Why Guatemala’s Experiment with Fighting Grand Corruption Was Not a Failure

The July 23 firing of Juan Francisco Sandoval, Guatemala’s top corruption prosecutor, seemed to put paid to the nation’s extraordinary experiment in fighting grand corruption.  Sandoval’s office was established to prosecute cases developed by the Commission Against Impunity, or CICIG after its Spanish initials. CICIG was a U.N. entity the Guatemalan government accepted as the price for international assistance after the civil war ended. It was tasked with investigating gross human rights abuses and grand corruption; recognizing how powerful Guatemalan elites were and how weak the judiciary was, it was staffed by non-Guatemalan investigators and prosecutors.

As Matthew described here, in 2019 an unholy alliance of Guatemalan elites and Trump cronies succeeded in pulling U.S. support for CICIG, allowing the elites to kill it off. With its demise, all that stood in the way of their looting the country was Sandoval’s office.  

The original plan had been for CICIG to both investigate and prosecute cases themselves.  But after the Guatemalan Supreme Court ruled that only the public prosecution office (Ministerio Publico) could prosecute, CICIG’s first head, Carlos Castresana, worked out arrangement with the then Attorney General to assign ten young, “clean,” newly recruited lawyers to an office that would be responsible for CICIG’s cases.  Given how far the elites’ tentacles reached into Guatemala’s middle class, Castresana doubted “clean” recruits could be found.  Or if they were clean, they would stay that way if faced with the notorious choice between plata o pluma, taking a bribe to drop the case or being killed. One of the great parts of the CICIG story, and as far as I can tell one still untold, is how those like Sandoval, from a new generation of Guatemalans, rose to the challenge.

The creation of CICIG and its early successes developing cases against powerful military and civilian leaders that Sandoval’s office successfully prosecuted provided a hopeful example of what an alliance between the international community and a nation’s citizenry could achieve. Its end, and now Sandoval’s firing, show the limits of the approach.  At the same time, it shows the effort is worth emulating.  Sandoval’s firing prompted international and condemnation and will lead to sanctions likely to create divisions between at least some in the business class and the politicians.  The governing body of the judiciary has demanded an explanation for his termination, and his initial replacement stepped down after less than days in office (here). Sandoval and like-minded lawyers and public servants aren’t going away, and many are now moving up the ranks in the judiciary and prosecution service.  

In a fine article for PlazaPublica, former U.S. Ambassador to Guatemala Stephen McFarland explains what the U.S. and others in the international community can do in light of Sandoval’s firing to combat corruption in Guatemala.  That whatever they do, they have in-country allies like Sandoval is why the CICIG experiment should not be treated as a one-off failure.  

Fighting Corruption Isn’t Rocket Science

Space, the final frontier, sure is expensive to explore. Every launch, every mission, can cost billions of dollars in research, materials, and overhead. And partly because of this, government space agencies may be especially susceptible to corruption. After all, these agencies are responsible for enormous projects with thousands of moving parts (literally and figuratively), but are monitored principally by committees that lack the scientific knowhow to conduct effective oversight. Embezzlement, overspending, bribery, and other crimes are easy to miss. Not only is corruption easily buried by bureaucratic or technical minutiae, it’s also extremely costly, as mistakes can result in the loss of valuable equipment or even human life. Even when corruption causes things to go wrong, the fact that space missions are inherently risky and complex may make it difficult to recognize when a malfunction is due to malfeasance.

Roscosmos, the Russian state corporation responsible for space flights, serves as a cautionary tale. For years, Roscosmos funds have been embezzled though contracting bids— officials were bribed to make fake deals and artificially inflate costs, allowing hundreds of millions of dollars to evaporate and a few Soyuz rockets to accidentally explode. (In 2014 alone, corruption and other malfeasance caused Roscosmos to lose roughly US$1.8 billion.) After Russian anticorruption activist Alexei Navalny called out the “astronomic” levels of corruption and mismanagement at the Vostochny space center (one of President Putin’s pet projects), multiple criminal investigations resulted in the conviction and sentencing of fifty-eight officials for fraud and abuse of office.

Though the record of the U.S. National Aeronautics and Space Administration (NASA) is not nearly as egregious, neither is it pristine. Suspicions regarding bribes by private contractors to NASA officials have existed for decades. For instance, back in the mid-1990s, a controversial FBI sting operation implicated dozens of contractors that allegedly paid bribes to NASA employees in hopes of determining which commercial experiments would be selected for the International Space Station. Representative John Conyers, who chaired the Committee on Government Operations in the House of Representatives at the time, pinned the blame on “NASA’s dismal record of contract mismanagement and faulty financial controls.” And the problems haven’t gone away: just last year, NASA’s associate administrator for human spaceflight Doug Loverro resigned amid allegations for improper contacts with Boeing regarding the contracts for NASA’s moon lander program. NASA’s Office of the Inspector General (OIG) has raised numerous concerns about NASA’s procurement system, and NASA attributed the Taurus XL launch failures, worth $700 million, to faulty materials provided by a contractor that falsified thousands of certifications for their aluminum products.

Though NASA has since taken some measures to curb against the potential for this sort of corruption (such as the installation of a Chief Financial Officer and the Acquisition Integrity Program), the risks are still significant, especially as NASA ponders a return to crewed missions by way of billion dollar contracts. These risks are further exacerbated by the agency’s even greater reliance on private sector contractors to compensate for the decline in the agency’s budget. There are therefore several additional steps that NASA can and should take to further safeguard integrity in the procurement process.

Continue reading

Nation-Building and Corruption: A Warning from French Vietnam

Nation-building has long been a popular project—albeit a controversial one—among Western nations. Nation-building is a complicated activity, one that requires balancing such a wide variety of considerations, and making hard choices about what areas to prioritize. As a result, anticorruption is sometimes neglected or ignored in the nation-building process. This, however, is a mistake. Unchecked corruption can have devastating effects on nation-building. And while contemporary critics make this point in the context of modern nation-building initiatives, such as U.S.-led efforts in Afghanistan, there are also compelling historical illustrations of how tolerance of corruption can help derail the nation-building project. One such lesson comes from the French experience during the First Indochina War.

Though France had held on to Vietnam with ease from the mid-nineteenth century to the early days of World War II, the post-war era spelled trouble for the French Empire in Southeast Asia. The Viet Minh, a burgeoning nationalist force led by Ho Chi Minh, challenged French colonial dominance in the region, eventually securing the support of China and the Soviet Union. By the early 1950s, France’s military campaign against Ho’s guerrilla forces was flailing. So, rather than trying to continue to hold Vietnam as a colonial territory, French leaders decided to create an independent Vietnamese state. In attempting to build this new country, however, French leaders turned a blind eye to a corruption scheme—the so-called “Piastres Affair”—that would gravely weaken this enterprise.

Continue reading

NGOs, Dark Money, and Corruption: Lessons from Ohio’s Biggest Public Corruption Scandal

Ohio public utility giant FirstEnergy pled guilty June 20 to capturing or at least renting the Ohio state legislature long enough to win passage of financial bailout legislation. The picture below shows how the company used third-parties and cut-outs to hide its campaign to get Ohio’s legislature to do its bidding.

As with all large corruption schemes, several lessons can be learned from its unraveling.  One comes from the picture itself: how a well-designed graphic can make a complex, convoluted corruption scheme readily understandable. A second is how savvy prosecutors can craft plea agreements to curb future corruption.  A third is a step the Biden Administration could take to make it easier to ferret out those behind some of the dark money now plaguing American politics.

Continue reading

To Cut Corruption in the Palestinian Authority, Cut Off Development Aid

Foreign development aid plays a unique role in the lives of Palestinians, as aid is the main driver of growth in the Palestinian economy. For this reason, many people welcomed the Biden Administration’s announcement in April to reverse the Trump Administration’s decision to halt all development aid to Palestinians. Yet widespread corruption in the Palestinian Authority (PA)—which remains the principal recipient of aid to Palestinians—threatens to undermine the effectiveness of aid. Worse, foreign aid to the PA helps perpetuate and exacerbate the PA’s culture of corruption.

Corruption in the PA is deeply entrenched. To illustrate with just a handful of many possible examples: Between 2008 and 2012 alone, over US$2.3 billion in development aid money from the European Union to the PA was embezzled. In 2017, the PA spent staggering sums on fake companies and projects, including a non-existent airline. Rather than develop welfare programs to distribute social services or development aid money to the public, the PA allocates the money to salary payouts for security officers and government officials in job placements secured by cronyism. High-ranking PA officials regularly establish their own NGOs and phony companies to attract additional funds from aid programs. Yet for the most part donors have turned a blind eye to the PA’s blatant corruption and mismanagement of development funds. (For instance, even when investigators reported PA officials’ massive embezzlement of EU aid funds, the EU did not discontinue the provision of aid.) Consequently, despite more than US$15 billion in development aid given to Palestinians in the past thirty years, that aid has failed to reduce poverty or deliver sustainable improvements in ordinary Palestinians’ quality life.

And it’s not just that the PA’s corruption undermines the effectiveness of aid. Perhaps the even bigger problem is that the flow of development aid contributes to and props up the PA’s culture of large-scale corruption. The more funding the PA can access, the more powerful it becomes, and the more capable it is of embezzling funds and extorting bribes from its populace. Worse still, the costs of the corruption that the aid to the PA fuels are not merely economic costs: In Palestine, corruption contributes to needless violence, political radicalization, and, ultimately, the loss of innocent lives.

The only way to break out of this malignant cycle is for donors to call a halt to unfettered development aid to Palestinian government institutions, which have proven themselves time and again to be too weak and unscrupulous to handle aid without corruption.

Continue reading

A Dearth of Data in the De-Risking Debate

As readers of this blog are likely well aware, the fight against grand corruption is closely linked to the fight against money laundering. After all, kleptocrats and others involved in grand corruption need to hide the origins of their ill-gotten wealth. While the criminals who seek to launder their illicit cash are sometimes prosecuted for money laundering, much of the burden of the anti-money laundering (AML) regime falls on banks and other financial institutions. These institutions have obligations to perform due diligence on prospective clients—especially those clients with attributes suggesting high risk—and to report suspicious transaction to the government. Financial institutions can be held liable for failing to fulfill these obligations, and in some cases for their complicity in money laundering schemes. Yet many advocates believe that the current AML framework is not stringent enough, and have called for reforms that would impose additional obligations, and potential liabilities, on the financial institutions that handle clients and transactions that pose a high money laundering risk.

Banks and other skeptics often resist these reforms, arguing not only that the various proposals will do little to reduce money laundering, but also that more stringent AML regulations will lead to a phenomenon known as “de-risking.” This piece of industry jargon refers to the practice of ending or avoiding relationships with individuals or businesses perceived as “high risk” for money laundering. Of course, we want banks to eschew an individual client or transaction with characteristics that suggest a high probability of money laundering. But when banks and others warn about de-risking, they are referring to a phenomenon in which banks refuse to do business with broad categories of clients – for instance, those from particular countries or regions, or in specific lines of business – despite the fact that most of the individuals or firms in that category do not actually present a serious money laundering risk. If the monitoring costs and legal risks associated with certain kinds of accounts are too high relative to the value of those accounts, the argument goes, it’s easier for banks to simply close all of the accounts in the “de-risked” category. But this indiscriminate closure of allegedly risky accounts cuts off many deserving people, firms, and organizations from much-needed financial services.

Is de-risking really a significant problem? Skeptics might observe that the financial industry has incentives to resist more stringent AML regulation, and their warnings of de-risking may be, if not deliberately pretextual, then at least self-serving. That said, other actors, including non-profit groups, have alleged that they have experienced account closures due to de-risking. So the concern is likely a real one. Still, to set rational AML policy, we would want to know not just whether de-risking is a potential problem (it is) or whether it occurs sometimes (it probably does); we would want to know whether it is a systematic and serious problem, one that would likely be exacerbated by a significant enhancement of banks’ AML obligations.

So, what do we know about the extent and magnitude of de-risking in response to AML regulations? The short answer is: not much.

Continue reading

Castles of Corruption

Owning a castle has never been easier. In 2017, Italy’s State Property Agency made international headlines by announcing that the country would be giving away over a hundred castles for free. The only catch? Takers must promise to restore the dilapidated structures and turn them into tourist sites. (The program builds on an existing initiative in which the Agency gives historical federally-owned properties to local authorities for restoration.) At first glance, this program looks like a win for everyone. The Italian federal government no longer has to deal with crumbling historic castles, the properties will be cleaned up and made available to tourists, and lucky entrepreneurs and local governments can reap the profits. Unfortunately, however, there are reasons to worry that this program, like so many other castle restoration initiatives, will end up sapped by corruption, money laundering, collusion, and nepotism.

 Corruption and related malfeasance is quite common in the context of castle ownership and restoration. This is not all that surprising, given that corruption is a perennial issue within the construction industry as a whole. All of the usual problems in that sector—including bribery in the bidding process, collusion to funnel work to friends and family, embezzlement, and the substitution of substandard materials—apply in the specific context of castle restoration. On top of that, real estate has long been a favorite of those involved in money laundering due to the lower scrutiny that real property transactions receive, at least in comparison to stock or other commodities. But in addition to these familiar risk factors, castle restoration projects have several additional distinctive features that make them even more vulnerable to corruption than comparable construction projects and real estate transactions:

Continue reading

Why Paying the Media to Uncover Corruption Would Work in India

Jennifer Kline’s recent post on this blog proposed a novel way to support and encourage investigative journalism that exposes corruption: When such exposés result in legal actions that impose substantial monetary penalties on wrongdoers, the responsible media outlet should receive a percentage of the penalty as a reward—comparable to how some countries have programs that pay whistleblowers a percentage of any monetary recoveries that result from the original information that the whistleblowers supplied. While Jennifer’s discussion of this idea was fairly general, and seemed to have in mind implementation in countries like the United States, her proposal may be especially suitable for a country like India. 

Continue reading

Will Canada Help Curb Haitian Corruption?

Many Haitians fear for their safety and that of their family as their country slips into anarchic violence after the assassination of their president. But not Haitian Senator Rony Célestin and his family

Courtesy of the Canadian government, they are ensconced in the mansion pictured above. Located in the toniest of tony areas in Quebec, the couple recently settled on it for some $4 million.

 What did the Canadian government have to do with Célestin’s acquisition of the mansion? Everything. Célestin is a high-ranking official of a foreign country.  Any Canadian real estate agent or bank he contacted about buying the mansion was obliged by Canadian law to ask a simple question: How does a public official of one of the world’s poorest countries amass enough to buy such a luxurious home?  

If the July 11 New York Times story on the Senator and the mansion is correct, an inquiry would quickly have raised suspicions that the money did not come from a legitimate source. That in turn would have further obliged the real estate agent or banker to alert Canadian authorities.

Reports by the Financial Action Task Force and Asia/Pacific Group on Money Laundering have repeatedly warned Canadian officials that controls on money laundering in the real estate sector were toothless, that for years corrupt foreign officials have been hiding their money in Canada through the purchase of pricey real estate.  Indeed, in their latest, joint report, issued in 2016, the two flagged the rise of “criminally-inclined real estate professionals, notably real estate lawyers” to cater to the money laundering needs of criminals of all kind.

Is it too much to ask Canadian authorities to stop looking the other way when corrupt officials come to their country to shop for real estate?  Perhaps the picture of the Senator’s mansion juxtaposed with anyone of the thousands of Haiti’s poor might prompt action?  Canadian civil society, where are you?

Breaking News without Breaking the Bank: Monetary Rewards for Media Organizations that Expose Corruption

Investigative journalists play a key role in exposing corruption. In many cases, as a direct result of media exposés, the government has been able to recover substantial sums. To take just a few examples: In 2011, the Los Angeles Times revealed that officials in a small California city improperly paid themselves exorbitant salaries, and the subsequent court cases ordered restitution awards nearing $20 million. In 2012, the New York Times exposed Walmart’s widespread bribery in Mexico, and the company ultimately agreed to pay $282 million to settle the resulting seven-year investigation into whether Walmart had violated the Foreign Corrupt Practices Act (FCPA). In 2017, the International Consortium of Investigative Journalists (ICIJ) shocked the world when its affiliated journalists broke the Panama Papers scandal, exposing extensive fraud and tax evasion by world leaders, drug traffickers, and celebrities alike. As a result of the ICIJ’s investigation, governments around the world have managed to claw back $1.28 billion from perpetrators thus far. A Malaysian-born British journalist’s investigations (prompted by a whistleblower who provided her with more than 200,000 documents) produced the first hard evidence of what became known as Malaysia’s 1MDB scandal, the world’s largest kleptocracy scheme to date, which has produced, among other things, a nearly $2.9 billion settlement for FCPA violations.

But despite the crucial role journalists play in uncovering corruption, investigative journalism is a risky investment for media outlets. For one thing, this sort of investigative journalism is time- and resource-intensive—much more so than straight reporting—and many investigations come to nothing. And when investigative journalism does uncover evidence of wrongdoing by powerful figures, publishing those stories can be legally and politically risky. So, even though media outlets can reap substantial rewards from successful investigations—in the form of clicks, subscriptions, and prestige—media outlets faced with declining revenues and an increasingly hostile environment may not invest nearly as much in investigations into corruption as would be socially optimal.

To mitigate this problem, I propose what may initially seem like a radical way to create stronger incentives for media outlets to invest in this kind of investigative journalism: When media outlets expose corruption or similar wrongdoing, and this exposure leading to monetary sanctions on the culpable entities or individuals, the media outlets responsible for the reporting ought to receive a percentage of the government’s recovery. Such a proposal is inspired by (though distinct from) the whistleblower reward programs that many governments have already adopted. (For example, in the United States, individuals who voluntarily provide the Securities and Exchange Commission with original information pertaining to securities law violations may receive between 10% and 30% of the total penalty collected if their information leads to a successful prosecution.) A similar “media rewards program” could substantially improve the effectiveness of independent investigative journalism in exposing and deterring corruption.

Continue reading