Category Archives: Commentary

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 →

In the Excitement of the New, Let’s Not Neglect the Tried and True

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In my two posts last week (here and here), I attempted to go through all of the 41 country statements submitted by the participants in the London Anticorruption Summit held earlier this month, to see what those statements had to say about four specific issue areas highlighted by the Summit’s joint Communique: (1) accessibility (and possibly transparency) of beneficial ownership information for companies and other legal entities, (2) public procurement transparency, (3) independence, effectiveness, and transparency of national audit institutions, and (4) whistleblower protection (and encouragement). I didn’t originally intend to say much more about this, other than putting the information out there for others to examine, but on writing up the summaries, I was struck by the following observation:

Of the four issue areas I picked out–all of which, again, were prominently featured in the Communique–I would characterize two (beneficial ownership and, to a somewhat lesser extent, procurement transparency) as relatively “new” topics that have generated a lot of excitement. (This is clearly the case for beneficial ownership; public procurement transparency has been on the agenda for much longer, though I put it in this category because a lot of the focus of discussion in this area has been on relatively new initiatives like e-procurement and the Open Contracting Data Standard.) The other two issues I chose to highlight–independent and competent audits of government programs, and adequate protection of (and, preferably, affirmative encouragement for) whistleblowers–have been part of the conversation for considerably longer, though that doesn’t mean we’ve yet seen anywhere near as much movement on either of those issues as we’d like. And, compared to the newness and (relative) sexiness of topics like beneficial ownership registries and e-procurement initiatives, whistleblower protection and audits seem a bit humdrum. (Audits especially. Even I get bored when I hear the word “audit,” and I happen to think they’re really important.)

The thing that struck me, when going through the country statements, was the dramatic lopsidedness of the attention lavished on beneficial ownership and procurement transparency (to say nothing of other topics I didn’t cover, like corruption in sports and improved asset recovery mechanisms), compared to the relative neglect of country commitments in the areas of improving national audit institutions and whistleblower protections. Continue reading →

Going Cashless to Fight Corruption: The Case of Kenyan Public Transit

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In the fight against petty corruption, a potentially game-changing development is the rise of cashless payments. In a world where people do not use or carry cash, petty bribes to traffic cops or low-level government bureaucrats are either foolish—in that they require a processing mechanism and are therefore easy to detect—or altogether impossible. While some wealthier jurisdictions have made substantial steps towards a cashless economy (see Sweden and Hong Kong), a surprising leader in the rise of cashless payments has been Kenya, reinforcing its role as the Silicon Savannah of Africa and a potential hub for innovation in combatting petty corruption.

In 2007, the Kenyan telecom company Safaricom launched M-PESA, a mobile banking service that allows people to transfer money to other users using their mobile phones, and to withdraw cash from any of over 40,000 agents across the country, creating convenient mobile bank accounts accessible to virtually all Kenyans. M-PESA has been remarkably successful: As of 2015, M-PESA had 20 million subscribers (over two-thirds of Kenya’s adult population), and by some estimates around 25% of the country’s GDP flows through the service. The brilliance of M-PESA is that users do not need to carry around vast sums of cash; instead, they can treat any M-PESA agent as an ATM, and withdraw cash only when needed.

A recent plan has suggested leveraging technology like M-PESA to create cashless payments on the shared buses, known as matatus, that are the main form public transportation in Kenya. Traffic police routinely stop matatus to extort bribes from the drivers and conductors of the vehicles, who often in turn demand cash from passengers in order to continue on their route. In 2014, Kenya’s National Transport and Safety Authority (NTSA) proposed a policy whereby matatus would become cashless, shifting payments to a more easily regulated electronic system. All commuters would have prepaid cards, or funds accessible through their mobile phone that they could use to pay the conductor a flat rate for a given route. Drivers would be discouraged from extorting payments to fund bribes through the online system, as this system would be more stringently regulated and payments would be more easily tracked. Given the ubiquity of M-PESA agents acting as de facto ATMs throughout the country, commuters as well as matatu drivers and conductors would in theory not need to carry cash at all on these routes, thus reducing the incidence of bribes paid to traffic police.

The implementation of this plan, however, has been slow and fraught with difficulties. As of the time of writing, only some matatu associations have begun accepting cashless payments, and cash payments still predominate. In January of 2016, the Chairman of the Matatu Owners Association, Simon Kimutai, stated that full implementation will likely take up to four years, despite the government’s more optimistic timelines. One problem is inter-operability: Ideally, there should be a uniform set of payments on all matatu routes, but this is not yet the case; the unfortunate consequence is that even in matatus with the equipment to receive cashless payments, drivers and conductors still accept cash payments to avoid logistical difficulties. A potentially more serious problem is that some matatu drivers are actively resisting the plan by pretending the card readers are broken or feigning confusion over the new system. One reason for this resistance is the drivers’ desire to preserve their ability to inflate prices at rush hour or in poor weather. But drivers may also resist the cashless system in order to avoid retribution by the criminal gangs that currently patrol certain matatu routes and force drivers to pay bribes for protection. (Similar problems arose in Guatemala, when a similar cashless plan was enacted: When the cashless system limited drivers’ ability to pay these “protection” bribes, gangs reacted with violence, burning buses and threatening drivers and passengers alike.)

These problems mean that in the short term, it is unlikely that this plan to shift to cashless payments will have much effect on the incidence of petty bribes on matatus, as commuters will be forced to carry cash all the same. However, I remain optimistic that this plan nevertheless represents an exciting development, and is one that will ultimately have a meaningful impact. There are three main reasons for my optimism:

Continue reading →

What Does Rodrigo Duterte’s Victory Say About the Philippines’ Experience with Corruption?

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Last week, the Philippines elected the highly controversial Davao City Mayor Rodrigo Duterte as President of the Philippines. Duterte, who has built up a reputation as a political outsider who will challenge the traditional elite, had been the front-runner for several months, and on May 9th swept his competition with nearly twice as many votes as his closest competitors. In a previous post, I described Duterte’s zero-tolerance approach toward fighting corruption. Unlike his predecessor, President Noynoy Aquino, who himself ran on an anticorruption platform, Duterte has advocated for policies based in discipline and violence. He has threatened to bring back the death penalty for the crime of plunder or even to kill violators himself. (Indeed, Duterte has already admitted to killing criminals in the past). Duterte and his supporters acknowledge that his approach disregards due process and rule of law, which they argue is necessary because of how widespread corruption has become in Philippine government.

Since my last post, Duterte’s notoriety has only grown. In mid-April, Duterte became the subject of international scrutiny when footage from a campaign rally was released that showed him joking about the gang rape of Australian missionary. The real tragedy, Duterte said, was that he had not gotten to the beautiful woman first. His remarks drew criticism from his opponents and the Australian ambassador, and some expressed concern that Duterte’s brazen attitude would threaten relationships with foreign nations. A recent sketch by John Oliver detailed these horrifying remarks, as well as Duterte’s homophobic and bizarre comments while officiating at a mass wedding, when he publicly offered himself as a gift to all of the brides present.

Remarkably, and to the shock of most other countries, Duterte succeeded despite scandal and protest, and in a couple months he will assume office as the next President of the Philippines. What does his victory reveal about the Philippines’ experience with corruption? In the wake of what I view as an extremely troubling electoral result, here are some initial thoughts:

 

Continue reading →

London Anticorruption Summit–Country Commitment Scorecard, Part 2

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This post is the second half of my attempt to summarize the commitments (or lack thereof) in the country statements of the 41 countries that attended last week’s London Anticorruption Summit, in four areas highlighted by the Summit’s final Communique:

  1. Increasing access to information on the true beneficial owners of companies, and possibly other legal entities, perhaps through central registers;
  2. Increasing transparency in public procurement;
  3. Strengthening the independence and capacity of national audit institutions, and publicizing audit results (and, more generally, increasing fiscal transparency in other ways); and
  4. Encouraging whistleblowers, strengthening their protection from various forms or retaliation, and developing systems to ensure that law enforcement takes prompt action in response to whistleblower complaints.

These are not the only subjects covered by the Communique and discussed in the country statements. (Other topics include improving asset recovery mechanisms, facilitating more international cooperation and information sharing, joining new initiatives to fight corruption in sports, improving transparency in the extractive sector through initiatives like the Extractive Industries Transparency Initiative, additional measures to fight tax evasion, and several others.) I chose these four partly because they seemed to me of particular importance, and partly because the Communique’s discussion of these four areas seemed particularly focused on prompting substantive legal changes, rather than general improvements in existing mechanisms.

Plenty of others have already provided useful comprehensive assessments of what the country commitments did and did not achieve. My hope is that presenting the results of the rather tedious exercise of going through each country statement one by one for the language on these four issues, and presenting the results in summary form, will be helpful to others out there who want to try to get a sense of how the individual country commitments do or don’t match up against the recommendations in the Communique. My last post covered Afghanistan–Malta; today’s post covers the remaining country statements, Mexico–United States: 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 →

London Anticorruption Summit–Country Commitment Scorecard, Part 1

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Well, between the ICIJ release of the searchable Panama Papers/Offshore Leaks database, the impeachment of President Rousseff in Brazil, and the London Anticorruption Summit, last week was quite a busy week in the world of anticorruption. There’s far too much to write about, and I’ve barely had time to process it all, but let me try to start off by focusing a bit more on the London Summit. I know a lot of our readers have been following it closely (and many participated), but quickly: The Summit was an initiative by David Cameron’s government, which brought together leaders and senior government representatives from over 40 countries to discuss how to move forward in the fight against global corruption. Some had very high hopes for the Summit, others dismissed it as a feel-good political symbolism, and others were somewhere in between.

Prime Minister Cameron stirred things up a bit right before the Summit started by referring to two of the countries in attendance – Afghanistan and Nigeria – as “fantastically corrupt,” but the kerfuffle surrounding that alleged gaffe has already received more than its fair share of media attention, so I won’t say more about it here, except that it calls to mind the American political commentator Michael Kinsley’s old chestnut about how the definition of a “gaffe” is when a politician accidentally tells the truth.) I’m going to instead focus on the main documents coming out of the Summit: The joint Communique issued by the Summit participants, and the individual country statements. There’s already been a lot of early reaction to the Communique—some fairly upbeat, some quite critical (see, for example, here, here, here, and here). A lot of the Communique employs fairly general language, and a lot of it focuses on things like strengthening enforcement of existing laws, improving international cooperation and information exchange, supporting existing institutions and conventions, and exploring the creation of new mechanisms. All that is fine, and some of it might actually turn out to be consequential, but to my mind the most interesting parts of the Communique are those that explicitly announce that intention of the participating governments to take pro-transparency measures in four specific areas:

  1. Gathering more information on the true beneficial owners of companies (and possibly other legal entities, like trusts), perhaps through a central public registry—which might be available only to law enforcement, or which might be made available to the general public (see Communique paragraph 4).
  2. Increasing transparency in public contracting, including making public procurement open by default, and providing usable and timely open data on public contracting activities (see Communique paragraph 9). (There’s actually a bit of an ambiguity here. When the Communique calls for public procurement to be “open by default,” it could be referring to greater transparency, or it could be calling for the use of open bidding processes to increase competition. Given the surrounding context, it appears that the former meaning was intended. The thrust of the recommendation seems to be increasing procurement transparency rather than increasing procurement competition.)
  3. Increasing budget transparency through the strengthening of genuinely independent supreme audit institutions, and the publication of these institutions’ findings (see Communique paragraph 10).
  4. Strengthening protections for whistleblowers and doing more to ensure that credible whistleblower reports prompt follow-up action from law enforcement (see Communique paragraph 13).

Again, that’s far from all that’s included in the Communique. But these four action areas struck me as (a) consequential, and (b) among the parts of the Communique that called for relatively concrete new substantive action at the domestic level. So, I thought it might be a useful (if somewhat tedious) exercise to go through each of the 41 country statements to see what each of the Summit participants had to say in each of these four areas. This is certainly not a complete “report card,” despite the title of this post, but perhaps it might be a helpful start for others out there who are interested in doing an assessment of the extent of actual country commitments on some of the main action items laid out in the Communique. So, here goes: a country-by-country, topic-by-topic, quick-and-dirty summary of what the Summit participants declared or promised with respect to each of these issues. (Because this is so long, I’m going to break the post into two parts. Today I’ll give the info for Afghanistan–Malta, and Thursday’s post will give the info for Mexico–United States). Continue reading →

Lacey Act Corruption-Based Risks Should Prompt Wood Importers to Branch Out

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The Lacey Act, a century-old U.S. statute, provides a unified set of penalties for possession of illegally procured animals or plants from the U.S. and, after amendments five years ago, those procured in violation of foreign laws as well. The Act was envisioned as a conservation statute, not an anticorruption statute; big cats (Siberian tigers) rather than big cronies were named as the motivation behind a recent prosecution under the new amendments. Yet in finalizing that case—involving retailer Lumber Liquidators’ purchase and import of illegally sourced wood—the Department of Justice (DOJ) seemed to suggest that companies could be held to a higher standard of diligence where they source natural goods from countries with high levels of corruption. In announcing Lumber Liquidators’ agreement to plead guilty to various Lacey Act charges for importing timber procured in violation of foreign logging laws, the DOJ emphasized the company’s failure to address red flags that the imports were illegally acquired. Those flags included that the imported wood came from a region known “to carry a high risk of [timber] being illegally sourced due to corruption and illegal harvesting.” Furthermore, the case suggests heightened scrutiny when natural resource products travel through intermediary agents whose countries also suffer from corruption or lack of robust enforcement of laws against illegal logging and the like. (In the Lumber Liquidators case, Russia was the source of the stock in question, and China was the intermediary seller’s base.)

The fate of Lumber Liquidators should put companies sourcing wood from regions with entrenched corruption on alert. The DOJ’s statement, if it is carried forward, foreshadows positive results. The Lacey’s Act’s potential in the fight against corruption is significant, straightforward, and good for everyone. A Bloomberg analysis notes that enforcement of foreign laws benefits U.S. producers as well as combatting foreign corruption. The Sierra Club emphasizes the role that corruption plays in global illegal logging and the Lacey Act’s role in “leading the fight” against it. The Natural Resources Defense Council blog also advocated the role of the Act in helping “countries establish rule of law and crackdown on corruption.” Such commentary highlights a second takeaway from the DOJ order: to reach the corruption-combatting potential of the statute, wood sourcing companies need to allow the Lacey Act threat to improve compliance in their source nations, rather than leaving for greener pastures. Indeed, using the Lacey Act to incentivize companies to “engage their supply chain” to avoid forestry corruption is both achievable and worthwhile:

Continue reading →

Jacob Zuma Violated the Constitution. Now What?

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It’s hard to imagine a court decision more dramatic than the South African Constitutional Court’s March 31 ruling on President Jacob Zuma’s misuse of public funds at his private home in Nkandla. In powerful language that sometimes verged on purple prose, the ConCourt announced that the Public Protector, the constitutionally-created institution charged with investigating improper government conduct, is the “embodiment of a biblical David, … who fights the most powerful and very well-resourced Goliath[:]  impropriety and corruption by government officials.” In order for the Public Protector to effectively serve that function, the ConCourt decided, the remedial action she recommends must be binding. By failing to follow her prescribed remedial action, which included paying back a “reasonable percentage” of the misused funds, Zuma had failed in his “obligation[] to uphold, defend and respect the Constitution.”

However, the scene in the National Assembly, South Africa’s lower (and more important) house of Parliament, on May 4 was equally dramatic—though much less dignified. With President Zuma scheduled to make his first appearance before the National Assembly since the Nkandla judgment–and with the reopening of a different judgment by a lower court that could lead to the investigation into another corruption-related incident–the opposition Economic Freedom Fighters (EFF) party demanded that he not be allowed to speak since he was clearly “illegitimate.” EFF members and the Speaker of the National Assembly got into a “screaming match,” which eventually escalated into a fight. As Parliamentary protection service officers forcibly removed the EFF from the legislature, the EFF members continued to shout insults and declare that it was the President, not they, that should be forced to leave. The day also involved the ruling African National Congress (ANC), Zuma’s party, ruling that any quotations from the Nkandla judgment during the legislative session were out of order, and the Democratic Alliance (DA), the primary opposition party, mocking Zuma and calling him the “looter in chief.” Putting a punctuation mark on this fracas was a five-day ban on the EFF’s National Assembly representatives and a decision by the remaining opposition parties to boycott the National Assembly the following day.

The ConCourt’s ruling, though, is far more than just a prompt for an exciting 24 hours in the National Assembly.  Looking further down the road, what does the Nkandla judgment mean for South Africa?

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.