Category Archives: Commentary

The FinCEN Files: Some Scattered Preliminary Thoughts

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As most readers of this blog are likely well aware, last week BuzzFeed News and the International Consortium of Investigative Journalists (ICIJ) released a bombshell story about international money laundering through major financial institutions. The collection of stories—more of which are likely in the works—is based on an analysis of a large trove of leaked documents from the U.S Treasury Department’s Financial Crimes Enforcement Network (FinCEN), which the journalists reporting on the case have dubbed the “FinCEN Files.” These files consist of so-called Suspicious Activity Reports (SARs), which are documents that, pursuant to a U.S. statute called the Bank Secrecy Act (BSA), banks and certain other institutions are legally required to file with FinCEN whenever the bank has reason to suspect that a transaction it’s handling involves money laundering or some other criminal activity, or simply lacks an apparent lawful purpose. The bank does not inform its customer that it’s filing a SAR—indeed, the BSA prohibits banks from doing so. FinCEN can use SARs to detect and investigate financial crime, and may share SARs with other law enforcement agencies in the context of an investigation, but otherwise SARs are supposed to remain strictly confidential. However, in October 2018 a FinCen employee leaked over 2,100 SARs to a BuzzFeed reporter. (While BuzzFeed and ICIJ do not identify their source, it is almost certain that this former employee, who pled guilty last January to illegally leaking the documents, is the source.) Journalists with BuzzFeed and the ICIJ analyzed these documents and have published multiple stories (see, for example, here and here) about what these documents reveal regarding the global anti-money laundering (AML) regime, together with a subset of the actual SARs. (The journalists released only those SARs that support reporting in specific stories, principally SARs that pertain to known criminal figures. They are not publishing a database of all the SARs in their possession due to concerns about privacy of the individuals involved, many of whom are not currently accused of any wrongdoing.)

The picture that these stories paint of the global AML regime is not a pretty one. While the stories are lengthy and detailed, and discuss many different aspects of the overall issue, if I had to try to distill all this reporting into a simple punchline, it would go something like this: The leaked SARs reveal that the major banks repeatedly handled huge and highly suspicious transactions for corrupt kleptocrats, organized crime groups, terrorists, fraudsters, sanctions evaders, and others, and relatively little was done, by the government or the banks, to stop it. As the ICIJ puts it, “The FinCEN Files show trillions in tainted dollars flow freely through major banks, swamping a broken enforcement system.” Or as BuzzFeed puts it, the FinCEN files reveal “how the giants of Western banking move trillions of dollars in suspicious transactions,” while “the US government, despite its vast powers, fails to stop it.”

I’m still working my way through all the FinCEN Files stories, and I’m certainly no expert on money laundering or banking regulation. (I come to this issue sideways, from an interest in anticorruption, rather than any professional expertise in AML as such.) But, in the interest of getting some ideas down in writing and perhaps stimulating some further conversation on what we can learn from the FinCEN Files reporting, let me share a few scattered, somewhat disconnected preliminary observations. Continue reading →

FACTI: Launch of Interim Report// Background Paper on Global Anticorruption Efforts

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The United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development, or FACTI, presents its interim report tomorrow, September 24, 8:00 – 10:30 a.m. Eastern Time, 12:00 – 14:30 UTC (register for webinar here). The report will identify reforms to the laws governing international tax cooperation, anticorruption, and money laundering needed to staunch illicit financial flows and hasten the return of stolen assets. As explained last week, the FACTI panel was created by the UN General Assembly and the Economic and Social Council as part of the effort to ensure developing states will have sufficient resources to meet the 2030 Sustainable Development Goals.

Professors J.C. Sharman, Daniel L. Nielson, and Michael G. Findley of Cambridge, Texas, and Brigham Young Universities respectively, prepared a background paper for the panel assaying the progress made in curbing money laundering and other abuses of the financial system that facilitate corruption. A summary of their paper is below; the full text is here.

Progress in Global AntiCorruption Efforts? Not So Fast

In April of 1989, Laurence Greenwald, a partner in the NYC law firm Stroock & Stroock & Lavin had reached the end of his patience. His firm had spent thousands of hours and tallied $1.2 million in legal fees seeking to identify and seize hundreds of millions of dollars in assets stolen from Haiti’s treasury by its notorious dictator Jean-Claude “Baby Doc” Duvalier. The successor Haitian government had retained Stroock firm to investigate and launch recovery proceedings. Yet after years of legal work by Stroock and other firms around the globe, in 1988 the new government stopped cooperating and refused to pay its legal bills.

In a letter to the Haitian government, Greenwald fumed, “The behavior of your ministers leaves us no alternative except to conclude that your ministers apparently want our efforts on behalf of Haiti to fail, are not concerned that Haiti will lose the substantial investment it has made in pursuing the Duvaliers, and want the Duvaliers to keep the money they stole.” Such frustrations commonly afflicted those seeking an end to corrupt practices in the international financial system during the late 20th Century. What progress has the international community made in the intervening decades?

Continue reading →

Universal Asset Declarations Will Not Solve Kazakhstan’s Corruption Problem

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In March 2019, Kassym-Jomart Tokayev replaced long-serving President Nursultan Nazarbayev to become independent Kazakhstan’s second head of state. Apparently recognizing the scope and scale of Kazakhstan’s corruption problem, President Tokayev made combatting corruption a central focus of his agenda from the get-go. And he has continued to emphasize that the fight against corruption is a top priority.

Although it’s not unusual for heads of state to deploy anticorruption rhetoric, often without action to back it up, there are indications that President Tokayev is serious. Over the past year and a half, the Kazakh government has implemented several concrete anticorruption measures—both large-scale and quotidian. Perhaps most prominently among the former category, in January 2020 Kazakhstan joined the Group of States against Corruption, a corruption-monitoring organization run by the Council of Europe. Additionally, a law enacted in December 2019 provides for the dismissal of public officials in managerial roles if their subordinates are convicted of corruption-related charges. Most recently, President Tokayev himself announced a new policy under which high-ranking officials and their family members will be barred from keeping bank accounts abroad. Among the more “everyday” measures, the government has created “anticorruption centers” where citizens can speak directly with employees of Kazakhstan’s anticorruption agency. And to prevent price-gouging during the COVID crisis, the government has required pharmacies to post QR codes that allow customers to easily check the legal prices of medicines.

It remains to be seen whether these measures will be effective in helping to address Kazakhstan’s corruption problem. One additional measure, however, appears unlikely to make much difference: a new system of “universal” property and income declarations that the Kazakh government is beginning to implement (see here, here, and here). Kazakhstan has required public officials to declare their assets and income since 1996, but the new initiative will extend this requirement to all citizens and foreign permanent residents of Kazakhstan in a phased rollout over the next several years. By 2025, all Kazakhstanis will be required to file, in addition to their standard income tax return, a declaration listing the value of their assets and liabilities, including real estate, cars, bank accounts, and jewelry. According to the government, this new system of universal asset declarations will help counteract the shadow economy, increase compliance with tax laws, and reduce corruption.

The new disclosure regime may well be justified as a matter of tax policy or as a measure to combat the shadow economy. However, evaluated purely as an anticorruption measure, the policy is misguided, for two main reasons: Continue reading →

FACTI Background Paper: To Curb Grand Corruption, Subject Lawyers and Other Professionals to the AML Laws

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Last March, the President of the United Nations General Assembly and the President of the United Nations Economic and Social Council formed a panel to review global rules on financial accountability, transparency and integrity (here).  The two presidents explained that the current regime countenances a massive outflow of resources from developed nations, depriving them of the resources required to meet the 2030 Agenda for Sustainable Development.  Formally known as the High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda Financing for Sustainable Development (FACTI), the panel will recommend how tax and anticorruption laws, asset recovery rules, beneficial ownership disclosure requirements, and other international norms can be changed to staunch illicit financial flows and hasten the return of corrupt monies held abroad.

The FACTI Panel’s interim report will be released for comment September 24. The report will draw on consultations with governments, civil society groups, interested organizations, and a series of background papers commissioned by the United Nations Department of Economic and Social Affairs, the panel’s Secretariat.  With Fatima Kanji of the International State Crime Initiative, this writer authored the paper on asset recovery. A post summarizing it is below.  Over the coming weeks GAB will publish posts draw drawn from the other papers. Readers who can’t wait can click here to access the full text of the papers now.  The page also includes links to FACTI’s extensive global consultations. FACTI members are listed here.

Accelerating and Streamlining

the Return of Assets Stolen by Corrupt Public Officials

Corruption is hardly a new problem. Three centuries before the Common Era the author of the Arthaśātra advised the Maurya Empire’s rulers on ways to prevent corruption, and the first statute the English Parliament enacted made bribery a crime.  What is new is the ease with which corrupt money flows out of the victim state.  For a hefty fee, corrupt officials can today readily find a lawyer, real estate agent or other professional willing to help hide the assets they have stolen offshore.

Continue reading →

President Theodore Roosevelt on the Importance of Fighting Corruption

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Last week, I posted some information about a new working paper that I jointly authored with Justice Mariano-Florentino Cuellar on anticorruption reform in the United States over the 1865-1941 period. Although one of our main arguments in that paper is that the process of anticorruption reform in the United States was long, slow, and involved many different actors at all levels (in contrast to the image of the “big bang” reform driven by a single powerful figure, like a Lee Kwan Yew or a Mikheil Saakashvili), there were indeed some periods, and some leaders, who were especially important to the anticorruption fight. One of those leaders was undoubtedly President Theodore Roosevelt. President Roosevelt was a complicated figure with complicated legacy, but with respect to anticorruption, he was a significant leader of the reform movement. Since today (September 14) is the 119th anniversary of President Roosevelt’s assumption of the presidency, I thought I’d use the occasion to share some of my favorite remarks of his on the subject of corruption The specific context of these remarks, which came in a December 1903 address to Congress, concerned his administration’s efforts to secure the extradition of bribe-taking officials who had fled the country, but President Roosevelt’s sweeping rhetoric sounds like it could have come from a modern anticorruption reformer in a particularly fiery mood:

There can be no crime more serious than bribery. Other offenses violate one law while corruption strikes at the foundation of all law. Under our form of Government all authority is vested in the people and by them delegated to those who represent them in official capacity. There can be no offense heavier than that of him in whom such a sacred trust has been reposed, who sells it for his own gain and enrichment; and no less heavy is the offense of the bribe giver. He is worse than the thief, for the thief robs the individual, while the corrupt official plunders an entire city or State. He is as wicked as the murderer, for the murderer may only take one life against the law, while the corrupt official and the man who corrupts the official alike aim at the assassination of the commonwealth itself. Government of the people, by the people, for the people will perish from the face of the earth if bribery is tolerated. The givers and takers of bribes stand on an evil pre-eminence of infamy. The exposure and punishment of public corruption is an honor to a nation, not a disgrace. The shame lies in toleration, not in correction…. If we fail to do all that in us lies to stamp out corruption we can not escape our share of responsibility for the guilt. The first requisite of successful self-government is unflinching enforcement of the law and the cutting out of corruption.

Lebanon Disaster Update: An Excellent and Disturbing OCCRP Report Sheds New Light on the Backstory of the Deadly Explosion

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A couple of weeks ago, I did a short post in reaction to the deadly warehouse explosion in Beirut, which killed at least 182 people, wounded thousands, and left hundreds of thousands homeless. My post wasn’t really about the Lebanon blast per se—especially because the causes of the explosion, and the role that corruption may have played, were unclear—but rather discussed more generally the direct and indirect ways that widespread corruption can increase the risk of deadly accidents. But I continue to wonder whether, with respect to the Beirut tragedy, it will turn out that corruption (rather than “mere” incompetence) will have been a contributing cause.

We still don’t have all the answers—particularly with respect to the decision-making process within Lebanon itself—but thanks to excellent investigative reporting by an international team of journalists with the Organized Crime and Corruption Reporting Project (OCCRP), we now have a great deal more information about the shadowy and highly suspicious backstory of the abandoned ship that brought the ammonium nitrate to Beirut in the first place. I don’t think I can do the report justice, but I highly recommend that everyone read it—it’s available here. And to give you a sense of what’s in it, I’ll just quote the main findings summarized at the beginning of the report: Continue reading →

“The Cyprus Papers”: Al Jazeera Report Sheds New Light on Golden Passport Programs

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Last year, we had a series of posts on so-called “golden visa” and “golden passport” programs—systems in which countries allow foreign nationals to obtain permanent residence (in the case of golden visa programs) or even citizenship (in the case of golden passport programs) in exchange for a sufficiently large investment in the country, or in some cases for a straight-up cash payment to the government. (See here, here, here, and here.) These programs raise three corruption-related concerns:

  • First, in the eyes of some critics, the programs are themselves a form of (legalized) corruption, enabling individuals to use money to purchase something (permanent residence or citizenship) that should not be for sale.
  • Second, even if we adopt a narrower understanding of corruption, golden visa and golden passport programs may make it easier for corrupt officials and their cronies (as well as other wealthy criminals) to find safe havens for themselves and their money.
  • Third, while several countries have rules designed to deal with the preceding problem, these rules can generate considerable corruption in the programs themselves, as individuals who are ineligible for golden visas or passports can bribe or otherwise corrupt those administering the system to skirt the rules.

Data on the extent of these or other problems, though, is a bit thin, in part because information on the operation of golden passport and golden visa programs—especially with regard to the individuals who take advantage of these programs—is generally not publicly available. But those interested in this topic—and concerned about the corruption risks or other problems associated with these programs—might be interested in a recent report from Al Jazeera, dubbed “The Cyprus Papers,” which analyzed leaked documents on the operation of Cyprus’s “golden passport” program between 2017 and 2019. (Golden passport programs in Cyprus and Malta have attracted particular concern because those two countries are EU members, thus making citizens of these countries EU citizens as well.)

Al Jazeera provides a user-friendly interactive webpage for exploring the results of its analysis of these leaked documents, and I recommend that those interested in this subject check it out. A few highlights: Continue reading →

Implicit Corruption in the Chinese Consumer Debt Industry? A Close Look at Recent Evidence

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While many country’s bribery laws require an express quid pro quo—an agreement to exchange a specific benefit for a specific exercise of government power—in practice many corrupt relationships involve implicit quid pro quos, in which the private party provides something of value to government officials, and the government officials use their power to help their private benefactors, but there is never any express agreement, or even any direct connection between any individual official act and a particular benefit conferred by the private party. The context in which such implicit quid pro quos are most widely suspected and discussed is perhaps campaign finance in democracies, but such implicit quid pro quos can occur in many other contexts as well. It is often very difficult—not only for law enforcement agencies, but also for empirical researchers—to find sufficiently clear evidence of an implicit corrupt deal. Yet quantitative empirical researchers have been making important strides in using available data to detect evidence of hidden or implicit wrongdoing—an approach sometimes dubbed “forensic economics.”

A fascinating recent paper by Sumit Agarwal, Wenlan Qian, Amit Seru, and Jian Zhang (forthcoming in the Journal of Financial Economics) illustrates both the potential and limitations of this approach. The paper, entitled “Disguised Corruption: Evidence from Consumer Credit in China,” presents quantitative evidence of an implicit quid pro quo between a large Chinese bank and government officials who wield regulatory authority over the bank. The paper finds that the bank offers unusually favorable lending terms to government employees (the “quid”) and that in those provinces where this practice is more widespread, the bank receives more favorable treatment from governments (the “quo”). While this evidence alone cannot establish that there was an implicit exchange (the “pro”), the authors suggest that this is the most plausible explanation of the data.

The data is certainly susceptible to that interpretation, but there are other, more benign possibilities. I’ll first say a bit more about the main evidence the paper offers for an implicit quid pro quo, and then suggest (though not necessarily urge) a possible alternative explanation.

Continue reading →

Corruption and Deadly Accidents

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After last week’s catastrophic explosion in Beirut—which killed over 150 people, injured thousands, and left hundreds of thousands homeless—Lebanese citizens are rightly demanding a full investigation of the incident and accountability for those responsible. The official reports so far have stated that the source of the blast was an abandoned Russian cargo ship carrying a large quantity of ammonium nitrate; it is not clear why that vessel and its dangerous cargo, which arrived at the port in 2013, were allowed to remain for so long despite repeated warnings about the dangers. Some commentators have expressed skepticism about the official account, and suggested that the blast was caused by illegal munitions being smuggled through Lebanon. We do not yet know, and may never know, the full story.

Much of the coverage of the incident has emphasized the widespread corruption of the Lebanese government, and many Lebanese protestors have emphasized this same theme. It is not yet clear whether corruption had much directly to do with this incident. The official account so far suggests negligence and mismanagement rather than intentional malfeasance. But the instinct to suspect corruption is entirely understandable, because there is ample evidence that corruption is often a significant contributing cause of many deadly accidents. Indeed, while much of the public discussion about the costs of corruption, particularly by donor agencies and international institutions, focuses on macroeconomic outcomes (such as per capita income, GDP growth rates, and economic inequality) or on other measures of human development (such as education, literacy, and health), corruption is also a significant contributing cause of avoidable accidental deaths. Continue reading →

How the European Union Can Work with China To Advance Anticorruption Goals in the Western Balkans and Beyond

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The European Union has traditionally imposed strict anticorruption rules for its lending and development projects. In the Western Balkans in particular, the EU’s Western Balkans Investment Framework attaches transparency and anticorruption conditions to EU investments. Moreover, the EU has made clear that progress on anticorruption reform is a main requirement for attaining EU membership, a core goal of all countries in the region. The EU’s approach, however, is under increasing pressure given competition from China, which has steadily ramped up its investment in Southeastern Europe—especially in the energy, transport, and telecommunications sectors—via its Belt and Road Initiative (BRI). China is willing to invest heavily in the region (largely via loans) without attaching any anticorruption conditions. This approach can be more appealing to many of the region’s (corrupt) public officials, who would like to build infrastructure quickly and under less scrutiny.

Because of competition from China and its demonstrated negative effects on local anticorruption efforts, the EU needs to reevaluate its approach. While last year the EU published a strategic outlook paper labeling China a “systemic rival” and toughened its overall approach to the country, the EU should actively pursue more cooperation with China when it comes to investment in Southeastern Europe. This does not mean that the EU should relax its strict anticorruption and governance conditionalities. The EU still retains considerable leverage in the region, and can and should continue to use this leverage to push an anticorruption agenda. But the EU’s efforts would be more effective if the EU directly engaged with China on this topic. Indeed, the EU may even be able to work with Chinese companies in ways that raise the latter’s integrity standards and safeguards. Continue reading →