Author Archives: Richard Messick

Illicit Financial Flows: Tax Fraud, Evasion, Avoidance, Abuse, Mitigation, and Planning

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Thanks to high profile reports by Global Integrity, Eurodad, the OECD, and the African High Level Panel spotlighting losses developing countries suffer from the manipulation of tax laws and other forms of illicit financial flows, questions about “tax fraud,” “tax evasion,” “tax avoidance,” and “tax abuse” are now on the development policy agenda.  These terms and their equivalents in other languages are, with the exception of “tax fraud,” ambiguous — sometimes used to mean actions that are unlawful and sometimes used to refer to legal ones.  Before the debate on how to ensure developing countries receive the tax revenues they are due goes any farther, it may be helpful to explain how the ambiguity arises. Continue reading →

Corruption Risk Assessments: Some Observations on Private Sector Analyses

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As the pressure to curb corruption has grown, so too has the demand for “corruption risk assessments,” efforts to predict what form corruption in a public agency or private firm is likely to take and what can be done to reduce if not to eliminate it.  In the private sector risk assessments have been fueled by national laws that reduce penalties for corruption violations if a firm has a risk management program in place.  In the public sector risk assessments help assure citizens that their money is not being stolen and provide an agency leader unlucky enough to be at the helm when a corruption scandal breaks at least a partial defense to charges of incompetence or venality.

Public sector assessments come in several varieties: those which examine the risks faced by a single organization, say the Albanian tax agency, others which assess risks in a publicly-funded program, for example a de-forestation project in the Democratic Republic of the Congo, and still others which consider overall risk in a sector with a large public presence such as water or education.  While public sector assessments are almost always readily available, private sector assessments are not, presumably for proprietary or competitive reasons.  What is available on private sector risk assessment are hundreds (thousands?) of tomes advising firms on how to conduct a risk assessment — often written by those looking to assess the corruption risks a corporation faces for a fee.

A Google search for “corruption risk assessment” produced 300,000 hits, one for “assessing corruption risks” 48 million!  I won’t pretend to have read even a representative sample of the reports or “how to” manuals, but the many I have read so far have been a disappointment. Continue reading →

Corruption Measurement: A Primer

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In an early post Matthew predicted that the measurement of corruption was likely to be a major topic of discussion on this blog.  So far his prediction has proved correct.  Ten of the sixty plus posts that have appeared since this blog was launched in mid-February have been devoted in whole or part to measurement issues:  Are perception measures accurate?  Useful whether accurate or not?  What’s the source of the $1 trillion bribe estimate?  Shouldn’t someone develop sub-national corruption perception measures?   And so forth.

This eleventh post steps back from the policy issues examined in earlier ones to address a much more straightforward question:  What are the different ways corruption can be measured? Continue reading →

America’s Pursuit of Absolute Integrity

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Attempts to control corruption have a long history in the United States.  Since the late 19th century numerous laws have been enacted at the federal, state, and local level to end patronage and nepotism in government employment, control conflicts of interest by public servants, and reduce opportunities for bribery and kick-backs.  Although the current corruption landscape differs from that of 20th century America, policymakers considering anticorruption legislation today can profit from a look at the U.S. experience.

A useful, if sobering, place to start is with Professors Frank Anechiarico and James B. Jacobs’ 1997 analysis based on New York City’s century long effort to combat corruption supplemented by the federal government’s more recent experience with ethics laws.  Useful because the authors analyze many of the same interventions now commonly advocated to combat corruption around the globe: conflict of interest legislation, financial disclosure requirements for public servants, whistleblower protection, the creation of inspectors general, the reduction of officials’ discretion.  Sobering, not only because they conclude these reforms have done little to combat corruption, but also because the authors contend that together these laws have contributed to the current dysfunctional state of American government.  In short, they say, America’s effort to suppress corruption has produced little benefit at great cost.

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The New Chinese-Backed Infrastructure Bank: Will it Tame the Corruption Dragon?

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Asian governments are welcoming China’s recent decision to establish a bank to finance infrastructure across Asia.  As Devex reported June 2, China plans to capitalize it with an initial $50 billion with the possibility of increasing it by an additional $100 billion.  For China, the bank is one more way to assert leadership in the Asian region.  For Asian states leery of relying on the Western-led World Bank and Asian Development Bank for financing public works, the bank is a chance to diversify.  For both the lender and borrowers alike, the bank offers the chance to profit from Asia’s economic dynamism.

The Chinese-led bank will have to overcome many challenges to realize these objectives, the most difficult of which may well be preventing corruption from infecting the projects it finances.  Infrastructure corruption produces half-built roads, dilapidated ports, and white elephants of all kinds.  It leaves borrowing governments indebted for under-performing, over-priced assets while stirring a backlash against the lender.  Will the new bank and its principal backer be able to keep the corruption dragon at bay?   There are at least three reasons to worry that it won’t.  Continue reading →

Encouraging More Corruption-Related Litigation?

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On June 28 the Oxford Institute for Ethics, Law and Armed Conflict and the Open Society Foundations’ Justice Initiative will, with the help of this writer, host a one-day conference at the Said Business School entitled Legal Remedies for Corruption to discuss ways civil society can stimulate corruption-related litigation – either by pressuring prosecutors to file more criminal cases or by bringing their own civil actions for damages.

The question mark in the title is for American readers who might be forgiven for asking why such a conference is necessary.  Isn’t there enough litigation already? The U.S. Department of Justice and Securities & Exchange Commission continue to vigorously enforce the Foreign Corrupt Practices Act, while the Justice Department’s Public Integrity Section continues to ferret out corrupt federal, state, and local officials.  In 2012, the last year for which data is available, the section charged more than 1,000 individuals with accepting bribes, criminal conflict of interest, and other corruption offenses. And private parties in the U.S. have also been willing to sue alleged bribe payers, with suits brought by a range of injured parties including competitors, suppliers, partners, shareholders, and employee-whistleblowers.  Even foreign governments have taken advantage of American law’s broad standing rules and generous theories of damages: One alleged bribe payer recently paid a company owned by the Government of Bahrain $85 million to settle a claim it had harmed the company by bribing one of its employees to secure a contract, while the government of Trinidad has brought an action under Florida’s version of the Racketeer and Corrupt Organizations Act against the companies that allegedly rigged bids on an airport construction project in Port of Spain.

It turns out that while there is a great deal of litigation — public and private — over bribery allegations in the United States, this is much less true in most of the rest of the world. Continue reading →

What the World Bank Can Do About Bid Rigging

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I took the World Bank to task last week for its failure to tackle bid rigging and other forms of collusion in its new procurement framework.  Despite mounting evidence that prices on many Bank-financed projects are jacked up 25%, 50%, or even more thanks to bidder cartels, the new framework does not even mention the problem let alone recommend steps to combat it.  The omission is all the worse because developing country governments and other donor agencies generally follow the Bank’s lead on procurement policy.  With upwards of $1 trillion likely to be spent on power plants, water works, and other big-ticket items in developing nations over the next decade, if the rest of the development community, like the Bank, remains blind to the risk of collusion, the potential losses could be staggering.

What might the Bank do were it to decide to amend the new framework to confront the risk of collusion in public procurement? Continue reading →

Ignoring Corruption in Procurement: The World Bank’s New Procurement Policy

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In a recent post Matthew spotlighted a handful of academics that are in denial about the extent of corruption in developing countries.  As bad as it is for armchair analysts to ignore the facts about corruption, it is far worse when a leading development policy maker does.  Yet that is what the World Bank is on the verge of doing as it puts the finishing touches on its new procurement policy. Continue reading →

The Quality of Contract Execution Depends on the Process of Contract Selection

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Last week I complained about the dearth of practical, policy-relevant literature available to help governments oversee contracts for the construction of civil works, the development of complex software programs, and other products which take months if not years to complete.  This is but one of many examples where governments must navigate the procurement process without rigorous, empirically grounded work on what procedures to employ when and how.  Absent such guidance, the procurement community falls back on rules of thumbs, old saws, and folk wisdom — the accuracy of which is always suspect.

One of the more suspicious sounding old saws in the procurement practice is the notion that contract execution and contract selection are independent activities — the belief, in other words, is that that how one selects a contractor is of little or no import for how well the contract is performed. But economic theory and recent empirical work both cast doubt on the accuracy of this bit of folk wisdom.
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New York City Pays a Steep Price for Failing to Guard a Guardian

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This past Monday, April 28, U.S. federal trial court judge George B. Daniels sentenced three persons at the center of a corrupt scheme that cost New York City some $600 million to 20 years each in prison.  Despite the massive loss and the large number of firms and individuals that participated, the scheme was quite simple.  Its simplicity, and the vulnerability of a government as large and sophisticated as that of New York City to it, is a stark reminder of how critical contract administration — one of the more prosaic-sounding responsibilities of government — is to controlling corruption.

The New York scam arose from a $63 million contract to modernize its payroll system. Software contracts, like construction contracts, can take months if not years to perform and may need to be modified as the contractor runs into issues not anticipated when the contract was drafted.  More computer code than initially foreseen may be required to capture the way employees in some departments record their hours; a road may have to be re-routed because the ground along the original route turns out to be unstable.  But it may also be that more code isn’t needed or that the original routing of the road is fine.  Instead, it may simply be that the contractor is looking for a way to squeeze more money out of government.

To deal with this concern, governments typically rely on expert professionals to evaluate a contractor’s requests for change orders. Often these professionals also decide whether the completed project meets contract specifications.  They thus serve as guardians of project quality and integrity.  What happened in New York was simple: the guards deserted their post, conspiring with the contractor to bilk the city of out hundreds of millions of dollars. Where the city erred was its failure to heed the famous question attributed to the Roman satirist Juvenal:  Who guards the guardians?

Heeding that question and coming up with a satisfactory answer are, of course, two different things.  What can a government do to avoid the sort of collusion that cost New York City so much money? Continue reading →