Category Archives: Commentary

Castles of Corruption

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Owning a castle has never been easier. In 2017, Italy’s State Property Agency made international headlines by announcing that the country would be giving away over a hundred castles for free. The only catch? Takers must promise to restore the dilapidated structures and turn them into tourist sites. (The program builds on an existing initiative in which the Agency gives historical federally-owned properties to local authorities for restoration.) At first glance, this program looks like a win for everyone. The Italian federal government no longer has to deal with crumbling historic castles, the properties will be cleaned up and made available to tourists, and lucky entrepreneurs and local governments can reap the profits. Unfortunately, however, there are reasons to worry that this program, like so many other castle restoration initiatives, will end up sapped by corruption, money laundering, collusion, and nepotism.

 Corruption and related malfeasance is quite common in the context of castle ownership and restoration. This is not all that surprising, given that corruption is a perennial issue within the construction industry as a whole. All of the usual problems in that sector—including bribery in the bidding process, collusion to funnel work to friends and family, embezzlement, and the substitution of substandard materials—apply in the specific context of castle restoration. On top of that, real estate has long been a favorite of those involved in money laundering due to the lower scrutiny that real property transactions receive, at least in comparison to stock or other commodities. But in addition to these familiar risk factors, castle restoration projects have several additional distinctive features that make them even more vulnerable to corruption than comparable construction projects and real estate transactions:

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Why Paying the Media to Uncover Corruption Would Work in India

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Jennifer Kline’s recent post on this blog proposed a novel way to support and encourage investigative journalism that exposes corruption: When such exposés result in legal actions that impose substantial monetary penalties on wrongdoers, the responsible media outlet should receive a percentage of the penalty as a reward—comparable to how some countries have programs that pay whistleblowers a percentage of any monetary recoveries that result from the original information that the whistleblowers supplied. While Jennifer’s discussion of this idea was fairly general, and seemed to have in mind implementation in countries like the United States, her proposal may be especially suitable for a country like India. 

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Will Canada Help Curb Haitian Corruption?

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Many Haitians fear for their safety and that of their family as their country slips into anarchic violence after the assassination of their president. But not Haitian Senator Rony Célestin and his family

Courtesy of the Canadian government, they are ensconced in the mansion pictured above. Located in the toniest of tony areas in Quebec, the couple recently settled on it for some $4 million.

 What did the Canadian government have to do with Célestin’s acquisition of the mansion? Everything. Célestin is a high-ranking official of a foreign country.  Any Canadian real estate agent or bank he contacted about buying the mansion was obliged by Canadian law to ask a simple question: How does a public official of one of the world’s poorest countries amass enough to buy such a luxurious home?  

If the July 11 New York Times story on the Senator and the mansion is correct, an inquiry would quickly have raised suspicions that the money did not come from a legitimate source. That in turn would have further obliged the real estate agent or banker to alert Canadian authorities.

Reports by the Financial Action Task Force and Asia/Pacific Group on Money Laundering have repeatedly warned Canadian officials that controls on money laundering in the real estate sector were toothless, that for years corrupt foreign officials have been hiding their money in Canada through the purchase of pricey real estate.  Indeed, in their latest, joint report, issued in 2016, the two flagged the rise of “criminally-inclined real estate professionals, notably real estate lawyers” to cater to the money laundering needs of criminals of all kind.

Is it too much to ask Canadian authorities to stop looking the other way when corrupt officials come to their country to shop for real estate?  Perhaps the picture of the Senator’s mansion juxtaposed with anyone of the thousands of Haiti’s poor might prompt action?  Canadian civil society, where are you?

Breaking News without Breaking the Bank: Monetary Rewards for Media Organizations that Expose Corruption

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Investigative journalists play a key role in exposing corruption. In many cases, as a direct result of media exposés, the government has been able to recover substantial sums. To take just a few examples: In 2011, the Los Angeles Times revealed that officials in a small California city improperly paid themselves exorbitant salaries, and the subsequent court cases ordered restitution awards nearing $20 million. In 2012, the New York Times exposed Walmart’s widespread bribery in Mexico, and the company ultimately agreed to pay $282 million to settle the resulting seven-year investigation into whether Walmart had violated the Foreign Corrupt Practices Act (FCPA). In 2017, the International Consortium of Investigative Journalists (ICIJ) shocked the world when its affiliated journalists broke the Panama Papers scandal, exposing extensive fraud and tax evasion by world leaders, drug traffickers, and celebrities alike. As a result of the ICIJ’s investigation, governments around the world have managed to claw back $1.28 billion from perpetrators thus far. A Malaysian-born British journalist’s investigations (prompted by a whistleblower who provided her with more than 200,000 documents) produced the first hard evidence of what became known as Malaysia’s 1MDB scandal, the world’s largest kleptocracy scheme to date, which has produced, among other things, a nearly $2.9 billion settlement for FCPA violations.

But despite the crucial role journalists play in uncovering corruption, investigative journalism is a risky investment for media outlets. For one thing, this sort of investigative journalism is time- and resource-intensive—much more so than straight reporting—and many investigations come to nothing. And when investigative journalism does uncover evidence of wrongdoing by powerful figures, publishing those stories can be legally and politically risky. So, even though media outlets can reap substantial rewards from successful investigations—in the form of clicks, subscriptions, and prestige—media outlets faced with declining revenues and an increasingly hostile environment may not invest nearly as much in investigations into corruption as would be socially optimal.

To mitigate this problem, I propose what may initially seem like a radical way to create stronger incentives for media outlets to invest in this kind of investigative journalism: When media outlets expose corruption or similar wrongdoing, and this exposure leading to monetary sanctions on the culpable entities or individuals, the media outlets responsible for the reporting ought to receive a percentage of the government’s recovery. Such a proposal is inspired by (though distinct from) the whistleblower reward programs that many governments have already adopted. (For example, in the United States, individuals who voluntarily provide the Securities and Exchange Commission with original information pertaining to securities law violations may receive between 10% and 30% of the total penalty collected if their information leads to a successful prosecution.) A similar “media rewards program” could substantially improve the effectiveness of independent investigative journalism in exposing and deterring corruption.

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Perishing Under Corruption: A Cautionary Tale from the Dutch East India Company

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A transnational megacorporation that exerts near total monopoly, mints its own currency, fields its own armies, negotiates treaties, and executes convicts. This is not the stuff of dystopic cyberpunk novels, but history books. Founded in 1602, the Vereenigde Oostindische Compagnie (often referred to in English as the Dutch East India Company, but self-styled as the VOC) was the first publicly-traded company, established the first stock exchange, became the first multinational corporation, and boasted the first globally recognizable logo. At the height of its valuation in 1637, the VOC was worth roughly $8.28 trillion in 2021 dollars—more than Apple, Microsoft, Google, Amazon, Facebook, and fifteen more of the world’s most important modern companies combined (or, if you prefer, roughly the GDP of modern Germany, the UK, and France added together). Yet, by the mid-1790s, the VOC was bankrupt. On December 31st, 1799, the Company dissolved entirely. The principal reason for this collapse was no secret: a popular joke at the time said that VOC actually stood for “vergaan onder corruptie” (“perished under corruption”).

How did the world’s wealthiest and most powerful corporation “perish under corruption” in just a handful of decades? And what lessons can be learned from such a failure?

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See Hearing in Kleptocracy Fight Live at 11:30 EST Today

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The anticorruption community rarely has a chance to witness first-hand the fight against Kleptocracy.  Today, Thursday, July 8, at 11:30 US East Coast time it will have a rare opportunity to see the combatants in action. In a Zoomed court hearing, the Department of Justice will ask a federal judge to order Equatorial Guinea’s kleptocratic Vice President, Teodoro Obiang Mangue, to abide by the settlement he reached with the Department in the famously styled action United States v. One White Crystal-Covered “Bad Tour” Glove and Other Michael Jackson Memorabilia.     

One of its first salvos in the U.S war against kleptocracy, the Department filed suit to confiscate the Jackson glove and other Jackson memorabilia, a Southern California mansion worth north of $20 million, and other assets on the grounds Obiang had acquired them with corrupt monies (complaint here).  After a key witness disappeared (under mysterious circumstances), a settlement was reached. Obiang agreed to surrender some of the property and sell the mansion (here) with the funds from the mansion’s sale given to a charity that would see it was used “for the benefit of the people of the Republic of Equatorial Guinea.”   

The settlement provided that should the Department and Obiang be unable to agree on a charity, a three-member panel — one chosen by the United States, one by Equatorial Guinea, and a chair jointly selected — would decide how to use the funds. After years of Obiang’s stalling, so many it prompted Mathew to wonder whatever had happened (here), a panel was finally chosen. An agreement was reached this past May 4 to use $19.5 million of the funds to vaccinate Equatorial Guineans against Covid-19.

Obiang and the EG government are now trying to renege on the deal, prompting the Department to seek an order enforcing it. The Department’s memorandum in support of an enforcement order is here, the affidavit of the U.S. panel member, the American Ambassador to Equatorial Guinea Susan Stevenson, which details the agreement is here, and the e-mail Equatorial Guinea sent backing out of the deal is here.

Click here for the link to the home page of U.S. federal judge George Wu who will preside at the hearing.  At the top will be a Zoom link to the hearing.  

Social Distancing Reduces Corruption Too

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Together with a trio of Chinese scholars, Boston University Professor Raymond Fisman offers the latest evidence on the value of social distancing. Their research, in the July issue of the American Economic Journal: Applied Economics (here, prepublication version here), is the first rigorous, quantitative test of a result suggested by case studies of small countries (Guatemala), small towns (Fall River, Massachusetts), and small professional circles (Chicago judges). The greater the distance between those who enforce the anticorruption laws and those likely to violate them, the more likely it is the laws will be enforced.

“Social distance” to public health authorities means the actual physical space that individuals should maintain between on another (six feet for Americans, two meters for everyone else) to prevent the spread of Covid-19. Applied to the findings of Fisman and colleagues and the case studies, it means more than how far apart investigators, prosecutors, auditors, and others responsible for enforcing anticorruption laws stand physically from those whom they police. It means too the absence of school and neighborhood ties, different circles of friends, and the lack of other relationships that would make an individual hesitant to question another’s conduct let alone investigate or arrest them. In short, when evaluating social distance in the anticorruption world, “social” comes with a capital S.

Consider what Professors Fisman and his colleagues Professors Chu, Tan, and Wang found in their study of Chinese auditors.

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eSports: A Playground for Corruption?

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Video game tournaments—sometimes referred to as “eSports”—are relatively new but increasingly popular. In these tournaments, players compete for cash prizes. In certain U.S. states it is now legal to place bets on eSports tournaments, though in other states such betting is prohibited. The growing popularity of eSports and the rise of eSports betting unfortunately gives rise to the risks of the same sorts of corruption that we have seen in traditional sports, such as gamblers (including organized criminal betting syndicates) bribing players to fix matches. And this is not purely hypothetical: Recently the FBI obtained evidence that criminal betting syndicates were bribing a group of players to throw matches in certain eSports competitions.

Responding effectively to bribery-related corruption in eSports is complicated by the fact that, unlike traditional sporting leagues, eSports do not have a central governing body. Rather, each game publisher controls its own tournaments, and many tournament operators have not taken the steps necessary to implement effective mechanisms for identifying betting-related match-fixing activities and levying punishment on bad actors. In 2016, a group of eSports stakeholders tried to address this issue by establishing a nonprofit association called the Esports Integrity Commission (ESIC), which is tasked with investigating and disciplining individuals involved in corrupt eSports activities. But ESIC only has authority over competitions organized by its members, and players sanctioned for match-fixing activities within an ESIC member tournament can still compete in non-ESIC member competitions.

More effective measures are therefore needed to prevent the spread of corruption in eSports. In particular, those states that permit betting on eSports tournaments should require, as a condition for betting on such matches to be lawful, that the tournament and betting operators join an authorized eSports governing board equivalent to the ESIC. Authorized governing boards should have the following responsibilities and obligations:

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A Closer Look at Corruption, Hamas, and Violence in the Gaza Strip

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The recent violent clash between Israel and Hamas followed a pattern that has become depressingly familiar since Hamas won control of the Gaza Strip in 2006: Hamas instigates violence towards Israel and its civilians; Israel responds with military strikes targeting Hamas’s weaponry infrastructure, but since Hamas has intentionally embedded itself in Gaza’s civilian population, Israel’s strikes inevitably claim innocent lives. The question whether Israel’s response was proportional or excessive saturates the news and media. Eventually the two sides reach a tentative ceasefire, the violence subsides, and attention turns elsewhere—until the vicious cycle repeats.

Most readers, whatever their views on the underlying moral and legal issues, are likely familiar with this pattern. But what does this have to do with corruption? Quite a bit, actually. 

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Something Is Rotten from the State of Denmark

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In this year’s Corruption Perception Index (CPI) rankings, Denmark yet again topped the list (tied with New Zealand) as the world’s cleanest country. But the CPI has well-known limitations—including the fact that it focuses on corruption within countries while excluding how country’s nationals behave abroad. And in this latter context, Denmark performs rather poorly. Danish companies have faced numerous credible allegations of paying bribes worth hundreds of millions of dollars in dozens of countries (see, for example, here, here, here, here, here, here, and here). Several of those countries have been sanctioned by the World Bank and the European Union. Yet Danish companies have largely escaped suffering any consequence within Denmark for their corrupt practices abroad. Of the thirteen major allegations of foreign bribery brought in the last decade by Danish authorities against Danish companies, several closed without adequate investigation, and none resulted in any prosecution. No wonder that Denmark’s last report card on from the OECD’s Anti-Bribery Working Group—released in 2015—found Denmark’s performance in enforcing its laws against foreign bribery to be deeply wanting. Yet six years and many public commitments later, Denmark has done very little (other than publishing a three-page “How to avoid corruption” pamphlet) to address its shortcomings in this area.

So, what’s stopping the “least corrupt” country in the world (at least, according to the CPI) from tackling its foreign bribery problem? If allegations of foreign bribery are widespread and credible, why have Danish companies continued to enjoy effective domestic impunity? There are two ways to answer this question, one of which focuses on the legal deficiencies in Denmark’s criminal code, which make it hard for prosecutors to bring winning cases, and the other of which focuses on the reasons why Denmark hasn’t changed these laws, notwithstanding critical commentaries and advice from organizations like the OECD.

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