Category Archives: Commentary

Corruption’s War on the Law

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“Corruption’s War on the Law” is the headline on an article Project Syndicate just published. There former French magistrate and corruption fighter Eva Joly recounts the fate of those who have dared to confront powerful networks of corrupt officials and those who corrupt them.  Maltese investigative journalist Daphne Caruana Galizia was murdered by accomplices of those she was investigating. So was Rwandan anti-corruption lawyer Gustave Makonene. So too was Brazilian anticorruption activist Marcelo Miguel D’Elia.

After a second attempt on his life, Nuhu Ribadu, first chair of Nigeria’s Economic and Financial Crimes Commission, the country’s premier anticorruption agency, famously remarked:

“When you fight corruption, it fights back.”

In her article, Mme. Joly, who received numerous threats for investigating and ultimately convicting senior French officials for corruption, explains that violence is just one way corruption “fights back.”  The most recent head of Nigeria’s EFCC was arrested and detained on trumped up charges of corruption. Ibrahim Magu has been suspended from office pending further proceedings, proceedings unlikely to be held this century.

At the same, Nigerian anticorruption activist Lanre Suraju is, as this blog reported last week, being charged with “cyberstalking” for circulating documents from a court case that implicate associates of the current Attorney General in a the massive OPL-245 corruption scandal. This form of intimidation, which Nigerians have dubbed “lawfare,” has now been exported to Europe. Italian prosecutors are being subjected to both criminal charges and administrative action for having the nerve to prosecute one of Italy’s largest companies for foreign bribery (here).

President Biden has declared the global fight against corruption to be a national priority, and he will shortly host a democracy summit where Brazil, Italy, Malta, Nigeria, and Rwanda will be represented at the highest level. Might he remind them which side of the fight they should be on?

Why Italy Should Not Prioritize Anticorruption in Spending Covid Recovery Funds

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The Covid-19 pandemic has been an economic disaster as well as a public health disaster, and massive public spending will be needed to promote recovery. In Europe, the EU is projected to spend up to €1.8 trillion on pandemic recovery. One of the biggest recipients of these EU funds will be Italy, the EU’s hardest-hit member state. Currently, Italy is poised to receive €123 billion in loans and €69 billion in grants between now and 2026. Provision of these funds has already started; the first tranche of €25 billion arrived this past June. This funding will support Italy’s Covid recovery plan, known as the Piano Nazionale di Ripresa e Resilienza (PNRR), which—in the name of territorial cohesion—will allocate 40% of the funds to the Italian south.

If history is any guide, a massive amount of that money will be misallocated, misspent, or outright stolen by corrupt public officials colluding with organized crime groups. The mafias have a long history of bribing Italian officials for lucrative public contracts. Between 2014 and 2020, Italy received €77 billion from the EU for use in structural and investment funds; 60% of those funds were “fraudulently requested or obtained,” often by organized crime, with the 85% of that fraud occurring in the South. Much of the fraud occurs when illegitimate companies request funds in the form of loans and grants; the companies either don’t exist or are liquidated upon receipt of the funds.  

But we needn’t look only to history: Italy’s three most powerful crime syndicates—Cosa Nostra in Sicily, the Camorra in Campania, and the ‘Ndrangheta in Calabria—are already bribing Covid response officials, winning fraudulent contracts, and plundering businesses in receipt of PNRR funds. As the EU money pours in, we can expect that these mafia groups will use their corrupt networks to siphon off a staggering percentage of the EU Covid relief funding.

What should European policymakers do in response? It’s tempting to insist—as anticorruption activists have in this and other contexts—that the EU and Prime Minister Mario Draghi’s government adopt enhanced oversight and transparency measures, to better ensure that funds are spent appropriately. But that would be a mistake. Right now, the priority must be on promoting a swift economic recovery. Attaching burdensome anticorruption requirements to the public spending needed to support that recovery will slow the process down too much. This is, I realize, a bitter pill to swallow. Many readers will instinctively resist the idea that the EU and the Italian government might bankroll Italy’s most powerful mafias (to the tune of up to €200 billion). But if Italy is to recover from the economic effects of the Covid-19 pandemic, the priority must be the swift delivery of recovery funds, even if this means that much of the money will be intercepted by the mafia.

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Letter to Nigerian Attorney General Malami from Civil Society: Stop Harassing Anticorruption Activist

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Civil society organizations are poised to write Nigerian Attorney General Abubakar Malami asking he dismiss criminal charges against long-time Nigerian anticorruption activist Olanrewaju Suraju. His crime? Circulating documents implicating an associate of the Attorney General in the alleged payment of $1 billion by oil giants Royal Dutch Shell and ENI in return for rights OPL-245, Nigeria’s most lucrative offshore oil block.  

Not only is a criminal indictment for Suraju’s conduct absurd on its face, the Community Court of Justice for the Economic Community of West African States, whose decisions are binding on Nigeria, has declared the cyberstalking law under which he is being charged in violation of the African Peoples and Human Rights Charter.  

The text of the letter is below. Concerned NGOs and individuals are invited to add their names. Use the “Contact” function at the top of the page. Alternatively, letters supporting Nigerian activists’ freedom to urge that those responsible for corruption be brought to justice can be sent to Nigerian President Muhammadu Buhari through info@statehouse.gov.ng

Dear Attorney-General Abubakar Malami:

Our attention has been drawn to press reports of an indictment, approved by your office, against Olanrewaju Suraju, chair of the anti-corruption and human right group HEDA, for alleged cyberstalking.[1]

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Brazil Should Rethink the Corporate Death Penalty for Corrupt Acts

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Brazil’s Clean Company Act (CCA), enacted during a time of mass protests against corruption and impunity, was a major step forward in the fight against corporate crime. While the CCA is best known for its imposition of strict civil and administrative liability on legal entities that commit corrupt acts against public administration, the CCA is also notable for its authorization, in extreme cases, of a “corporate death penalty.” More specifically, the CCA requires the dissolution of a corporation or other legal entity when (1) the legal entity is in fact a “shell company” used to conceal illegal acts (such as money laundering, tax evasion, or procurement fraud), or (2) the legal entity was used on a regular basis to facilitate or promote the performance of wrongful acts. Applying the corporate death penalty to shell companies created for the purpose of facilitating or concealing criminal acts is straightforward and not terribly controversial, especially since these shell companies do not engage in any genuine productive activity. The controversy arises with respect to the second category, which can include productive companies.

Applying the extreme sanction of corporate dissolution might seem like appropriately strong medicine for companies, even productive companies, that have been involved in serious and ongoing illegality. In practice, however, this sanction is not working as intended. A much more effective and realistic sanction, at least in the Brazilian context, would be to compel a persistently corrupt (but productive) company’s shareholders to sell their controlling stake in the company—thus preserving the company as a going concern, but placing it under new ownership and management.

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ENABLERS in the Legal Profession: Balancing Client Confidentiality Against Preventing Money Laundering

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The anticorruption world is abuzz with discussion of the Pandora Papers, a major leak of financial documents that exposed how wealthy elites, including various political leaders and shady businesspeople, conceal their assets. But alongside revelations about the illicit expenditures of the rich and powerful, reporting based on the Pandora Papers also highlighted the role that lawyers and law firms have played in facilitating these arrangements—many of which are technically legal, but at least some of which suggest possible money laundering or other illicit activities.

This is hardly the first time that concerns have been raised about attorneys’ involvement in money laundering. Indeed, such concerns have existed for years, and have been repeatedly emphasized by groups like the Financial Action Task Force, and a 2010 study found that lawyers played a facilitating role in 25% of surveyed money laundering cases in an American appeals court. But perhaps because of the Pandora Papers revelations, U.S. legislators finally appear to be taking the problem seriously. Within days of the Pandora Papers leak, Members of Congress introduced a bill called the ENABLERS Act, which would expand the scope of the Bank Secrecy Act (BSA) so that many of the BSA’s requirements, including the duty to file suspicious activity reports (SARs) with the Treasury Department and to implement anti-money laundering (AML) controls, would apply to a broader set of actors—including attorneys and law firms.

The American Bar Association (ABA), which has consistently resisted pretty much every effort to impose even modest AML requirements on the legal profession, has strenuously opposed this aspect of the ENABLERS Act. The ABA’s principal objection is that many BSA requirements—especially the requirement that covered entities file SARs with the government—conflict with the lawyer’s ethical duty of client confidentiality—the attorney’s obligation not to reveal information gained in the course of representing a client to outside parties, including the government, save in a very narrow set of circumstances. (The duty of confidentiality is related to, but distinct from, the attorney-client privilege, which prevents a lawyer from testifying against her client in court regarding private communications that the attorney had with the client in the course of the legal representation, or providing such communications in response to a discovery request. Some critics have also raised attorney-client privilege concerns about SAR filings.) The ABA and other commentators have argued that extending the BSA’s mandatory reporting requirement to attorneys, as the ENABLERS Act would do, compromises attorneys’ ability to guarantee confidentiality, and thereby discourages the full, frank communications between attorney and client that are essential for effective legal representation.

The ABA has a valid concern, but only to a point. A broad and unqualified extension of BSA reporting requirements to attorneys could indeed impinge on traditional and important principles of lawyer-client confidentiality. But this is not a reason to leave things as they are. Rather, the ENABLERS Act and its implementing regulations can and should draw more nuanced distinctions, imposing SAR and other AML requirements on lawyers when those lawyers are acting principally as financial advisors, but enabling lawyers to preserve client confidentiality—including with respect to suspicious transactions—when lawyers are providing more traditional legal representation, for instance in the context of litigation.

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Little Trust on the Prairie

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Offshore finance has always been glamorous. The world’s tax dodgers and kleptocrats seem to favor the same jurisdictions as James Bond, places with soring vistas, crystalline waters, and plenty of five-star resorts. Yet as the recent release of the Pandora Papers makes clear, the geography of offshore finance has shifted in recent years. For those seeking to obscure the origins of their wealth, South Dakota now eclipses Grand Cayman. Customer assets in South Dakota trusts have more than quadrupled over the past decade to $360 billion. And while there are of course legitimate reasons to set up a trust, trusts offer an ideal mechanism—even better than shell companies—for concealing ownership and preserving anonymity.

South Dakota is an especially attractive jurisdiction for setting up such trusts because it offers not only low costs and flexibility, but also a combination of privacy and control that those seeking to hide their wealth find attractive. Notably, South Dakota automatically seals trust records, preventing outsiders from identifying settlors and beneficiaries, and does not require publicly filing trust documents. (Although South Dakota’s privacy laws do not shield settlors and beneficiaries from federal law enforcement, they do conceal the trust from journalists and the private parties, making it less likely that those involved in the trust come to the attention of government authorities.) South Dakota also allows the creation of “dynasty trusts,” which exist in perpetuity, as well as “directed trusts,” which give families and their advisors maximum control in managing the trust’s affairs. Unusually, South Dakota also allows trusts whose settlor and beneficiary are the same person.

These rules make South Dakota trusts particularly appealing to business and political elites whose assets may be the target of civil as well as criminal litigation. Indeed, the Pandora Papers identified, among those who used South Dakota trusts to conceal their assets, a Colombian textile baron who had sought to launder international drug proceeds, a Brazilian orange juice mogul who allegedly underpaid local farmers, and the former president of a Dominican sugar producer who was accused of exploiting workers. With banks and even real estate agents wary of taking large sums from officials in corrupt regions, a U.S. domiciled trust offers a veneer of legitimacy.

Allowing states like South Dakota to join the archipelago of secrecy jurisdictions where bankers and trustees ask few questions undermines the United States’ fight against global corruption. Indeed, attacking those who abet foreign corruption while welcoming dirty money as an investment strategy is not just hypocritical but self-defeating. The rise of anonymous domestic trusts in the United States demands and an aggressive response from federal regulators. That response can and should include the following measures:

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Some Reflections on the Meaning of Anticorruption “Success”

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Last month, we had a spirited debate in the anticorruption blogosphere about the conceptualization of corruption, academic approaches to the study of the topic, and the relationship between research and practice. (The debate was prompted by provocative piece by Bo Rothstein, to which I replied; my critical reaction prompted a sur-reply from Professor Rothstein, which was followed by further contributions from Robert Barrington, Paul Heywood, and Michael Johnston.) I’ve been thinking a bit more about one small aspect of that stimulating exchange: How do we, or should we, think about evaluating the success (or lack thereof) of an anticorruption policy or other intervention? I was struck by the very different assessments that several of the participants in last month’s exchange had regarding whether the anticorruption reform movement had been “successful,” and this got me thinking that although part of the divergence of opinion might be due to different interpretations of the evidence, part of what’s going on might be different understandings of what “success” does or should mean in this context.

That observation, in turn, connected to another issue that’s been gnawing at me for a while, that I’ve been having trouble putting into words—but I’m going to take a stab at it in this post. My sense is that when it comes to defining and measuring “success” in the context of anticorruption reform (and probably many other contexts too), there’s a fundamental tension between two conflicting impulses: Continue reading →

Why the U.S. Corporate Transparency Act Should Cover Trusts

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In late 2020, anticorruption and transparency advocates scored a major victory: the passage of the U.S. Corporate Transparency Act (CTA), which requires U.S. corporations, limited liability companies, and “other similar entities” to disclose the identities of their true beneficial owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). FinCEN is currently in the process of drafting regulations to implement the CTA. One of the key questions FinCEN is considering concerns the scope of the CTA’s coverage—in particular whether trusts should be considered “similar entities” to which the CTA’s disclosure obligations apply.

The answer ought to be a resounding yes. As the recent revelations from the International Consortium of Investigative Journalists (ICIJ) stories on the so-called Pandora Papers has made all too clear, trusts are prime vehicles for kleptocrats, organized crime groups, and others who want to hide their illicit assets. To be sure, trusts have legitimate uses, such as estate planning, charitable giving, and certain (lawful) strategic business purposes. But the potential for abuse means that it is essential to increase transparency and oversight of trusts.

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Leniency Revisited: China Should Also Reward Bribe Takers Who Confess

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China’s anticorruption campaign has focused almost exclusively on the so-called “demand side” of bribe transactions—the public officials who request or accept bribe payments. Indeed, it is quite common for a bribe-taking government official to be prosecuted while the bribe giver receives no punishment at all (see here, here, and here). Overall, China has convicted and punished almost four times as many bribe-takers as bribe-givers, and only 1% of bribe-givers have faced criminal prosecution. 

This lopsided emphasis on the demand side of bribery is mostly caused by a odd asymmetry in China’s Criminal Law. According to Article 390, bribe givers who confess their crimes to the authorities before the case is handed over the procuratorate office for criminal prosecution are eligible for leniency, including outright exemption from punishment, but there is no equivalent provision for bribe takers. (There are some general provisions in Chinese criminal law that afford criminal defendants mitigated punishment, but these sections are applicable only when suspects voluntarily turn themselves in before any investigation has commenced, or provide sufficiently valuable service in uncovering other criminal misconduct. These provisions are not as generous as Article 390.) Due to the asymmetric structure of Article 390, coupled with the fact that bribery is often hard to uncover without the cooperation of one of the parties involved in the transaction, China’s principal anticorruption agency, the Central Commission for Discipline Inspection (CCDI), has cut deals almost exclusively with bribe givers, offering them immunity pursuant to Article 390 in exchange for their assistance in going after the corrupt officials.

This asymmetry has contributed to criticism that China is too lenient on bribe givers. Some critics have argued that China should eliminate the disparate treatment of bribe givers and bribe takers by abolishing Article 390 altogether, thus making it equally difficult for bribe givers and bribe takers to receive leniency (see, for example, here and here). While China has not gone that far, it has taken steps in this direction, for example by amending Article 390 back in 2015 to narrow the set of bribe givers who would be eligible to receive mitigated punishment under that section.

I agree that the asymmetric treatment of bribe givers and bribe takers makes little sense, but rectifying that asymmetry by restricting the availability of leniency to bribe givers who voluntarily confess is the wrong approach. On the contrary, China should expand Article 390 so that bribe takers who report to the government and offer evidence against the bribe payer would be eligible for leniency. But only the party that reports first (and fully and candidly) should be eligible for leniency—the other party to the transaction would be punished harshly. This system, which would resemble the US Department of Justice’s Antitrust Leniency Program, creates a prisoner’s dilemma problem for both parties to the bribe transaction, thus helping to detect and deter bribery more efficiently.

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Defining Corruption: What Do Readers Say?

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Recent posts have treated readers to a discussion of what corruption means.  Professor Rothstein suggested coming at it from its opposite and offered “impartiality” so corruption would mean the absence of impartiality or bias. [Note: I had flubbed Prof. Rothstein’s view in the original text as per his comment below.] Professor Johnson argued that at its core corruption is about an imbalance of power and suggested tying the definition to notions of “justice.” Transparency International’s “abuse of entrusted power for private gain” was also examined.

I think it time for GAB readers to be heard. Rather than asking which one of these definitions they prefer, or whether they have another candidate, however, I thought it more interesting to see how a definition of corruption helps them judge actual conduct in the real world. 

Below are six cases where at least some have alleged corruption was afoot. What say, GAB readers? Do any of the cases described below involve corruption as you define it?

A yea or nay on each in a comment to this post will suffice. Extra credit for explaining how one of the definitions proffered helped you decide. Lifetime subscription to GAB at the current rate to the best entry or entries. How each played out in court and in the court of public opinion will be revealed in a future post.

Case 1. To defeat a motion of no confidence, Vanuatu’s Unity of Change government offered two MPs parliamentary appointments in return for withdrawing their support for the motion.  Another MP was offered the position of Minister of Health, and a fourth Parliamentary Secretary to the Minister of Fisheries. All four accepted the offers, and the government defeated the motion. Bribery?

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