Category Archives: Commentary

Risky Wagers: How Lack of Oversight Increases the Odds of Corruption in Sports Gambling

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Thanks to the internet, sports gambling—once limited to smoky back rooms and local bookies—has rapidly expanded, and this expansion has fueled growing concerns over the integrity of professional sports. Sports gambling has long been intertwined with sports-related corruption, but the sheer number of gambling transactions made possible by the advent of online betting (through both legal and illegal websites) substantially increases the likelihood that bribery or match-fixing will be used to ensure a “winning bet.”

National regulatory approaches have not kept up with the heighted risks. The United States, for example, continues to rely on outdated regulatory regimes and ill-defined responsibilities shared between state regulators, federal regulators, and professional sports leagues. As more and more states move to legalize sports gambling, the US is in urgent need of a centralized authority that possesses the necessary incentives and requisite capabilities to properly regulate this burgeoning industry.

To see why reform is needed, consider each of the three main actors (or sets of actors) that have some responsibility to deal with the integrity threats posed by online sports gambling in the U.S.: state governments, the federal government, and the professional leagues: Continue reading →

The European Court of Justice’s Invalidation of Public Beneficial Ownership Registries: A Translation

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One of the most important developments in the fight against corruption—and other forms of organized criminality—over the last couple of decades has been the push for greater transparency in the ownership of companies and other legal entities. An increasing number of countries now require artificial legal entities (“legal persons”) to provide information on their true beneficial owners—that is, the actual human beings (or, in the language of the law, the “natural persons”) who own or control the entity—to the government and to potential investors or potential business partners who need to conduct due diligence on those entities. Many anticorruption activists believe that there should be even greater transparency in corporate ownership, and that the information in these so-called beneficial ownership registries should be made publicly available.

These pro-transparency advocates achieved an important but partial victory back in 2015, when the European Union issued its Fourth Anti-Money Laundering (AML) Directive. The Fourth AML Directive instructed EU Member States not only to collect beneficial ownership information in a central register, but to make that information available to anyone who could demonstrate a “legitimate interest” in accessing the information. In 2018, pro-transparency advocates scored an even bigger victory when the EU issued its Fifth AML Directive. The Fifth AML Directive dropped the requirement that those requesting beneficial ownership data show a “legitimate interest”; the directive instead required Member States to make corporate beneficial ownership information publicly available, unless an individual beneficial owner could show an exceptional interest in keeping his or her ownership interest confidential.

Just last month, though, the push for corporate ownership transparency suffered a setback at the hands of the European Court of Justice (ECJ). The ECJ ruled that the provision of the Fifth AML Directive that required the provision of corporate beneficial ownership information available to any member of the general public was invalid because it violated two provisions of the European Union’s Charter on Fundamental Rights: Article 7, which states that “[e]veryone has the right to respect for his or her private and family life, home and communications,” and Article 8, which provides that “[e]veryone has the right to the protection of personal data concerning him or her,” and that “[s]uch data must be processed … on the basis of the consent of the person concerned or some other legitimate basis laid down by law.”

Many anticorruption organizations condemned the ECJ’s decision, though there appears to be some disagreement about just how consequential the ruling will turn out to be. (The ECJ issued a subsequent clarification—also released on LinkedIn—that journalists and civil society organizations concerned with money laundering, corruption, terrorist financing, and related issues would have a “legitimate interest” in accessing beneficial ownership information, and should therefore continue to have access under the terms of the now-reinstated Fourth AML Directive.) I have my own views on the underlying policy dispute—I’ve come out tentatively in favor of making corporate beneficial ownership registers public (see here and here)—but I thought I should read the ECJ opinion carefully to better understand the rationale behind the decision, and what space (if any) it leaves for moving in the direction of greater corporate ownership transparency.

I may try to weigh in on that latter question in a future post, but in this post, I want to focus on the ECJ decision, and I want to do something a bit unusual. Here’s the thing: The ECJ opinion is terrible. And I don’t mean that it’s terrible with respect to the outcome. Though I disagree with that outcome, reasonable people can debate the merits of public beneficial ownership registries, and how to balance the interest in transparency against the interest in privacy. I mean that the opinion is terrible as a matter of reasoning and craftsmanship. The writing is just godawful—full of unnecessary verbiage, awkward phrasing, circumlocution, and obfuscation. And the terrible writing obscures the shocking thinness of the legal reasoning. If I were grading this as a final exam, it would be a B-minus at best, and that’s only because of grade inflation.

It occurred to me that other people who want to better understand and evaluate this decision might find the opinion even more impenetrable than I did. So I decided to take the liberty of translating the ECJ’s decision from English into English. I didn’t bother with all the prefatory material in the first 33 paragraphs of the decision—my translation exercise focused only on paragraphs 34-88, which contains the court’s legal reasoning (such as it is). I’ve also interjected a few snarky comments throughout in italics. Again, this is my paraphrase of the court’s opinion—if you want to see the original, you can find it here. But in all seriousness, I thought it would be helpful to others to have a more readable version of the court’s opinion, so they can draw their own conclusions. And now, without further adieu, here’s my translation: Continue reading →

Anticorruption Parties in Central and Eastern Europe: Why Do They Fail, and How Can They Succeed?

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Since the collapse of the Soviet Union, Central and Eastern Europe (CEE) has seen both highly unstable party systems and high rates of corruption. As a result, lots of new parties keep popping up, and an anticorruption focus has proven to be a great way for them to get noticed. In fact, studies have found that new parties are more successful when they center their message on fighting political misconduct.

Among those that actually win, some of these anticorruption parties have been modestly successful in passing reforms. But many other anticorruption parties have floundered when in office. Part of the problem is that these parties often make lofty promises but fail to put forward actual, workable plans. Enough voters will still vote for the “anticorruption” party as a way of expressing disapproval for the incumbent government, without necessarily paying close attention to whether the anticorruption party and its leaders are willing or able to follow through on their promises. As a result, numerous CEE countries have had bad experiences with anticorruption parties that, when in office, appear to have little idea how to govern differently from their predecessors—and sometimes little apparent interest in doing so. Consider a few examples:

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Putting the G in ESG Investment: Incorporating Anticorruption into Investment Decisions

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A growing number of investors now consider environmental, social, and governance (ESG) issues when making investment decisions. While ESG investment methods vary, typically ESG investment involves evaluating potential investments not only based on traditional financial indicators, like annual cash flows and debt levels, but also on a number of observable ESG criteria, such board diversity or use of renewable energy. Given the difficulty of establishing investment parameters that incorporate a wide range of sometimes competing objectives, however, ESG investors usually end up prioritizing certain ESG considerations over others. In particular, governance issues—including corruption-related concerns—have often fallen by the wayside (see here, here, here, and here), so much so that a joke in the field has it that the “G” in ESG is silent.

This is unfortunate. Investments tainted with corruption not only indicate a failure in corporate governance—which can reduce the investment’s expected profitability—but also can contribute to a plethora of grave social and environmental ills (see here, here, here, here, and here). Given the fact that an investment’s corruption risk is relevant to a range of social and financial objectives, why hasn’t corruption risk played a more prominent role in ESG investing?

The cynical explanation would be that ESG investing is nothing more than a marketing ploy, and that ESG investors are therefore more likely to tout PR-friendly topics, such as CO2 emissions, and neglect less flashy issues like corporate governance. But that cynical explanation is unpersuasive in light of the fact that ESG investors are spending heavily on efforts to obtain more comprehensive ESG data—behavior that is hard to square with the view that this is all for PR. More plausibly, the insufficient attention to corruption is not from a lack of concern, but rather from a lack in ability to properly assess corruption risk. Reasons for this shortcoming are twofold:

  • First, companies’ reporting on corruption varies significantly in terms of both the quantity and quality of information provided to investors. Without certain standardized disclosures, it is difficult to compare corruption risk across investments. Reliance on voluntary disclosures can allow for the corruption equivalent of greenwashing, where positive information is exaggerated and negative information is buried or completely excluded.
  • Second, even if companies report robust internal control policies, it is difficult for external parties to assess whether these practices are effective or actually utilized. Proper assessment of corruption risk requires internal information that is hard for investors to obtain on their own.

There are several possible things that government regulators, and the ESG investors themselves, might do to address these problems, thereby making it more feasible for ESG investors to take corruption issues more seriously.

With respect to regulation, financial regulators should require certain corruption-related disclosures, so that ESG investors could better engage in relative comparison between investments’ corruption risk. The required disclosures might include:

  • Detailed information on the company’s internal controls and chain of command, including the size and scope of the compliance department, the names the officers and board members responsible for oversight of the compliance program, and whether the company as an “ombudsperson” or independent reporting channel;
  • The number of alleged compliance infringements and the number of resulting disciplinary measures;
  • The company’s assessment (perhaps in the annual report) of the corruption risks it faces, including general risks associated with its line of business and, more specifically, the level of interaction it has with governments and public officials.

The ESG investors themselves can also do more to demand greater corruption-related information from companies and insist that this information be accurate and independently verified. Independent assessments by third-party organizations could ensure that impressive anticorruption reporting and compliance programs are not merely “lip service.” NGOs and consultants already engage in similar analysis of private sector corruption, and would be well-placed to perform such “corruption audits.” For example, Transparency International’s Defense and Security program assesses corruption risk for individual companies in the opaque private military and security industry. With sufficient demand from the growing ESG market—which has already large capital outflows from investments that fail to meet certain socially responsible investment parameters—this type of corruption audit could become an industry norm.

ESG investors have been able to exert meaningful financial pressure on companies, making them increasingly influential over corporate behavior (see here, here, and here). These investors could become a powerful force in combating corruption—if, but only if, they are equipped with the necessary information.

Civil Society to the U.S.: Repair the Damage Italy Has Done to the OECD Antibribery Convention

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Eni and Shell’s acquittal by an Italian court of foreign bribery threatens to undermine one of the major advances of the fight against corruption: the OECD Antibribery Convention. Italy and the 43 other wealthy nations parties to the Convention pledge to investigate, prosecute, and punish nationals who bribe officials of another government.  

The trial court’s acquittal of Eni, Shell, and four individuals of paying Nigerian officials over $1.1 billion in return for the rights to OPL-245, a lucrative offshore oil field, shocked those following the case. The bribery evidence on the public record was overwhelming. Rumors that the acquittal was bought immediately began circulating. When the prosecutor announced she would not to appeal the acquittal, the rumor mill went into overdrive and put the question Italy’s commitment to the Convention squarely on the international agenda.

And if a G-7 country backs away from it, how long before other parties follow? Especially when, as in Italy, one of their major companies is in the dock?

Below is a letter from a broad coalition of civil society groups, and the lawyer who represents Nigeria in foreign bribery cases asking U.S. Attorney General Merrick Garland to open a case against Eni and Shell for bribing Nigerian officials.  As the authors explain, because Eni and Shell are both subject to Foreign Corrupt Practices Act, when the allegations involving Nigeria first surfaced the U.S. had initiated an investigation. After Italy signaled it was also investigating the companies, the U.S. deferred and closed its case.  Now that Italy has utterly failed to see the case through, they urge the U.S. to pick up the ball. 

Dear Mr. Attorney General:

Urgent action required by US to defend the OECD Anti-Bribery Convention: The Department of Justice must reopen its investigation into Eni and Shell

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Can Argentina Prosecute its Leaders Without Dragging Down its Democracy?

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Prosecuting a former leader for corruption is no easy task, but it is one that a lot of countries have had to undertake. In fact, since 1980, roughly half of the world’s nations have seen their former leaders jailed or prosecuted. The vast majority of those cases involved corruption charges.

Argentina has been in this situation quite a few times. Most recently, Cristina Fernández de Kirchner—the country’s ex-president and current vice-president—has been standing trial for having allegedly diverted state funds to a friend through fraudulent public works contracts. This seems like a victory for rule of law. But with the divisiveness and instability that the process has caused, it’s not clear whether the prosecution of Kirchner has done more good than harm. Because this is probably not the last corruption case that Argentinian authorities will bring against a former leader, enforcers should learn from the problems that have arisen from the Kirchner investigation.

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Mississippi’s Welfare Scandal Highlights the Corruption Risks in Federal Welfare

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What do a Hall of Fame quarterback, a former professional wrestler, and numerous government officials have in common? This sounds like the start to a bad joke, but unfortunately the answer is far more serious: These figures are among those implicated in the largest public embezzlement scheme in the history of Mississippi, one that deprived some of the poorest residents in the United States of access to desperately needed federal assistance. From 2016 to 2020, officials in the state funneled approximately $77 million of federal welfare funds to various sham initiatives designed to enrich themselves and their friends. Much of that money was directed to a nonprofit education center, which spent it on things like kickbacks to the director of the Mississippi Department of Human Services, a horse ranch, football tickets for state lawmakers, and—in what brought this story to national attention—volleyball courts for the university where former NFL quarterback Brett Favre’s daughter played.

On the surface, the Mississippi welfare scandal appears to be a straightforward story of grift and greed. But perhaps more importantly, the scandal highlights deeper structural problems in one of the main federal welfare programs, known as Temporary Assistance for Needy Families (TANF). Although the Mississippi scandal is one of the more egregious examples of TANF abuse, it’s certainly not the only one. Officials using TANF funding for kickbacks is not uncommon, and there are many more examples of states using these funds to finance projects seemingly unrelated to poverty reduction, including anti-abortion clinics and college scholarships for students who are not themselves eligible for welfare. What accounts for this widespread mismanagement of TANF funding, and what can be done to address it?

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

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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 Group, Black Cube, Mitiga, 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

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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

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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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