth Savoring

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In its April 29 opinion in World Bank Group v. Wallace the Canadian Supreme Court upheld the use of a growing practice in the fight against transnational corruption, ruling that World Bank investigators can provide information to the Royal Canadian Mounted Police about corruption in Bank projects and that it can do so without becoming subject to Canadian law.  The investigators had provided material suggesting executives of a Canadian company had paid bribes to win a Bank-financed contract in Bangladesh.  After being charged, the executives sought to depose the investigators and inspect Bank files in Washington.  Had the Court ruled for defendants, the World Bank and other development banks would almost certainly have halted further information sharing with national law enforcement agencies.  In ruling for the Bank, the Court not only endorsed information sharing arrangements but explained why it was essential that national authorities have unimpeded access to information from the Bank and other development finance institutions: “multilateral banks . . . are particularly well placed to investigate corruption and to serve at the frontlines of international anticorruption efforts” (¶94).

In Wallace the Court had to decide two questions:  1) Did the Bank’s immunity from Canadian law apply when it cooperated with the RCMP?  2) Would defendants be denied a right to a fair trial if they were not allowed to depose the investigators and search Bank records?  The Court’s reasoning in answering both questions in the Bank’s favor  offers valuable guidance that development banks will want to consider when entering into sharing arrangements with national law enforcement agencies in the future.    Continue reading →

Should Other Countries Enact a False Claims Act?

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For governments looking for a cheap, easy way to curb fraud and corruption in government contracts, the American False Claims Act seems like a no lose proposition.  It authorizes private citizens to file civil suits against companies they believe have cheated the federal government, and if their suit succeeds, the citizen is entitled to anywhere between 15 to 30 percent of any damages the government collects.  The offer of a reward creates an army of volunteer investigators and lawyers willing to invest their own time and energy into ferreting out fraud and corruption.  If they win the case, the government recoups most of its losses.  If they lose, the government isn’t out a cent.  The data suggests that False Claims Act suits have indeed been a bonanza for the U.S. government.  Recoveries in recent years have exceeded $2 billion per year with an average of $1.7 billion going to the government and the rest to citizen sleuths.

Before copying the False Claims Act verbatim, however, policymakers will want to consider University of Houston Law Center Professor David Kwok’s paper on why the statute seems to work well in the U.S., why an exact copy might not work so well elsewhere, and how it might be changed to fit countries where conditions differ from those in the United States.  The paper is the third in the series of papers commissioned by the Open Society Justice Initiative on civil society and anticorruption litigation, following earlier ones on standing by GAB editor-in-chief Matthew Stephenson and on civil society litigation in India by Vidhi Centre for Legal Policy Director Arghya Sengupta. As with those by Matthew and Arghya, David’s paper provides civil society activists and policymakers wanting to bolster the enforcement of anticorruption laws in their country much to deliberate on.