Category Archives: Commentary

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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Will Afghanistan’s New Taliban Rulers Govern Corruptly?

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On August 15, 2021, the Taliban marched into Kabul unopposed, toppling the Western-backed government. The Taliban came to power in a very corrupt country. Afghan police regularly used informal checkpoints to extort truck drivers. Education and banking were also rife with corruption. Some estimates put the amount of bribes paid annually in Afghanistan at somewhere between $2 and $5 billion, or about 13 percent of the country’s GDP. Afghan military commanders siphoned off huge amounts of money by listing non-existent soldiers in their units, and then pocketing the salaries of these “ghost soldiers.” And on top of all this, former president Ashraf Ghani allegedly stole over $100 million on his way out of Afghanistan. From top to bottom, Afghanistan had a major corruption problem. 

The Taliban, by contrast, cultivated a reputation for relatively clean government. During the Taliban’s previous reign, from 1996 until 2001, bribes were uncommon, and the justice system was viewed as comparatively honest (and certainly less corrupt than that of the Western-backed government established after the Taliban’s ouster). Over the last two decades, the justice administered by Taliban judges in areas under Taliban control has been popular among many Afghans precisely because they perceive it as less corrupt and more efficient. This may explain why, despite the Taliban’s extremism and abysmal human rights record, the group was viewed favorably by many ordinary Afghans—at least when contrasted with the Western-backed government. Many commentators have suggested this factor contributed to the Taliban’s takeover of the country (see here and here). And since the Taliban has come to power, early reports suggest that it is governing in a relatedly non-corrupt manner. For example, business owners in Kabul—often the targets of shakedowns by security forces under the Ghani government—note that Taliban security forces check in on them regularly to offer help with security, without demanding bribes. Afghans also report that the police no longer extort bribe payments from truckers, who now just pay a single toll to the Taliban. More generally, citizens in places like Kabul have offered positive preliminary assessments, regarding the comparatively lower corruption of the new Taliban government.

Does this mean that, notwithstanding the Taliban’s terrible record on other issues, the Taliban government is likely to continue governing the country relatively cleanly? There is no way to know, but there are good reasons to be skeptical. Those who welcomed the Taliban as a less corrupt alternative to the Western-backed government are likely to be disappointed.

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Keep the Dogmatic Privatization Argument Out of Style

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It used to be trendy to talk about privatization as the solution for corruption. The World Bank, for example, declared back in 1997 that “any reform that increases the competitiveness of the economy will reduce incentives for corrupt behavior. Thus policies that lower controls on foreign trade, remove entry barriers to private industry, and privatize state firms in a way that ensures competition will all support the fight [against corruption].” (See also here, here, and here.) Although this theory declined rapidly after its peak in the 1990s, anticorruption policy ideas, like fashion, seem to be cyclical. Even as the privatization dogma has become démodé in Western anticorruption circles, it has gained new life elsewhere. As “privatization as a solution to corruption” debates reemerge in India and the Philippines, it’s worth reexamining the flaws in such policy proposals that made them fall out of favor twenty years ago.

The logic behind the idea that privatization inherently(or at least usually)decreases corruption is the notion that private shareholders are more interested than government bureaucrats in the efficient usage of whatever resources they control, and are therefore more likely to crack down on corruption. Relatedly, competition in the private market should favor those entities that can provide a service most efficiently—and if graft is inefficient, as many believe, market competition should drive corruption down. On top of this, private organizations also reduce corruption by offering more competitive wages, which means that employees aren’t forced to turn to corrupt means to supplement their incomes.

That’s the theory. The problem is that it isn’t supported by empirical evidence. Starting in the early 2000s and continuing well into the present, scholarship examining the aftermath of the privatization wave of the 1990s has repeatedly found that privatization has been largely unhelpful, and in some cases outright detrimental, to efforts to bring corruption under control (see here, here, here, here, here and here, to cite but a few sources). Why is this? Three main problems stand out:

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In Pari Delicto & Parens Patriae: Latin All Corruption Fighters Should Know

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In pari delicto, Latin for “of equal fault,” is a legal doctrine that prevented the government that succeeded Saddam Hussein’s from recovering hundreds of millions of dollars in damages from those involved in Saddam and cronies’ corruption. It has deterred other governments taking power after a kleptocrat’s fall from attempting to recover damages as well. Parens patriae, Latin for another legal doctrine, is one way around the result in pari delicto dictates in kleptocracy cases.

Corruption hunters thus have good reason to learn Latin. At least enough to ensure that those who profit from a kleptocrat’s reign don’t escape reckoning when there is a regime change.

The barrier in pari delicto raises to a government recovering damages from a kleptocrat’s accomplices was first revealed in a suit the post-Saddam government filed in 2008.

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Current and Former Mozambican Presidents, Other Higher Ups “Cleared” in Hidden Debt Scandal

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Last week the presiding judge in Mozambique’s hidden debt trial made it plain that the country’s current and former presidents and other senior members of the country’s ruling party would not have to answer for their role in the hidden scandal. The massive corruption scheme has cost the impoverished nation billions and ended any hope millions of its citizens could escape a life of abject poverty.

Nineteen middle-level officials and accomplices are on trial in Maputo for accepting bribes to approve $2.1 billion in contracts to the Middle East shipbuilding company Privinvest and then taking more bribes to have the government secretly borrow the money to finance the projects. The economy tanked and poverty rates skyrocketed when the secret loans were revealed.

As he was finishing his testimony last Thursday, the General Director of the State Intelligence and Security Services, the highest ranking official on trial, complained to trial judge Efigénio Baptista, “I am here alone.” He said he was the only member of the Joint Command and the Operation Command, the inter-agency groups that cooked up the scheme, to be prosecuted.

“The former Minister of National Defense, Filipe Nyusi, and the former Minister of the Interior, Alberto Mondlane, should be answering. They were also part of the Joint Command.”

The judge explained that Nyusi, now the country’s president, and Mondlane, governor of an important province, were not charged because the prosecution had no evidence they had taken bribes.  He also helpfully went on to add that for the same reason Armando Guebuza, president when the contracts were let and the loans taken out, was not on trial. 

The above comes from the Centro para Democracia e Desenvolvimento reports on the trial. This one, recounting the state security director’s testimony, also helpfully reminded readers of the testimony of Jean Boustani at a 2018 trial in New York. There the Privinvest senior executive provided details about the bribes Privinvest paid Nyusi, Guebuza, and other officials not among the 19 on trial in Mozambique. Perhaps Judge Baptista and the Mozambican prosecutor have overlooked something?