The OECD Anti-Bribery Convention Should Ensure a Fair Distribution of Settlement Recoveries

In December 2016, the United States, Brazil, and Switzerland announced that they had concluded plea agreements with the Brazilian construction firm Odebrecht and its affiliate Braskem, in which the companies admitted their culpability in extensive bribery schemes involving upwards of US$800 million in bribes paid in a dozen countries—mainly though not exclusively in Latin America—and agreed to pay approximately US$3.5 billion in penalties to the US, Brazilian, and Swiss authorities. But with the exception of Brazil, none of the countries where the bribes were actually paid were entitled to receive any compensation under these plea agreements.

In fairness, the plea agreement with Odebrecht did require the company to cooperate with foreign law enforcement and regulatory agencies in any future investigation into related misconduct by Odebrecht or any of its current or former officers, directors, employers, or affiliates. The plea agreement further required Odebrecht to truthfully disclose all non-privileged factual information, and to make available its officers, employees, and affiliates, to foreign law enforcement authorities. Additionally, under the terms of the plea deal Odebrecht consented to US federal authorities sharing with foreign governments all documents and records that the company had provided to the US authorities in the course of the investigation into Odebrecht’s violation of US law. 

These well-intentioned provisions seem to have been included specifically to ensure that enforcement agencies of other countries could pursue their own actions against Odebrecht and its officers. But the plea agreements did not create a formal mechanism that enables foreign enforcement agencies to ask the DOJ, Swiss authorities, or Brazil to impose sanctions for breach of these conditions. If Odebrecht fails to fully cooperate with foreign enforcement agencies, that foreign government’s only recourse would be to try to convince (presumably through informal channels) the US, Brazilian, or Swiss authorities to sanction Odebrecht for breaching the plea agreement. But it’s unlikely that those governments will have much appetite for assessing these claims of non-cooperation. Furthermore, even if other countries do bring their own cases, the penalties imposed by the US, Switzerland, and Brazil were so high that Odebrecht simply doesn’t have the money to pay sufficient fines to other countries, at least in the short run.

The Odebrecht case may be unusual in its size, but it is not unique. It is therefore useful to reflect on whether the international community should adopt new mechanisms governing how the fines or reparations recovered in settlements of cross-border bribery cases are distributed, in order to ensure proportionality and fairness, particularly to victim nations. The most promising way forward would be to amend the OECD Anti-Bribery Convention.The Convention already requires (in Article 4) that Convention parties shall consult with each other to determine which is the most appropriate jurisdiction for prosecution, and also requires (in Article 9) that Convention parties provide, to the fullest extent possible, “prompt and effective legal assistance” to any other Convention party concerning investigations and proceedings within the scope of the Convention. But the Convention does not explicitly address other forms of cooperation, such as ensuring fairness in the distribution of monetary recoveries. The Convention should be amended to include additional language that covers this topic, as follows: Continue reading

The Stream of Benefits Theory of Bribery Doesn’t Criminalize Ordinary Politics

Bribery of a public official can take one of at least two forms. In the most straightforward case, a public official accepts a one-off bribe in exchange for a particular official act. This kind of one-to-one exchange is illustrated by a recent case out of Puerto Rico, in which a territorial senator agreed to a direct trade: he would support legislation favorable to a local businessman’s security company, and in return he would receive an all-expenses-paid trip to Las Vegas. Things aren’t always so neat, however. Sometimes bribery involves a series of gifts to a public official in exchange for a series of official acts, and seldom do these gifts and official acts line up in a one-to-one fashion. An example of this kind of bribery can be seen in a recent case out of Texas, where, over an extended period of time, a local developer provided a town mayor cash, home renovations, hotel stays, airline upgrades, and even employment, and the mayor repeatedly voted for zoning changes that ultimately allowed a developer to build apartments.

Anticorruption officials in the United States prosecute the latter form of bribery under a “stream of benefits” theory of liability. Rather than requiring prosecutors to demonstrate tit-for-tat trades—in which a specific “thing of value” is offered or exchanged for a specific official act—under the stream of benefits theory unlawful bribery has also occurred when the prosecution can show a “course of conduct of favors and gifts flowing to a public official in exchange for a pattern of official actions favorable to the donor.” Some courts and commentators have described the idea as the briber regularly paying the public official to keep her “on retainer” with the expectation that she will help the briber out as opportunities arise. The stream of benefits theory recognizes that most bribes aren’t one-off trades of a thing of value for a particular official act. Instead, bribery often takes place in the context of a long-term, multifaceted relationship where there’s a general understanding along the lines of “I’ll scratch your back if you scratch mine.” Where gifts flow regularly to the official and the official occasionally acts for the benefit of the gift-giver, it would be difficult for prosecutors to prove that any particular gift instigated a particular official act. But as then-Judge Sonia Sotomayor once reasoned: “[A] reading of the [bribery] statute that excluded such schemes would legalize some of the most pervasive and entrenched corruption, and cannot be what Congress intended.” Accordingly, the stream of benefits theory has been approved by every federal circuit court that has ruled on the issue.

Yet despite the stream of benefits theory’s intuitive appeal, it has recently come under attack. Most prominently, a federal judge threatened to derail the trial of U.S. Senator Robert Menendez before it began by questioning the theory’s continued validity in light of the U.S. Supreme Court’s 2015 decision in the McDonnell case (which, as explained in more detail below, adopted a strict interpretation of what constitutes an “official act” under the U.S. bribery statute). Although the judge in the Menendez case ultimately determined that the stream of benefits theory was still good law, many commentators aren’t so sure. The Cato Institute, for one, speculates that McDonnell’s strict reading of the bribery statute requires the identification of a specific official act to be performed, rather than accepting as adequate the promise of future, undefined official acts in the briber’s favor. Others, like Professor Randall Eliason, argue that the Supreme Court already (albeit implicitly) rejected the stream of benefits theory on those grounds in a 1999 case called Sun-Diamond.

These attacks reflect a broader policy concern: fear that overly broad bribery statutes criminalize ordinary politics. Professor Albert Alschuler, for instance, asserts that the “principal danger” with the stream of benefits theory is that it “invites slippage” from a “quid pro quo requirement” to a “favoritism” standard. Favoritism, he argues, is endemic in politics––a politician will naturally favor allies and stakeholders who have supported him politically (and financially). Criminalizing favoritism is akin to criminalizing innocent political conduct, which, in turn, has far-reaching secondary effects, such as deterring good people from government service and giving prosecutors too much power to enforce the law selectively. The Supreme Court’s decision in McDonnell, though technically on a different issue, also expressed worries about how a “boundless interpretation of the federal bribery statute” could wind up criminalizing ordinary politics.

These fears are overblown. As other commentators have persuasively argued, the stream of benefits theory remains viable, and has not been expressly or implicitly repudiated by the Supreme Court in McDonnell, Sun-Diamond, or elsewhere. (See, for example, here and, on this blog, here.) I agree, but my main argument here concerns the detractors’ underlying policy concern. Put simply: the stream of benefits theory doesn’t criminalize ordinary politics.

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Returning Stolen Assets to Kazakhstan: Did the World Bank Flub It?

In 2012, Kazakhstan and Switzerland agreed to return $48.8 million that Switzerland had confiscated in a money-laundering case involving Kazakh nationals. This is the second time Switzerland has returned stolen assets to Kazakhstan. In the first, out of a fear the funds might be stolen again, the two had created an independent foundation with stringent oversight mechanisms to administer the money (details here).  This time the two decided to rely on the World Bank alone to see that returned funds were not misused.

One of the projects being funded is a $12 million grant program to instill a public service ethic in the nation’s youth, and a consortium of Kazakh NGOs has been selected to manage it. Although the consortium only recently began making grants, questions about the integrity of the grant-making process are already being raised.  In February, the Corruption and Human Rights Initiative identified several apparent irregularities. Among them: 1) The consortium’s lead NGO is headed by Dariga Nazerbayev, at the time of the award to the consortium she was the daughter of the country’s president and is now Speaker of the Kazakh Senate; 2) The youth wing of the ruling party was awarded a grant for “awareness-raising activities among vulnerable youth groups” across the country in seeming violation of the ban in the World Bank’s charter on political activities; 3) numerous grants have been awarded for an amount just under that which would trigger World Bank review; and 4) program managers have coached grant applicants on how to circumvent Bank procurement rules.

A full report on the irregularities is here. At the request of the Swiss government, the World Bank is said to be investigating.

 

The Global Community Must Take Further Steps to Combat Trade-Based Money Laundering

Global trade has quadrupled in the last 25 years, and with this growth has come the increased risk of trade-based money laundering. Criminals often use the legitimate flow of goods across borders—and the accompanying movement of funds—to relocate value from one jurisdiction to another without attracting the attention of law enforcement. As an example, imagine a criminal organization that wants to move dirty money from China to Canada, while disguising the illicit origins of that money. The organization colludes with (or sets up) an exporter in Canada and an importer in China. The exporter then contracts to ship $2 million worth of goods to China and bills the importer for the full $2 million, but, crucially, only ships goods worth $1 million. Once the bill is paid, $1 million has been transferred across borders and a paper trail makes the money seem legitimate. The process works in reverse as well: the Canadian exporter might ship $1 million worth of goods to the Chinese importer but only bill the importer $500,000. When those goods are sold on the open market, the additional $500,000 is deposited in an account in China for the benefit of the criminal organization. Besides these classic over- and under-invoicing techniques, there are other forms of trade-based money laundering, including invoicing the same shipment multiple times, shipping goods other than those invoiced, simply shipping nothing at all while issuing a fake invoice, or even more complicated schemes (see here and here for examples).

As governments have cracked down on traditional money-laundering schemes—such as cash smuggling and financial system manipulation—trade-based money laundering has become increasingly common. Indeed, the NGO Global Financial Integrity estimates that trade misinvoicing has become “the primary means for illicitly shifting funds between developing and advanced countries.” Unfortunately, trade-based money laundering is notoriously difficult to detect, in part because of the scale of global trade: it’s easy to hide millions of dollars in global trading flows worth trillions. (Catching trade-based money laundering has been likened to searching for a bad needle in a stack of needles.) Furthermore, the deceptions involved in trade-based money laundering can be quite subtle: shipping paperwork may be consistent with sales contracts and with the actual shipped goods, so the illicit value transfer will remain hidden unless investigators have a good idea of the true market value of the goods. Using hard-to-value goods, such as fashionable clothes or used cars, can make detection nearly impossible. Moreover, sophisticated criminals render these schemes even more slippery by commingling illicit and legitimate business ventures, shipping goods through third countries, routing payments through intermediaries, and taking advantage of lax customs regulations in certain jurisdictions, especially free trade zones (see here and here). In a world where few shipping containers are physically inspected (see here, here, and here), total failure to detect trade-based money laundering is “just a decimal point away.”

The international community can and should be doing more to combat trade-based money laundering, starting with the following steps:

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Beneficial Ownership Registry Coming to the United States?

This may be the year the United States finally requires disclosure of who owns American corporations.  By a 43-16 vote, the House Financial Services Committee recommended on June 11 that the full House of Representatives approve legislation creating a beneficial ownership registry accessible to federal and state law enforcement agencies and presumably to foreign law enforcement authorities through a valid mutual legal assistance request.  At the same time, a bipartisan group of Senators, including two conservative Republicans who back President Trump, is proposing similar legislation in the Senate.

The American legislative process is an arduous one.  The Financial Services Committee’s proposed bill must be passed by the House of Representatives; an identical bill approved by the Senate, and President Trump must then sign it. Long-time supporters of a registry cite two reasons for optimism a bill will pass this year. One, 10 Republican members of the Financial Services Committee voted for the bill and others may support it when the House considers it, and second, the Senate bill has the support of Republican Senators close to President Trump.

Key provisions of the committee-approved bill: Continue reading

The Case for Governments Maintaining PEP Registries

Financial institutions are obliged to apply enhanced client due diligence to politically exposed persons (PEPs) in order to comply with anti-money laundering (AML) and other regulations. Yet there are no official, government-sponsored or government-endorsed sources for identifying PEPs. As a result, financial institutions typically rely on private firms to identify PEPs across the globe. But this reliance is problematic. With barely any independent oversight into how these firms compile their lists, there is no way to ensure the lists are accurate, and there’s at least some evidence that they aren’t: Many of the vendors on which financial institutions rely were found to have “incomplete and unreliable PEP lists” in the past and these commercial databases also produce thousands of false positives due to people with identical names. Given these problems, very few AML officers rely solely on those external databases; they are forced to supplement the private vendor lists with ad hoc internet searches on Google, Linkedin, and other sources, often relying on Google-translations of foreign media articles. This does not seem very reliable. Some civil society groups have sought to contribute to the identification of PEPs by creating online registries, drawing on publicly accessible data on the international level and the national level. But none of these attempts has been comprehensive enough for AML purposes, and civil society organizations probably would not have the resources to compile PEP lists that would be suitable for financial institutions to use for screening clients on a sustainable, ongoing basis.

It is time to change how we approach the task of identifying PEPs for AML and related purposes. A couple of years ago, Professor Stephenson asked on this blog whether there should be a public registry of PEPs, sponsored and maintained by national governments or by an inter-governmental body such as the Financial Action Task Force (FATF). Such an idea is not entirely revolutionary. The UN Convention against Corruption (UNCAC) hints at something along these lines in Article 52(b)(2), which instructs each state party “in accordance with its domestic law … [and] where appropriate, [to] notify financial institutions within its jurisdiction … of the identity of particular natural or legal persons to whose accounts such institutions will be expected to apply enhanced scrutiny,” though the “where appropriate” and “in accordance with domestic law” qualifiers mean that there’s no concrete obligation here. Some countries, such as Australia, have undertaken to circulate lists of PEPs to financial institutions. And the European Union, in its Fifth AML Directive, required Member States to compile a list of government positions that are considered “politically exposed,” though the Directive does not require governments to name the actual persons holding those positions at any given time.

Yet these measures all fall well short of the possibility that Professor Stephenson raised in his post: official PEP lists compiled and maintained by governments. Professor Stephenson framed his post as merely posing the question whether this would be a good idea. I want to argue for what I believe is the correct answer to that question: Not only should governments maintain PEP registries, but the international community, through bodies such as the FATF and the UNCAC Conference of States Parties, ought to require governments to create and maintain such registries, using an internationally-standardized set of functional criteria to identify which public positions should be considered to be politically exposed.  Continue reading

The Incredible Shrinking Scandal? Further Reflections on the Lava Jato Leaks

Last week, I published a lengthy commentary on the recent explosive reports from the Intercept regarding the Lava Jato operation in Brazil—reports that were based primarily on text messages provided by a source who apparently hacked (or otherwise gained unauthorized access to) the cell phone of Deltan Dallagnol, the lead prosecutor in the case. Because I am unable to read Portuguese, my discussion was based exclusively on the two substantive English-language reports, here and here. (There are more reports in the series, but so far they’ve not been translated into English; if and when they are, I may update my commentary.) The Intercept’s reports argued that these leaked text messages indicate: (1) that Judge Moro engaged in unethical and possibly illegal coordinating with and coaching of the prosecutors; (2) that the prosecutors recognized that their case against former President Lula was without solid legal or evidentiary foundation; and (3) that the prosecutors were motivated by political/ideological bias against Lula and his party, the PT.

In last week’s commentary, based on my preliminary analysis of the Intercept stories, and what I knew about the background context, I reached the following tentative conclusions:

  • First, I thought that the evidence of extensive text communications between the lead prosecutor and the presiding judge was (or at least should be) per se impermissible. I used very strong language in making this point, describing the fact that the two were in regular text contact as “the height of impropriety,” and a “shocking and inexcusable breach of judicial ethics.”
  • Second, though, I thought that the specific text exchanges reported by the Intercept—the ones that allegedly showed the coaching and collaboration—were largely innocuous, and didn’t seem to contain much problematic material over and above the fact of the communications themselves.
  • Third, I did not think that the text messages reported by the Intercept provided any reason to call into question the legal and evidentiary basis for Lula’s conviction. That conviction was and remains controversial, but the leaked text messages don’t show anything other than a prosecutor preparing appropriately for his case.
  • Fourth, I concluded that although texts exchanged among prosecutors in late September 2018 did indeed indicate that the prosecutors did not want the PT candidate to win the election, this didn’t necessarily show that the prosecutors were biased against the PT back in 2015-2016 (when the decision to investigate and prosecute Lula took place), nor was there any evidence that the prosecutors had taken any concrete action that could be ascribed to partisan bias.

Much to my surprise, last week’s post seems to have attracted a lot of attention, particularly in Brazil. As a result, I’ve had the opportunity to engage in substantive exchanges with multiple Brazilian experts from across the political spectrum, who hold a wide range of views on Lava Jato, Lula, and related matters. Some of these exchanges can be found in the comment section of last week’s post, which I highly recommend that interested readers check out (particularly those who might have read that post the day it came out, before the comment thread included over 60 separate entries); others have communicated with my privately. (To be clear, though, I have not communicated about the post, publicly or privately, with Mr. Dallagnol or anyone else named or discussed in the Intercept story.)

Based on these conversations, and on further reflection, my views on the Intercept’s reporting have shifted somewhat, mainly in the direction of thinking that this “scandal” is considerably less scandalous than the Intercept reported, or that I’d originally believed. Continue reading