Protecting the Rights of Countries Victimized by Corruption: the Swiss Approach

One topic on the agenda at next week’s OECD Integrity Forum is “Settling Foreign Bribery Cases with Non-Trial Resolutions.”  As explained here, a principal reason for a session on settlements is the concern that developing countries are losing out on them.  When the bribe-taker is a developing country official and the bribe-payer employed by a transnational corporation, the case is most often resolved through a settlement in the country where the corporation is headquartered.  And the developing nation’s interests are often ignored.

A notorious example is the bribery of Nigerian officials by the American company Halliburton.  The company settled the case with U.S. authorities for $559 million; years later it settled with Nigeria for $35 million, just over six percent of what the U.S. extracted.  Yet which country suffered the most from the bribery?  And which one is more pressed for resources?

Countries with civil law legal systems offer a solution that common law nations would well advised to consider: allow the victim government to participate as a party to the criminal proceeding with the right to file a claim for damages and indeed to help in gathering evidence for the prosecution.  Swiss law provides one example employed by several countries which have been victimized by corruption.    Continue reading

Adjusting Corruption Perception Index Scores for National Wealth

My post two weeks ago discussed Transparency International’s newly-released 2017 Corruption Perceptions Index (CPI), focusing in particular on an old hobby-horse of mine: the hazards of trying to draw substantive conclusions from year-to-year changes in any individual country’s CPI score. Today I want to continue to discuss the 2017 CPI, with attention to a different issue: the relationship between a country’s wealth and its CPI score. It’s no secret that these variables are highly correlated. Indeed, per capita GDP remains the single strongest predictor of a country’s perceived corruption level, leading some critics to suggest that the CPI doesn’t really measure perceived corruption so much as it measures wealth—penalizing poor countries by portraying them as more corrupt, when in fact their corruption may be due more to their poverty than to deficiencies in their cultures, policies, and institutions.

This criticism isn’t entirely fair. Per capita income is a strong predictor of CPI scores, but they’re far from perfectly correlated. Furthermore, even if it’s true that worse (perceived) corruption is in large measure a product of worse economic conditions, that doesn’t mean there’s a problem with the CPI as such, any more than a measure of infant mortality is flawed because it is highly correlated with per capita income. (And of course because corruption may worsen economic outcomes, the correlation between wealth and CPI scores may be a partial reflection of corruption’s impact, though I doubt there are many who think that this relationship is so strong that the causal arrow runs predominantly from corruption to national wealth rather than from national wealth to perceived corruption.)

Yet the critics do have a point: When we look at the CPI results table, we see a lot of very rich countries clustered at the top, and a lot of very poor countries clustered at the bottom. That’s fine for some purposes, but we might also be interested in seeing which countries have notably higher or lower levels of perceived corruption than we would expect, given their per capita incomes. As a crude first cut at looking into this, I merged the 2017 CPI data table with data from the World Bank on 2016 purchasing-power-adjusted per capita GDP. After dropping the countries that appeared in one dataset but not the other, I had a 167 countries. I then ran a simple regression using CPI as the outcome variable and the natural log of per capita GDP as the sole explanatory variable. (I used the natural log partly to reduce the influence of extreme income outliers, and partly on the logic that the impact of GDP on perceived corruption likely declines at very high levels of income. But I admit it’s something of an arbitrary choice and I encourage others who are interested to play around with the data using alternative functional forms and specifications.)

This single variable, ln per capita GDP, explained about half of the total variance in the data (for stats nerds, the R2 value was about 0.51), meaning that while ln per capita GDP is a very powerful explanatory variable, there’s a lot of variation in the CPI that it doesn’t explain. The more interesting question, to my mind, concerns the countries that notably outperform or underperform the CPI score that one would predict given national wealth. To look into this, I simply ranked the 167 countries in my data by the size of the residuals from the simple regression described above. Here are some of the things that I found: Continue reading

The Tax Cuts and Jobs Act: Corruption by Another Name? Or Just Ordinary Law-Making?

Last December, the U.S. Congress passed, and President Trump signed, the Tax Cuts and Jobs Act. The debate over this law—characterized as the most “consequential tax legislation in three decades”—and the reaction to its passage was polarized and acrimonious. This is usually the case with tax debates, perhaps especially in the U.S. What was more notable and less typical, though, was the extent to which critics of the Act used the language of corruption to characterize both the Act’s substance and the process through which it was passed. (See here, here, here, and here). For example:

  • At several stages of the process, the votes of key Republican Senators seem to have been secured (some might say “purchased”) with special provisions. In fact, Texas Senator John Cornyn, the majority whip, openly admitted that provisions designed to appeal to individual Republican Senators were included in the final bill in an effort to “cobble together the votes we needed to get this bill passed.” That by itself may not be so unusual, even though many would find it distasteful. But in some cases, the special provisions were not only ones that these Senators favored on ideological grounds, or that would benefit their constituents (and hence the Senators’ re-election hopes); these special provisions also provided substantial personal financial benefits to the holdout Senators. For example, Wisconsin senator Ron Johnson was the first Republican to oppose the bill, on the basis that it would double the gap between corporate tax rates and the rates applicable to individuals receiving income from “pass-through entities”. Ultimately, the bill was amended to accommodate Senator Johnson’s concern by incorporating a 20% tax deduction for such entities. As it happens, Senator Johnson himself has millions of dollars invested in four such entities. Or consider Tennessee Senator Bob Corker, a critic of early versions of the bill who had asserted that he would not approve of adding even “one penny” to the “rapidly growing national debt.” Yet Corker ended up voting for a revised version of the bill that would add over $1 trillion to the deficit. What accounts for the change of heart? Critics point to the fact that the revised bill also included a new tax break that would increase Senator Corker’s personal income by up to $1.2 million every year (dubbed the #CorkerKickback on Twitter). Senator Corker claimed ignorance of how the bill would personally benefit him, though the fact that he reportedly earned a total of more than $8 million of income from the entities that were granted the tax break make this ignorance highly unlikely.
  • And then there’s President Trump. The Tax Cuts and Jobs Act could reduce President Trump’s personal tax bill by tens of millions of dollars. President Trump reportedly earned between $41 million and $68 million of income from 25 pass-through entities (which were granted the new tax break which also benefited Corker). He has not divested, in any meaningful way, from his investments. He has also refused to release his taxes on the pretext that he cannot do so as he is under audit, even though no such rule exists. The passage of a tax bill that confers such enormous benefits on the President seems to many like a form of “legalized corruption.”
  • In addition, Republican Party leaders admitted that passing the Tax Cuts and Jobs Act was necessary to ensure that the party continued to receive funding from its donors, who stood to gain millions of dollars in tax breaks—another quid pro quo of sorts. Indeed, the Republican Party has been unabashedly open about this, with Senator Lindsay Graham stating that if the party failed to push the tax bill through, “financial contributions will stop,” and Congressman Chris Collins justifying his support for the unpopular bill on the grounds that his “donors [were] basically saying, ‘Get this done or don’t ever call me again’.” That may not meet the legal definition of corruption in the United States, but to many voters and commentators it certainly seems corrupt.

Is “corruption” the right way to characterize the unsavory politics of the tax bill? Continue reading

Netanyahu’s Attempts to Undermine Police Recommendations May Be Dangerous for Israel

Israeli police have been investigating multiple corruption allegations against Prime Minister Benjamin Netanyahu for over a year. First, Netanyahu allegedly accepted extravagant gifts—such as expensive cigars, Champagne, and jewelry—from wealthy businessman Arnon Milchan in exchange for helping him secure a U.S. visa. Netanyahu is separately accused of striking a deal with the publisher of the newspaper Yediot Ahronoth, in which Netanyahu would push legislation that would curb competition from a rival paper, and in return Yediot Ahronoth would provide more favorable coverage of Netanyahu’s administration.

Recently, the Israeli police issued a recommendation that Netanyahu be charged with bribery, fraud, and a breach of trust in the two corruption cases. Perhaps anticipating this potential outcome, last December Netanyahu downplayed the significance of police recommendations, asserting that the “vast majority of police recommendations end in nothing.” Also last December, the Israeli parliament (the Knesset) passed, at the urging of Netanyahu’s supporters, a new Police Recommendations Law placing further restrictions on police recommendations for indictments. Though public pressure ultimately led to modifications so that the bill would not apply to the current investigations, it was also seen as prompted in large part by concerns about the possibility, now realized, that the police would recommend charges against the Prime Minister.

What, exactly, is so significant about the police recommendation in Israeli investigations into corruption and other matters? To get a better sense of what’s going on, it’s useful to take a step back and consider what Israel’s police recommendations are and whether they serve a useful function.

Continue reading

Rooting Out Malaysia’s Deep-Seated Corruption Requires Fundamental Political Reform

In a previous post, I wrote that to rebuild credibility and clean house in the wake of the 1MDB scandal, Malaysia needs to give the Malaysian Anti-Corruption Commission independent prosecutorial power. Even that much-needed reform, however, would leave Malaysia with a long way to go in its anticorruption efforts. The biggest obstacle to real improvement in Malaysia’s fight against corruption is not technical, but political: the chokehold that a single party—the National Front (Barisan Nasional or “BN”)—has on Malaysian politics.

The BN is a coalition party dominated by the United Malays National Organization (UMNO), and it has been in power since the 1970s. In a country with deep ethnic divisions, the party has managed to cling to power by perpetuating a far-reaching system of preferential treatment for the ethnic Malay majority. As a result, UMNO has a lock on the Malay vote – and therefore on general elections. Furthermore, Malay-owned firms get first priority for the award of government contracts, which perpetuates a culture of cronyism. UMNO leadership has a symbiotic relationship with an elite class of Malay businesspeople. On top of all this, districts in Malaysia are gerrymandered to give more weight to rural Malay areas. In the most recent general election, in 2013, the opposition party won the popular vote but did not win enough parliamentary seats to take power.

A party with a near-guaranteed place at the top has little incentive to clean up corruption. As visibly corrupt as UMNO may be, Malay voters are forced to weigh punishing UNMO corruption against preserving their privileges in every sector of life, from education to home-buying to business. Until there are significant changes in Malaysia’s political structure, anticorruption efforts are likely to be piecemeal and ultimately insignificant. A more structural change is required if there is to be any hope for rooting out corruption in Malaysia.

Continue reading

Maybe Half-Measures Aren’t Half Bad: Reflecting on Ghana’s Anticorruption Progress

Ghana, like many countries in sub-Saharan Africa, has long struggled with serious public corruption problems. Yet there have recently been encouraging signs of progress. Back in 2009, during the administration of then-President John Atta Mills, Ghana began formulating an ambitious, long-term National Anti-Corruption Action Plan (NACAP) with 120 goals. After President Mills’ death, work on the plan continued under President John Mahama; although Parliamentary approval was not required, President Mills nonetheless submitted the final version of the plan to Parliament, which ultimately approved the plan in 2014. Commitment to the plan appears as strong as ever despite a change of party with the ascension of President Nana Akufo-Addo in January 2017.

Of course, lots of countries develop ambitious-sounding national anticorruption strategies, and in many cases these strategies don’t achieve much. (More cynical critics argue that these plans are often not intended to actually do anything other than to create the appearance that the problem is being taken seriously.) But according to a report released last fall by Princeton University’s Institute for Successful Societies, there are encouraging signs that Ghana’s anticorruption plan is working, despite some significant setbacks and limitations. Because those of us who work on anticorruption, especially in challenging environments, are so starved for good news and anxious for lessons learned, it’s worth considering some of the factors that seem to have contributed to the relative success of Ghana’s recent efforts. Continue reading

Two Essential Volumes on Corruption

The study of corruption and what to do about it is no longer an academic or policy-studies backwater.  Matthew’s bibliography of corruption-related publications now lists over 6,000 books, articles, and reports and, as his regular updates show (thank you Matthew), the list continues to grow at the rate of some 50 plus per month.  That is the good news.  It is also of the course the bad news.  Few practitioners, and I suspect even academics, can claim to have absorbed the learning in the 6,000 current documents let alone keep up with the outpouring of new works.

For those who can’t , I recommend two recent books: Dan Hough’s Analysing Corruption and Alina Mungui-Pippidi and Michael Johnston’s Transitions to Good Governance: Creating Virtuous Circles of Anti-Corruption.  Both do an excellent job of synthesizing and extending recent scholarship on corruption issues, and both do so in a sophisticated but accessible manner.  Both have the added virtue of being available in reasonably priced paperback editions. Continue reading