How Regulatory Gaps in National Security Create Corruption – A Closer Look at Israel’s 8200 Unit

While much of the discussion of corruption focuses on traditional, illegal acts like embezzlement and bribery, other shadowy, nominally legal practices can contribute to corruption, and perhaps should be considered corrupt themselves. An important manifestation of this phenomenon is the pipeline between government military intelligence services and the private intelligence industry. Though this is an issue in many countries, Israel’s 8200 unit provides a useful and especially salient example.

Founded in 1952, Israel’s 8200 unit conducts intelligence and cybersecurity operations, as well as cyber warfare. It is consistently recognized as one of the world’s most effective intelligence units. Unfortunately, the Israeli government does not regulate what its former soldiers do with their skills and expertise. As a result, many 8200 veterans go on to develop technologies for private intelligence and to found or work for private intelligence companies like Psy GroupBlack CubeMitiga, and NSO Group, to name just a few. 

While many people believe that these private firms need to be more tightly regulated, it may not be immediately apparent why this issue relates to corruption specifically. While employed by the 8200 unit, Israel’s soldiers are not abusing their entrusted public responsibility for private financial gain—to the contrary, they are working for the public’s safety and security. And while they do seek private financial gain after they leave government service, and to market the special skills and experience they gained while in the military, this is not on its face that different from how any number of former public servants go on to monetize their government-acquired expertise in the private sector.

But there are at least two respects in which the public-private pipeline in the context of the 8200 unit, or intelligence services more generally, is of particular concern for anticorruption advocates:

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Responding to the ABA’s Objections to the ENABLERS Act

In a rare moment of bipartisanship, the U.S. Congress is on the cusp of adopting a significant piece of anticorruption legislation: the ENABLERS Act.  The ENABLERS Act is targeted at closing loopholes in the American financial services system that have allowed corrupt foreign actors to use “gatekeeper” entities like law firms, trusts, payment processors, and accounting firms to launder billions of dollars through offshore accounts. The proposed legislation, which has been attached to the FY2023 National Defense Authorization Act (NDAA), would expand the definition of “financial institution” in the current Bank Secrecy Act (BSA) to cover more gatekeeper entities like those mentioned above, and would require these financial services-adjacent entities to institute anti-money laundering (AML) systems, comply with Know Your Client (KYC) regulations, and file suspicious activity reports (SARs) with the Treasury Department. 

The ENABLERS Act, discussed previously on this blog, has received widespread support in both the House and Senate, but some influential interest groups remain opposed. Notably, the American Bar Association (ABA) has objected to the inclusion of law firms among the entities that the ENABLERS Act would subject to the BSA’s AML rules. The ABA’s chief objections are that the ENABLERS Act—especially the requirement that law firms would be required to file SARs—would undercut attorney-client confidentiality and the right to effective counsel and would inappropriately interfere with state judicial regulation of the legal profession.

While the ABA is correct in emphasizing the fundamental principle that everyone is entitled to legal representation, and that lawyers have duties of confidentiality, loyalty, and zealous advocacy to their clients, the ABA’s objections to the ENABLERS Act are overstated. Upon closer inspection, the ENABLERS Act does not ask lawyers to do more than the ethical regime that governs the legal profession already requires or permits.

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Participatory Budgeting: A Way Forward for the Brazilian Anticorruption Agenda

In Brazil’s presidential elections last month, former President Lula, leader of the left-wing Workers’ Party, narrowly defeated right-wing incumbent President Bolsonaro. But even though many Brazilian anticorruption scholars and activists, as well as members of the international anticorruption community (including on this blog), had endorsed Lula over Bolsonaro, there is considerable pessimism about the future of anticorruption reform in Brazil, at least in the near term. Although Lula’s previous administrations had advanced important anticorruption reforms, as well as broader institutional reforms to strengthen the independence and effectiveness of Brazil’s institutions of justice, the fact that Lula was himself incarcerated for corruption offenses until the Supreme Court voided his conviction on procedural grounds has made anticorruption such a polarizing issue—and so associated the anticorruption agenda with the right wing—that many believe that Lula will be much more hostile to an anticorruption agenda this time around. Moreover, even if President Lula were amenable to backing anticorruption reforms, the right wing dominates Congress, making such reforms even less likely to pass.

Although the prospects for significant advances in the anticorruption agenda at the national level are dim, there are more opportunities for progress than the dominant pessimistic view acknowledges. Importantly, Brazil is a federal republic, where both state governments and local municipalities have a considerable degree of autonomy. Furthermore, even if the rhetoric of anticorruption has become unhelpfully politicized in Brazil, there are many reforms that do not overtly target “corruption” but that nonetheless may have significant anticorruption benefits. So, the way forward for Brazilian anticorruption reformers over the next several years involves a shift in focus from federal-level anticorruption prosecutions to local-level institutional reforms with significant but indirect anticorruption effects.

One reform that fits the bill is participatory budgeting (PB). Brazil’s anticorruption community should make common cause with other good-government and pro-democracy advocates to push for the expansion of PB at the municipal level.

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Who Can Commit Honest Services Fraud? The U.S. Supreme Court Will Soon Decide

One of the most potent anticorruption tools for U.S. prosecutors is the “honest services” fraud statute. In essence, the statute makes it illegal for someone to violate their fiduciary duty to the public by participating in a bribery or kickback scheme. The idea behind this law is that when someone owes a fiduciary duty to the public, engaging in corruption deprives the public of their right to “honest services” and thus constitutes a violation of that duty.

Yet while it is relatively clear what activities violate this statute, it is less clear who can violate it. Some cases are obvious: Public officials, for instance, hold a position of power that has been entrusted to them by the public, and in turn must act on behalf of the public when wielding that power. They clearly are the sorts of public fiduciaries to whom the honest services fraud statute can apply. At the other end of the spectrum are ordinary private citizens who have no connection whatsoever to government office. Such people may have a general moral responsibility to behave honestly, but they do not owe fiduciary duties to the public. But between those easy cases at either end of the spectrum are more challenging cases. Consider a person who does not formally hold office but who, by virtue of some relationship to public office or to a public official, have significant influence over government decisionmaking. Do those people owe a fiduciary duty to the public? Are they subject to conviction under the honest services fraud statute? This is the difficult problem that the U.S. Supreme Court will soon address in Percoco v. United States.

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Preventing Corruption in the Reconstruction of Ukraine

It is clear Russia’s attempt to break Ukrainians’ will to fight by attacking the nation’s critical infrastructure is failing. No matter how much destruction its daily bombardments wreak on power plants, district heating systems, and the other facilities that support daily life, Ukrainians remain determined to recover every inch of territory the invaders now hold.

Helping to shore up Ukraine’s determination is the commitment its Western partners have made to financing Ukraine’s reconstruction. But as donors pledge their support, concerns are being raised about corruption. It is no secret that at the time Russia attacked, Ukraine was still struggling with the ingrained corruption it inherited from Soviet rule and the post-Soviet oligarchs who grabbed money and power in the first years of independence.

The Ukrainian government must the lead the fight against corruption during reconstruction, and draft legislation now circulating in Kyiv recognizes this. All funds would be channeled through an independent government entity with a 20-person board of directors of which 15 would be drawn from donor organizations and five would be Ukrainian officials. That the majority will be drawn from outside Ukraine is a critical provision, one that should reassure donors that oversight will not be wanting.

A second critical provision is that the entity would have a strong internal audit department reporting directly to the board of directors. The proposed bill provides the department would conduct financial audits, ensure the fund operates within the law, that information the board requested was supplied, and that managers did not act beyond their authorized duties.

As important as these provisions are, they are mainly backwards looking, aimed at identifying where corruption has occurred. More important is preventing it from occurring in the first place.

Ukrainian officials and their partners should thus include strong prevention measures in the final draft. All contractors should have an anticorruption compliance program that has been independently certified to be compliance with the standards for an antibribery management system found in ISO 37001. The legislation should also create a prevention department. One model is that the Millennium Challenge Corporation has. Its unit trains grantees responsible for overseeing construction projects in the creation of a risk register and development of an action plan to reduce if not eliminate corruption in both the award and execution of construction contracts. Regular field visits monitor how well grantees are doing in implementing their action plan.

Current estimates are that rebuilding Ukraine will run upwards of $350 billion, a number sure to grow as Russian bombs continue to fall. That Western nations are prepared to invest such an extraordinary sum in rebuilding a victim of aggression is the most reassuring sign to date that despite economic turmoil, social upheaval, and the election of demagogues, there is indeed a broad and deep global consensus on the value of a liberal, democratic order. Every step possible should be taken to ensure corruption does not undermine it.

Chile’s Way Forward: Corruption and Disqualification:

Many democracies have sought to preserve the integrity of their governments by prohibiting individuals who have been convicted of corruption-related offenses (or other serious crimes) from holding public office, either for a period of time or permanently. Such a prohibition was on the ballot this past September in Chile, when citizens voted on whether to adopt a new constitution. That proposed constitution included, among its many provisions, a specific article (Article 172) that would have disqualified from public office any person who had been convicted of a corruption offense. The provision did not become law, however, because Chilean voters overwhelmingly rejected the proposed constitution for reasons that had almost nothing to do with the relatively obscure Article 172.

The inclusion of that article in the proposed constitution does, however, invite the consideration of two distinct but related questions: First, should Chile—or another similarly situated democracy—adopt a law disqualifying those convicted of corruption from holding public office? Second, if the answer to the first question is yes, should that disqualification rule appear in the constitution (as opposed to an ordinary statute), which is, by design, much harder to change?

The answer to the first question, at least for Chile, is probably yes. The answer to the second question, though, is no. Chile should experiment with a disqualification law, but should not constitutionalize it.

This conclusion arises from a careful consideration of the advantages and disadvantages of disqualification laws and, perhaps more importantly, the conditions that must obtain for those laws to be beneficial:

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Curbing Corruption in India’s Healthcare System

The Indian healthcare system is rife with corruption, and much of this corruption arises from the way that healthcare is regulated (or not). Because healthcare in India is inexpensive, at least by Western standards, private health insurance is relatively rare, and a sizeable majority of total health expenditures are made out-of-pocket. With little regulation, and without much meaningful price negotiation by either the government or private insurance companies, India’s healthcare system has become a vast “network of unregulated private sector hospitals.” This lack of regulation, coupled with intense competition, encourages doctors (who are often under substantial financial pressure) “to enter a happy axis of corruption where they routinely prescribe expensive investigations and perform operations which a patient might not need” in order to increase their profit margins. Doctors have also been known to take bribes from other healthcare entities in return for patient referrals, or to accept kickbacks from pharmaceutical companies disguised as “professional fees” in order to outcompete other private hospitals. As a recent WHO-Eurohealth publication concluded, health sector corruption in India includes not only “collusion, bribes and kickbacks in procurement which may result in overpayment for goods and contracted services” and doctors’ willingness to accept “payments in exchange for special privileges or treatment,” but also “distort[ions in] medical professionals’ prescribing practices.” 

Prime Minister Narendra Modi’s government has sought to address some of these concerns through a healthcare initiative known as PMJAY. The main objective of this program is to increase access to healthcare for the poorest 50% of the population—approximately 700 million people—who are given biometric government “smart cards” to purchase eligible inpatient healthcare services at both private and public hospitals. But while PMJAY is principally designed as a system for subsidizing healthcare for low-income people, it also serves as an anticorruption tool by bringing under government oversight millions of previously unregulated out-of-pocket healthcare transactions, requiring enrolled physicians to acquire digital pre-authorization before administering nonemergency services to PMJAY beneficiaries, and giving the government more power to negotiate with private hospitals participating in the program over healthcare rates. PMJAY’s computerized billing platform also serves a surprising secondary role as an AI-powered “comprehensive fraud analytics solution” for millions of transactions that were previously beyond the government’s reach. The program has already detected over 18,000 fraudulent insurance transactions, leading to penalties against hundreds of healthcare entities so far. The government has even made a list of “corrupt” hospitals available on the PMJAY website. Given PMJAY’s early successes, the government should expand the program. Not only would this increase healthcare access in general—a worthy aim in its own right—but it would further reduce corruption in the healthcare system. This is more easily said than done, however, in light of several practical obstacles to further expansions.

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A U.S. Court Just Opened a Huge Loophole in Anticorruption Campaign Finance Laws

A New Jersey election law prohibits any “corporation carrying on the business of a bank” from donating to political parties. The New Jersey Bankers Association (NJBA), a trade group representing the interests of 88 banks in the state, challenged that law as unconstitutional. For those who follow disputes over U.S. campaign finance law, one might have expected that this case would be decided within a familiar framework: Under the Supreme Court’s well-established principle that campaign contributions are a constitutionally protected form of political speech, the restriction would only be permitted if it is narrowly tailored to advance the government’s compelling interest in preventing corruption or the appearance of corruption.

The federal appeals court’s surprising decision in this case, though, sidestepped that usual inquiry entirely. Instead, the court determined that the law in question did not apply to the NJBA in the first place. The court reasoned that the law applies only to “corporation[s] carrying on the business of a bank,” and because the banks’ trade association (the NJBA) does not itself make loans and receive deposits, the NJBA is not a “bank,” meaning the law does not prohibit the NJBA (as distinct from its member banks) from making political donations.

That reasoning is at least questionable as a purely linguistic matter. To “carry[] on” a business activity can mean both “to engage in or conduct” business oneself and “to develop [a business] beyond a stage already attained.” While a bank trade association does not do the former, it arguably does do the latter—for example, by lobbying against capital constraints that would impede the loan-making capacity of banks. But more importantly, the court’s narrow, literalist reading of the statute is inappropriate in light of its dangerous consequences for New Jersey’s efforts to restrict corruption and the appearance of corruption in the campaign finance system. The court’s ruling permits (at least for now) New Jersey to restrict banks’ campaign contributions, but allows the representative of those banks to make contributions on their behalf. That’s like saying your child isn’t allowed to reach in the cookie jar, but his friend can grab the cookie for him. This misguided decision has thus created a potentially gaping loophole, one allowing affluent industry groups to engage in campaign-related spending that would ordinarily be deemed to present such a high risk of corruption (or its appearance) that government regulation is justified.

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OECD Denounces Italy’s Failure to Enforce the Antibribery Convention

GAB readers know that Italy has repeatedly failed to meet its obligations under the OECD Antibribery Convention (herehere, and here). That in recent high-profile cases where evidence Italian companies bribed officials of foreign governments was overwhelming, the companies, their executives, and accomplices were all acquitted.  And that civil society organizations in Italy, Nigeria, and the United Kingdom have urged the OECD in no uncertain terms to condemn the Italian government’s blatant violation of its obligation to levy “effective, proportionate, and dissuasive criminal penalties” on those who bribe foreign public officials (here).  

Last Friday, the OECD did exactly that. In a comprehensive, well-reasoned report, a model for future compliance reviews, its Working Group on Bribery in International Business Transactions fingered both the legislature and the judiciary for Italy’s noncompliance. The legislature because the sanctions for foreign bribery are too low to deter anyone or any company from paying a bribe, the judiciary for interpreting the rules of evidence in ways that almost invariably end in acquitting defendants.

Indeed, it is hard to read the Working Group’s analysis of the decisions in recent cases without concluding as I have that underneath the strained reasoning in the recent acquittals is some mix of bribery, favoritism, or threats.

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When it Comes to Corruption, Lula is Toxic, but Bolsonaro is Lethal

The second round of Brazil’s presidential election—which pits incumbent right-wing President Bolsonaro against left-wing former President Lula—is a no-win situation for those who principally care about anticorruption. Both candidates have been embroiled in corruption scandals, and though both have deployed corruption allegations against their opponent, neither has articulated anything resembling a meaningful anticorruption agenda. For those voters whose top priority is increasing integrity and accountability within the Brazilian government, the question at the ballot box on October 30 will be: which candidate is the lesser of two evils?

Though painful, that question has a clear answer: Bolsonaro poses by far the greatest threat to anticorruption efforts in Brazil, and to the integrity of Brazilian democratic institutions as a whole. Lula is by no means an ideal candidate, and it is entirely understandable that many Brazilian voters are deeply concerned about the numerous corruption scandals involving his party, the PT (see here, here, and here). But Bolsonaro’s administration has been ripe with scandals as well (see here, here, here, and here). Ultimately, whatever Lula’s personal ethical failings may be, he is far more likely than Bolsonaro to preserve the institutional accountability mechanisms that are necessary to address corruption over the longer term.

To get an idea of why, it is useful to take a look at Bolsonaro and Lula’s track records:

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