Category Archives: Commentary

Why Didn’t the Disclosure of the Beneficial Owners of Real Estate Make a Difference?

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Anticorruption advocates have long thought that real estate and money laundering go together like a horse and carriage. At least in the United States. With a little help from a friendly lawyer, a corrupt official or other big time criminal has until recently been able to use an anonymous shell company to hide their money by buying a luxury mansion or pricey condominium. Because the real estate registry listed the company, not the crook, as the owner, the real owner’s identify was hidden. From law enforcement, the media, and civil society.

In 2016 the U.S. government made a start on ending this abuse. It began to require the disclosure of the beneficial owner of any corporation which paid cash for properties in cities where real estate purchases were likely used to hide stolen money.  Initially, and as expected, the new rule seemed to have the desired effect: all cash purchases of real estate appeared to drop significantly — indicating a gaping loophole in the antimoney laundering laws had been plugged.

But the first paper published by the Anticorruption Data Collective finds to the contrary.  Authors Matt Collin of the World Bank and Brookings Institution, Florian M. Hollenbach of the Copenhagen Business School, and David Szakonyi of George Washington University report the rule had no impact “on the number of, the total price volume, or the share of corporate all-cash purchases in targeted counties.”  Indeed, they could find “little difference in the patterns of corporate all-cash purchases versus a ‘placebo’ outcome that should not be affected by the policy.”

Beneficial ownership disclosure is a favorite reform of anticorruption advocates. One that would seem to have an obvious, immediate salutary effect. Why didn’t it here?

The authors offer two reasons, and suggest there could be others. Their paper demands careful attention. One because of the implications for beneficial ownership disclosure rules, and second, and more importantly, because it shows how important it is to carefully assay anticorruption reforms. Their paper is here and comments are welcomed.  And GAB looks forward to more work by the Anticorruption Data Collective.

Taking on the Demand Side of Foreign Bribery: How U.S. FCPA Settlements Can Facilitate Foreign Prosecutions

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Laws like the U.S. Foreign Corrupt Practices Act (FCPA) target what is sometimes referred to as the “supply side” of transnational bribery transactions—the firms and individuals of offer or pay bribes to foreign officials in order to secure a business advantage. But what about the demand side? All too often, the government officials who demand or receive these bribes escape accountability—even when the bribe-paying firms are forced to pay substantial penalties for FCPA violations. Years ago, some U.S. Department of Justice (DOJ) prosecutors floated the theory that bribe-taking officials could be charged as abettors to, or co-conspirators in, FCPA violations, but that theory, though legally plausible, failed to gain traction in the courts. On occasion, the DOJ has prosecuted bribe-taking foreign officials for money laundering. And more recently, Members of the U.S. Congress have introduced a new bill, the Foreign Extortion Prevention Act (FEPA), which would make it a crime under U.S. law for a foreign public official to seek, demand, or accept a bribe. FEPA’s chances of enactment are uncertain (the vast majority of bills fail, after all); moreover, even if enacted, FEPA’s impact may be circumscribed by the practical and political difficulties of arresting and trying foreign public officials, particularly those that do not have any contact with U.S. territory.

What about the bribe-taking public official’s own government? Shouldn’t that government take the lead in prosecuting its own public officials when they behave corruptly? There would be a nice symmetry—and a great deal of practical advantage—to a system in which the supply-side government (say, the United States) goes after the bribe-paying company, while the demand-side government goes after the bribe-taking public official. But often this doesn’t happen: In the majority of cases where the U.S. government imposes FCPA sanctions on a company for paying bribes in a given country, there is no parallel or subsequent prosecution by that country’s government of the corrupt officials involved.

Sometimes the explanation is political: the public officials involved are sufficiently powerful and well-connected to escape domestic accountability in their home countries, even when their misconduct is known. That’s a big problem, and one that statutes like FEPA are designed to address. But there’s another reason that demand-side governments often fail to hold their own officials accountable: a lack of capacity and an associated lack of evidence. In a great many cases, even when a bribe-paying firm settles an FCPA case with the US government, and in doing so admits to certain facts and provides evidence about the misconduct to the DOJ, the demand-side country government does not receive sufficient evidence to identify, let along prosecute, the corrupt officials involved—either because the company did not supply that information to the DOJ, or the DOJ did not turn that information over to the demand-side official’s government. True, FCPA settlement agreements are usually public, but the official statements of facts in these agreements are often not sufficiently precise and detailed to give a foreign enforcement agency what it needs to make out a case.

The U.S. government can and should fix this problem. Doing so would not require new legislation. Rather, it could be accomplished through a straightforward and easily implementable change in DOJ policy. Continue reading →

Narrowing the Scope of Brazil’s Administrative Improbity Law: Why the New Limits Will Strengthen, Not Weaken, the Law’s Efficacy

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Brazil’s 1992 Administrative Improbity Law, which authorized severe sanctions on government agents who commit “acts against the public administration,” was the first Brazilian statute specifically targeted at government corruption. Last year, Brazil adopted extensive amendments to this law, many of which were controversial. In a recent post, I criticized the amendment that reduced the number of institutions responsible for enforcing the Improbity Law. But other controversial amendments to the law are, in my view, positive developments. In particular, I want to defend two other amendments that critics have asserted weaken the law:

  • First, under the original version of the Improbity Law, a public official could be sanctioned for negligent behavior that caused damage to the public treasury. Under the amended version of the law, only intentional acts can be considered administrative improbity punishable under this statute.
  • Second, the original version of the law listed ten forms of administrative misconduct that would constitute “violations of the principles of public administration,” but, importantly, that list was not exclusive. Rather, the listed forms of misconduct were presented only as examples. This meant that law enforcers could, and often did, bring an action under the Improbity Law for conduct that, in the enforcer’s view, violated a “principle of public administration,” such as morality and equity, even if the particular form of alleged improbity was not included as one of the specifically listed forms of misconduct in the statute. The amended law constrains enforcement discretion by establishing a well-defined and restricted list of acts that qualify as violations of the principles of public administration.

Critics, including many anticorruption advocates, assert that these changes unduly narrow the scope of the law, thereby undermining one of Brazil’s most important anticorruption instruments. These concerns, while understandable, are misplaced: Both of the above amendments improve the law by ensuring that it is administered fairly and used to target serious corrupt acts, rather than being wielded as a political weapon to punish partisan adversaries for good-faith mistakes.

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South African Court Slaps Down Attack on Corruption Prosecutor

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Early Wednesday a South African judge ruled that former President Jacob Zuma’s attacks on the prosecutor leading the case him were baseless and that Zuma’s trial on corruption charges proceed forthwith. Zuma had claimed prosecutor William Downer’s conduct in pursuing the case was so egregious — running the gamut from the commission of serious crimes, to breaches of ethics, to intimations of racial animus — that the charges against him must be dismissed. Or, at the least, Downer be removed from the case and trial therefore delayed indefinitely while a new prosecutor was found.  

In seeing through Zuma’s desperate attempt to derail the case, and standing up to the still powerful former president, Judge Piet Koen provided a model judges everywhere should follow.  When Zuma raised the unfounded, scurrilous attacks on the prosecutor, Koen ordered they be aired without delay.  Upon sifting through the evidence, he promptly issued a scholarly 109-page opinion finding that not one of the allegations withstood scrutiny and that there was therefore no basis to find Downer was not a fair-minded, independent prosecutor and hence no reason Zuma would not receive a fair trial if Downer remained on the case.

Today’s 61-page decision came in response to that earlier decision. Zuma had requested that the trial be halted while he appealed it.  In again a scholarly and carefully written decision, Koen knocked down the legal arguments offered in support of an appeal while reiterating the absence of any facts showing Downer guilty of misconduct or bias.

Zuma has done his best to pressure the judge into throwing out or delaying the case, with hundreds of supporters crowding into the courthouse and surrounding grounds at his every appearance to let their views be known and with some issuing not so veiled threats against the judge. Koen could have easily caved, finding merit to the claims or a way to put off the trial for months if not years.

That he did not and that he instead set the trial for this April stands in marked contrast to the way attacks on Nigerian, Zambian, and Italian prosecutors have been handled (here, here, and here). Rather than standing up for them, judges, justice ministry officials, and even fellow prosecutors stood aside after the attacks were launched with some collaborating with the attackers. If corrupt officials and their accomplices are to face justice, Judge Koen’s response must become the standard when those prosecuting them come under attack.  

Will China’s Property Tax Reform Be a Catalyst for Corruption?

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In China, most residential property owners do not need to pay real estate taxes. In 2011, China initiated property tax trial programs in Shanghai and Chongqing, but even here, the taxes applied only to a few types of properties (newly purchased second homes and high-value properties, respectively) and the tax rates under these trial programs were quite low, and based on a property’s transaction price rather than its current appraised value. But this is about to change. President Xi Jinping’s administration sees a property tax as a key tool to achieve its goal of “common prosperity,” and last October, the government announced a major property tax reform, which is to begin with a five-year pilot program implemented at the local level in selected subnational jurisdictions. Under this reform, most residential property owners will need to pay property taxes, though local governments will have broad discretion to decide on the scope, rates, and collection procedures (see here and here).

Most of the debate about this dramatic change to China’s tax policy have focused on whether the proposed property tax can stop rampant speculation in the housing market and help redistribute wealth. Some commentators, though, have suggested that the new property tax might also help advance President Xi’s anticorruption campaign, because (it is argued) the tax will force greater disclosure of businessmen and government officials’ property ownership. But that hope is misplaced. In fact, the evidence so far suggests that the property tax reform might actually create more opportunities for corruption.

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“Elect a Government That Works”: A Case Study in Populism and Corruption from India 

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As the United States was reeling from President Richard Nixon’s resignation following the Watergate scandal, another imperiled leader—Indian Prime Minister Indira Gandhi—was fighting for her political life thousands of miles away. Although Gandhi and Nixon never got along, their stories overlap. Both barely squeaked into power after close elections in the late 1960s, but then won resounding reelection victories in the early 1970s. Gandhi’s political fortunes, like Nixon’s, took a turn for the worse shortly after reelection, in light of substantiated accusations of illegal campaign activity. But at this point, Nixon and Gandhi’s stories diverge. Unlike Nixon, Gandhi stayed the course and refused to resign. And in the end she prevailed: Gandhi was popularly elected three times with some of the largest governing majorities in Indian history.

How did Gandhi convince the public to reelect her, despite her known, widespread abuses of authority? How did a leader ensnared in scandal and corruption hold onto power to become one of the most beloved leaders in the world’s largest democracy? The answer to these questions may lie in Gandhi’s concentrated emphasis on left-wing populism. She argued to voters that she alone was most capable of effectuating change for India and its most needy citizens by enacting social programs and redistributing wealth. Additionally, Gandhi spent much of her time as Prime Minister consolidating her power within the party and the central government. This enabled much of the corruption that marked her rule but was also what allowed her to argue to the public that she was uniquely capable of fixing the nation’s problems.

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Will the Nigerian Judiciary Stand Up for the Rule of Law and Dismiss the Suraju Case?

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The Nigerian judiciary’s commitment to upholding the rule of law faces a decisive test this Monday, February 7. Nigerian prosecutors will present evidence to Federal High Court Justice Binta Nyakothat that anticorruption activist Olanrewaju Suraju should stand trial for violating section 24 of the Cybercrime Act 2015, the cyberstalking provision.

As explained below, the evidence in support of the charges is extraordinarily flimsy. More importantly, section 24 is no longer enforceable in Nigeria. The Community Court of Justice for the Economic Community of West African States, whose decisions bind all Nigerian courts, ruled in 2020 that the cyberstalking section was so vague and open-ended that it violated the freedom of expression provisions of the African Peoples and Human Rights Charter and hence was invalid (here). Justice Nyakothat should therefore immediately dismiss the charges against Suraju.

The only conceivable reason she might not is if she is under “extra-legal” pressure from those who stand to gain from the case being continued.

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Corruption and Trade Misinvoicing: A Closer Look at Colombia

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Trade misinvoicing—the misrepresentation of the price, quantity, origin, or quality of traded goods—is a serious problem. Misinvoicing deprives the government of revenue by enabling importers and exporters to evade taxes and duties, or to claim undeserved tax incentives. Consider the case of Colombia: According to estimates, in 2016 the country lost approximately US$2.8 billion in revenue due to trade misinvoicing (equivalent to roughly 5.2% of total Colombian tax revenues collected that year)—revenues that could have paid for Colombia’s 2018-2022 National Development Plan more than eight times over. Trade misinvoicing also plays a key role in so-called trade-based money laundering (TBML), as the under- or over-statement of value of traded goods is one way to move value across borders and disguise the origin of illicit wealth. This form of money laundering is especially attractive to criminals, in part because roughly 80% of global trade transactions do not involve bank financing and as a result are not subject to the anti-money laundering (AML) controls that apply to the financial sector. Myriad TBML cases can be found in countries where corruption is systemic and impunity reigns (see here, here, and here).

Corruption of customs officials is the lubricant that makes trade misinvoicing possible. As one illustrative example of the extent and impact of such corruption, consider the case of Humberto Angulo Montero, the former head of the Cartagena Office of Colombia’s National Directorate of Taxes and Customs (Dirección de Impuestos y Aduanas Nacionales, or DIAN). In 2015, following a nine-year investigation, Angulo was arrested for taking kickbacks from smuggling networks importing alcohol, cigarettes, textiles, and shoes. The investigation revealed that Angulo facilitated the under-reporting of goods by up to 50%, allowing the importers to make colossal profits. In return, the importers gave Angulo a share of those profits—a hefty enough share that his personal wealth increased an astounding 580% between 2003 and 2009. Angulo’s case may be extreme, but it is hardly unique.

Governments in countries like Colombia can and should do more to prevent this sort of corruption. While Colombia took an important step forward in 2015 by passing its Customs Law No. 1762, there is still much room for improvement. Here are four recommendations for making progress on this issue, which are tailored to Colombia but that may apply more broadly:

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All Nations Should Outlaw Tumbling or Mixing Cryptocurrencies

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The prosecutions of currency exchanges Helix (here) and Bitcoin Fog (here) show the dark side of virtual currency. As providers of what the Financial Action Task Force terms money or value transfer services, the two accepted a customer’s funds and returned a corresponding sum or product to the customer or third party for a fee.

Helix and Bitcoin both specialized in bitcoin transactions. A customer would buy something on the web and rather than sending the merchant bitcoins directly, the customer sent them through Helix or Bitcoin Fog. That way, the customer did not have to worry about contacting the seller directly, and moreover, if the seller did not accept bitcoins, Helix or Bitcoin Fog would convert the bitcoins into whatever currency the seller accepted.

What caught the U.S. Department of Justice’s eye is that the two exchanges “tumbled” or “mixed” the customer’s bitcoins as part of their service.

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SLAPPing Back at Corruption: Protecting Journalists from Frivolous Lawsuits

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Investigative journalism plays a crucial role in exposing corruption. Journalistic exposés often prompt not only prosecutions, resignations, and other forms of individual accountability, but can also serve as the catalyst for broader legal and institutional reforms. Yet investigative journalism—especially into the misdeeds of the wealthy and powerful—is risky. Journalists can sometimes face physical threats, and occasionally deadly violence. Even when their safety is not in jeopardy, journalists investigating corruption encounter legal trouble. In some jurisdictions, governments take legal action against reporters, seeking to impose large fines or even incarceration. In other cases, the targets of investigative reporting seek to derail such reporting through defamation lawsuits, even when the defamation claims lack legal merit. These sorts of suits are commonly referred to as SLAPPs—Strategic Lawsuits Against Public Participation. In many cases, the costs of defending against even a meritless defamation suit can drain the journalist or news organization’s funds, and such suits can also take a psychological toll on their targets. The litigious and deep-pocketed figures who bring SLAPPs seek to take advantage of these facts in order to intimidate journalists into silence.

Not all SLAPPs target journalists who expose corruption—the issue is much broader. But SLAPPs have frequently been used against journalists who write about corruption, and the anticorruption community therefore has a clear interest in legal reforms that would counter the threat that SLAPPs pose . So what can be done about this problem? Broadly speaking, there two primary legislative responses to the prevalence of SLAPPS: “Anti-SLAPP” laws and “SLAPPback” laws:

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