Author Archives: Richard Messick

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.

Not the “Panama Papers” But the “BVI Papers” or Better Still the “EI” Papers

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The immense public service performed by the consortia of journalists who exposed the inner-workings of the Panamanian law firm Mossack Fonseca is plain to all.  The thousands of stories in multiple languages revealing how M/F works with law firms and banks around the globe to help individuals hide their wealth has provided law enforcement a cornucopia of leads — as the investigations launched in France, Switzerland, South Africa, Pakistan, the United Kingdom, El Salvador, Argentina, and India attest to.  Far more important than nailing a few tax cheats or crooked politicians, though, are the revelations showing how easily firms like M/F can dodge laws that supposedly bar them from helping individuals keep their wealth a secret and what changes are needed to end this legal dodge ball.

But there is a risk that, because the revelations have been dubbed the “Panama Papers,” reformers will be thrown off the scent.  Panama is a small part of the story at best.  The real problem lies in jurisdictions like the British Virgin Islands where, as an April 4 Guardian story shows, an obscure provision in its antimoney laundering law allows M/F and other firms like it to establish a BVI corporation without having to verify who the true, or beneficial, owner of the corporation will be.  This creates an opportunity to introduce a layer of secrecy between the owner and his or her money and law enforcement authorities.  A name better calculated to lead reformers in the right direction would have been the “BVI Papers” since most of the corporations M/F establishes for clients are created under the law of BVI.

An even better name still might be the “EI Papers” as it is the “EI” provision of BVI law that allows M/F to duck verifying the identity of the beneficial owners of the corporations it creates.  “EI” stands for “eligible introducer,” and the best way to see how the EI provision in BVI law makes hiding money so easy is through an example.  Suppose, just for the sake of illustration, Russian President Vladimir Putin was about to come into a large amount of rubles that he would rather Russian citizens and his critics abroad not know about.  How would the EI provision in BVI law help him keep his wealth secret? Continue reading →

Five Things Washington Should Do to Help Latin America Curb Corruption

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The following is based on a March 24 talk I gave at the Washington office of the Council on Foreign Relations.  It is posted in a slightly different form on “Latin America’s Moment,” the Council’s blog on Latin America.

One of the most promising developments in U.S. foreign relations is the all out war on corruption being waged across Latin America.  From “Operation Car Wash” in Brazil to investigations of presidential wrongdoing in Bolivia, El Salvador, Honduras, Guatemala, and Panama, across the region independent, tenacious prosecutors and investigators are out to end the massive theft of state resources that for so long has hobbled political development and throttled economic growth.  Americans should be cheering for these corruption warriors, for we have much to gain if they succeed.  Less corruption translates into more stable, reliable political allies; it means faster, more equitable growth and that means shared prosperity and less northward migration.  Finally, less corruption in government will offer American firms new opportunities. Think what the end of corruption in Brazilian public works would mean for U.S. engineering and construction companies.

But given the stakes in Latin America’s corruption war, America should be doing more than cheering from the sidelines.  It should be doing everything it can – without infringing the sovereignty or sensibilities of Latin neighbors – to see its corruption warriors succeed.  Here are five things to start with: Continue reading →

When Should Governments Keep Stolen Assets?

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The Swiss government agreed in early March to return $321 million to the Nigerian government that was stolen by the late Sanni Abacha during his kleptocratic reign as the country’s president.   The agreement provides that the funds will be used for programs to benefit the Nigerian people in “an efficient and accountable way” and, to ensure the funds do indeed go to such programs, the World Bank will monitor their use.

World Bank oversight is one way to ensure returned assets are not again stolen, and in the case of Nigeria — a relatively open society with an elected government, a lively, unconstrained media, and a vibrant civil society – World Bank monitoring, when coupled with these conditions, may be sufficient to guarantee the funds are put to good use.  But what about in closed societies?  Those without elections, free media, an independent civil society.  Countries where the same tight-knit, authoritarian group which stole the assets in the first place remains in power?  Is there any way to ensure stolen assets returned to these countries will be used to benefit the nation’s citizens rather than going straight back into the pockets of the thieves? Continue reading →