Category Archives: Commentary

Finding Politically Feasible Anticorruption Reforms in Bosnia and Herzegovina: The Case for Indirect Approaches

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Bosnia and Herzegovina (BiH), like many of its neighbors in the Western Balkans, is beset by endemic, seemingly unsolvable corruption. Understandably, many Bosnian citizens would like to see the prosecution and conviction of high-level officials engaged in corrupt practices. Local activists and the international community have pressed for improvements to BiH’s judicial sector and law enforcement capacities, at least in part to make such high-level prosecutions more likely, and more likely to succeed. Yet while convictions of corrupt senior officials should indeed be one important goal, in the short term it will be very difficult to achieve, for the simple and familiar reason that political leaders will vigorously resist any changes that could put themselves at risk of criminal prosecution. Ending the culture of elite impunity in BiH, while necessary, will remain a long-term project.

That doesn’t mean, though, that there’s nothing that can be done about corruption in BiH in the short-to-medium term. Indeed, there are a number of measures, besides direct criminal prosecutions, that could reduce corruption in ways that are more indirect, and therefore less threatening to those currently in power. That feature, coupled with the fact that many of these reforms would also produce substantial economic benefits even independent of their corruption-reducing effect, makes these kinds of reforms more politically feasible. Reforms in the two following economic areas are examples of how BiH could cut opportunities for corruption and make everyday life better for Bosnians, and do so in a way that might be acceptable or even attractive to incumbent politicians. Continue reading →

Canadian Legislation to Permit Use of Stolen Assets for Humanitarian Relief

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Ontario Senator Ratna Omidvar has introduced legislation to allow the Canadian government to use frozen assets for humanitarian end. The Frozen Assets Repurposing Act (Loi sur la réaffectation des biens bloqués) would authorize the Attorney General or a designee to request the court where an asset is frozen to seize it. If after a hearing the court is satisfied on the balance of probabilities that the asset is “associated with a foreign national who is responsible for or complicit in” corruption or human rights violations, the asset would be liquidated and the proceeds paid into the court. The court may then distribute the funds to any person, organization, or foreign state for a “just and appropriate” purpose.

The Senator’s bill solves a problem both Canada and the European Union faced in the wake of the Arab Spring.  Canada’s federal government and EU executive both had the power to freeze assets where there was evidence that they were obtained through corruption. But the law allowed them to do no more.  The laws of both assumed the governments from which the assets had been stolen would initiate return proceedings in accordance with chapter V of UNCAC.  But thanks to some combination of a lack of capacity and political wherewithal, successor governments in Egypt, Libya, Tunisia, and Yemen did not. The freezes either ended and the funds went back to the crooked leader or they remain frozen indefinitely.

Although the legislation leaves it to the court to decide how to use the confiscated funds, Senator Omidvar’s bill explicitly states that consideration be given to helping foreign states accommodate refuges. She suggests for example that the frozen funds of Venezuela’s corrupt rulers could be distributed to Colombia and other neighboring countries to alleviate the suffering of Venezuelans who have sought refuge in them.

The confiscation process follows that in the U.K.’s Unexplained Wealth Order law. The holder of the asset would be given the opportunity to show he or she had obtained it through lawful means.  Only if the holder failed to convince the court that it was would confiscation follow.

The legislation was inspired by this 2018 World Refugee Council paper.  The Senator’s “Make Corrupt Foreign Officials Pay,” an article in the online journal Policy Options Politique, makes a strong case for its enactment.  The arguments are not Canada-specific. Perhaps legislators in other countries where the corrupt hide their money will be inspired to copy her bill?  The text is here.

Municipal Dissolution as a Means of Combatting Criminal Corruption

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In December of 2019, the Italian government dissolved the municipal government of the Calabrian town of Africo, replacing it with a national governmentk commission that would run the city for the next 12 to 24 months. This drastic action, decried by (former) Africo city councilor Nicola Paris as “interrupting democracy,” was authorized by a special Italian law, adopted in 1991, that permits the national government to dissolve a local government if that local government has been infiltrated by the mafia. Since 1991, 341 such dissolution decrees have been issued (though 21 were cancelled by administrative courts), with 22 issued in 2019-2020 alone. Sixty-six communities have seen their local government dissolved more than once. (Africo’s city council, for example, has now been dissolved three times.) And the practice is spreading geographically. Between 1991 and 2011, the vast majority of city council dissolutions were in the three regions under the “traditional” sphere of mafia control (Campania, Calabria, and Sicily), with only three dissolutions outside of those regions. But since 2011, the Italian government has dissolved city councils in 21 municipalities outside of that traditional sphere.

The dissolution of city councils is a serious measure, and is strictly regulated. The process begins when concrete evidence emerges of links between town councilors and organized criminal elements that could bias political decision-making or affect public security. This evidence is submitted to the Prefecture, an administrative body responsible for implementing state functions at the local level. The Prefecture appoints a three-person Committee of Inquiry. After an investigation, which usually takes roughly 3-6 months, the Committee presents its findings to the Prefect, who presents them to the Minister of Interior within 45 days. The Minister of Interior, after deliberating with the Council of Ministers, then decides whether to issue a proposal of dissolution; a dissolution is only finalized when the President of the Republic issues a decree of resolution. The issuance of such a decree is judicially reviewable by the administrative courts (and, as noted above, 21 dissolution orders have been judicially nullified). When a municipal government is dissolved, the mayor, councilors, and members of the executive committee are removed from office, and a group of three individuals, known as the Extraordinary Commission, takes over all council activities for a period of up to two years. At the end of this time, new local elections are held.

Even with all of this process, dissolution of a local government is an extreme measure, but in Italy, where deeply-entrenched organized criminal groups are able to secure their control thorough corruption of local governments, such an extreme response is warranted. Indeed, other countries struggling with similar problems might consider adopting a similar mechanism. Continue reading →

Protecting Guyana from the Natural Resource Curse

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The ethnically-divided country of Guyana is one of the smallest and poorest countries in South America. It has a population of just 782,000 people—roughly the size of North Dakota—and its income per capita is less than $5,000 per year. But while the rest of the world faces a crippling recession, Guyana’s economy is projected to grow by 53% this year, thanks to a significant offshore discovery. (The country’s projected growth had been even higher before the recent stress in oil markets.) Guyana sold its first barrel of oil this past January, and national oil output is expected to reach 750,000 barrels/day by 2025 and 1.2mm barrels/day by 2030—more than a barrel of oil per day for each of Guyana’s 782,000 citizens.

But will this oil wealth benefit Guyana’s citizenry? Many observers worry that Guyana may fall victim to the “natural resource curse”—a paradoxical phenomenon in which resource wealth not only fails to generate sustainable economic growth but actually worsens the standard of living for most of a country’s citizens. While some manifestations of the natural resource curse are macroeconomic in nature (for example, the so-called “Dutch disease,” in which resource-driven currency appreciation stifles other tradable sectors), other versions of the resource curse involve resource wealth undermining institutions and weakening governance. Natural resource wealth, especially from point-source resources like oil, gives the political leaders who control the resource cash flows the power and opportunity to engage in various forms corruption. Not only can these leaders profit directly through kickbacks or embezzlement, but they can use resource wealth to solidify their own political power through favoritism and clientelism. In both cases, political leaders may weaken or eliminate transparency, accountability, and institutional checks that are designed to constrain their ability to improperly use resource wealth for their own personal or political benefit. These risks are greatest in countries that already have relatively poor governance and weak institutional frameworks when the resource wealth is discovered. And this corruption and institutional weakening may make ordinary citizens worse off than they were before the resource boom, even as those with connections or political power get rich.

This manifestation of the resource curse is a significant concern for Guyana, a country with political institutions that are already fragile and prone to corruption. In a winner-take-all political system with voters split along ethnic (and even geographic) lines, politicians win by favoring their base and suppressing opposition turnout. And indeed, this year’s presidential elections, conducted just two months after the country’s first oil sale, were marred by vote rigging, civil unrest, and violence. But there are also encouraging signs that the Guyanese government is taking steps to address the resource curse concern by strengthening budgetary institutions. In January 2019, the government established the Natural Resource Fund (NRF) to manage the country’s natural resource wealth. Similar to funds established in Ghana and Timor-Leste, the NRF is structured as an offshore fund that invests in liquid international securities with well-established guidelines governing fund transfers to Guyana’s Ministry of Finance. By codifying transfer rules and prohibiting fund borrowing, the NRF will compel the government—and whichever political party controls it—to save a significant portion of its oil revenue, limiting its discretionary spending abilities and curbing the corruption opportunities that arise from unencumbered financial resources.

The NRF, however, is not sufficient. While the NRF is restricted from borrowing, the Guyanese government is not. And while the NRF limits a government’s ability to withdraw more oil revenue than the NRF’s bylaws allow, the Guyana state is not forbidden from borrowing against this revenue. This loophole would allow a profligate government—especially one that intended to reward its constituents or award suspicious investment contracts—to borrow in international financial markets to fund its expenditures. Furthermore, even with the constraints imposed by NRF transfers, Guyana’s central government expenditures are projected to double from 290 billion Guyanese dollars (approximately US$1.4 billion) to 580 billion Guyanese dollars (US$2.8 billion) over the next five years. This presents ample opportunity for political leaders to leverage their power over discretionary spending to enrich and entrench themselves.

To further constrain the sort of resource-fueled discretionary spending associated with the natural resource curse, Guyana should take at least two additional steps: Continue reading →

Australian Lawyers and Real Estate Agents: Kleptocrats’ Best Friends?

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Government officials who steal “vast quantities” of their citizens’ money need help hiding the loot.  The first generation of kleptocrats — the Ferdinand Marcoses, Mobutu Sese Sekos, and Sani Abachas of the world – showed that the preferred way is to retain someone to surreptitiously move the money into a safe haven abroad and then invest it in assets that cannot be traced back to them.  The anticorruption community calls these accomplices to grand corruption “enablers,” for they enable corrupt officials to hide their money.

The international community has begun cracking down on this professional class of crooks.  The primary means has been through making them subject to domestic anti-money laws.  Just as the laws of virtually all countries require banks and other financial institutions to take particular care (“enhanced due diligence”) before accepting as a customer current or former senior government officials or their family members or close associates and to report any suspicious transaction these “politically exposed persons” conduct, the Financial Action Task Force recommendations 22, 23, and 28 require the same from lawyers, accountants, real estate agents and others with the professional skills required to hide stolen assets. FATF has no power to compel countries to transpose these recommendations into domestic law.  It relies instead on the peer pressure generated by regular, highly publicized reports on individual nation’s compliance with them.

That system has now ground to a halt. According to the Financial Review, the reason is fierce opposition from Australian lawyers and real estate agents to what a FATF review of Australian compliance with the anti-money laundering recommendations would reveal. For 13 years the two have blocked the extension of the Australian anti-money laundering rules to their activities; last November a scheduled FATF review was about to finally call them out.  It was then suddenly cancelled. The only explanation given was that FATF had decided “to temporarily pause the start of all scheduled follow-up assessments pending the outcomes of the strategic review of FATF currently underway.”  Although FATF acknowledged discussing the review at its February 2020 meeting, no details about what the review would cover or when it would be completed was provided.  In the meantime, professions in the United States, Canada, and other nations (here, here, and here) who oppose extending anti-money laundering rules to their activities can breathe easier.  So can kleptocrats wanting to tap their expertise in hiding money.

Fighting Corruption in U.S. Civil Asset Forfeiture Requires State-by-State Reforms

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Civil asset forfeiture is a judicial process through which law enforcement officials seize assets belonging to a person suspected of a crime. To be subject to forfeit, the assets in question must be either the proceeds of crime or were used to further that criminal activity, but in many jurisdictions, civil asset forfeiture does not require a criminal conviction, or even the formal filing of criminal charges, and the typical legal threshold is probable cause that the seized property is connected to criminal activity, rather than the “beyond a reasonable doubt” standard generally required for a criminal conviction.

In the international context, civil asset forfeiture is an integral component in the battle against corruption. Empowering law enforcement agencies to seize ill-gotten gains, without the need to first secure a criminal conviction, is one of the most effective methods of punishing corrupt actors and depriving them of the proceeds of their crimes. But civil asset forfeiture is not limited to seizing the proceeds of grand corruption, and in the United States, the civil asset forfeiture system, particularly at the state and local level, has itself has become a significant vector for corruption, albeit on a much smaller scale, with local officials taking advantage of lax oversight to use seized funds for their own personal benefit. For example, in March 2020, the Michigan State Attorney General’s Office brought charges against Macomb County Prosecutor Eric Smith, alleging that Smith and other county officials had misused forfeiture funds for things like personal home improvements (including a security system for Smith’s house and garden benches for several other employee’s homes), parties at country clubs, and campaign expenditures. Smith is far from the only public official accused of corruption relating to forfeiture funds. To take just a few other examples: State revenue investigators in Georgia used millions in forfeited assets to purchase travel and trinkets like engraved firearms; police officers in Hunt County, Texas awarded themselves personal bonuses of up to $26,000 from forfeiture accounts; and the District Attorney in Lancaster County, Pennsylvania leased a new personal car with forfeiture funds.

To be clear, there are concerns about the civil asset forfeiture system in the United States that run much deeper than the misappropriation of funds. Critics have vigorously attacked both the legal underpinnings of the civil forfeiture system as it currently exists in the U.S., as well the system’s implementation. But for the purposes of this post I want to bracket those larger issues to focus on the question of why the civil forfeiture systems at the state and local level in the United States pose especially high risks of corrupt misappropriation, and what might be done about this (assuming that the civil forfeiture system is here to stay, at least in the short term).

Continue reading →

“NGOs with Foreign Support”: A New Draft Law Threatens Ukraine’s Anticorruption NGOs

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In May, Ukrainian Member of Parliament Oleksandr Dubinsky, a controversial member of the Servant of the People Party (Ukraine’s ruling party, headed by President Volodymyr Zelensky), registered a draft law that would label certain civil society organizations as “foreign agents.” More specifically, this legislation—which resembles Russia’s 2012 “foreign agent” law—would:

  • Oblige NGOs receiving at least 50% of their financial support from foreign entities to include the term “foreign support” in their organization’s name, and to include in any materials published by the NGO a disclaimer stating that the materials are published by an organization that functions with foreign support;
  • Initiate the creation of a central register of such NGOs, requiring the Ministry of Justice to publicize a list of these NGOs on its official website and to publish annual reports of foreign-funded NGO activity in Ukraine;
  • Require the management of these NGOs to undergo annual polygraph interviews in order to review whether or not these individuals have committed treason; and
  • Prohibit any individuals in NGO management positions from working in the civil service or holding membership on supervisory boards or in the leadership of state enterprises for five years after working in a foreign-funded NGO.

While Dubinsky’s proposed legislation poses a serious threat to all NGOs that receive foreign funding (except for a few categories that the draft law specifically exempts, such as NGOs that work in the sphere of culture, arts, science, prevention and health of citizens, social protection, social support for the disabled, and environmental protection), this legislation would have a particularly adverse impact on the work of anticorruption NGOs.

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Review of Søreide and Makinwa “Negotiated Settlements in Bribery Cases: A Principled Approach”

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The resolution of foreign bribery cases through some type of out-of-court agreement has spread from the United States to other OECD nations.  The latest figures show that close to 80 percent of foreign bribery prosecutions by OECD nations have been settled short of a full trial on the merits.  Settlements free prosecutors to pursue additional violations, but there is the ever-present risk the defendant will get off too easy, that the settlement terms will not deter the defendant or others from continuing to bribe officials of a foreign government.

The OECD’s Working Group on Bribery in International Business Transactions is now developing standards to ensure that settlements will provide the “effective, proportionate, and dissuasive criminal penalties” the OECD Antibribery Convention mandates. As it proceeds, it will find Negotiated Settlements in Bribery Cases: A Principled Approach, a new volume from Elgar edited by anticorruption scholars Tina Søreide and Abiola Makinwa, an invaluable guide.  In 12 chapters, the cross-disciplinary, multinational group of experts the editors assembled review the use of settlements in the United States, the experience of other nations and the World Bank with settlements, ways to judge whether a settlement serves the public interest, and recommendations for gauging whether a particular settlement passes the public interest test. Continue reading →

The Art World is Rife with Corruption, But Suspicious Activity Reporting Requirements Aren’t the Answer

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Customs officials at JFK airport didn’t have a reason to be suspicious. After all, the package wasn’t anything special—just a regular shipping carton with an unnamed $100 painting inside. Only later did it emerge that the $100 unnamed painting was, in fact, Hannibal, a 1981 painting by Jean-Michel Basquiat valued at $8 million. Authorities across three different continents had spent years trying to track down Hannibal, along with other famous works by Roy Lichtenstein and Serge Poliakoff, that Brazilian banker Edemar Cid Ferreira had used to launder millions of funds he illegally obtained from a Brazilian bank. It wasn’t until 2015, nearly ten years after Edemar’s conviction for money laundering, that US authorities managed to return Hannibal to its rightful owner, the Brazilian government. Meanwhile, thousands of other paintings move across borders with few questions asked about who owns them, who’s buying them, and for what end.

The art world is readymade for corruption. Paintings—unlike real estate—are readily portable. Their true value, as Hannibal illustrates, is readily disguisable. And the law does not require disclosure of the buyer or seller’s true identity. Unlike real estate, where ownership can be traced to a deed, the only available chain of title for most artwork is its “provenance”—which is commonly vague, falsified, or not readily verified. Recognizing that money laundering in the art world is a big (and growing) problem, there’s been a flurry of recent proposals to address that problem. In the United States, Congressman Luke Messer proposed a new law called the Illicit Art and Antiquities Act, which, if enacted, would amend the Bank Secrecy Act (BSA) to require art and antiquities dealers to develop an internal compliance system, report cash payments of more than $10,000, and file the same sorts of “suspicious activity reports” (SARs) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that the BSA currently requires of financial institutions and money service businesses. And in Europe, the EU’s Fifth Anti-Money Laundering (AML) Directive dramatically expanded suspicious transaction reporting requirements for art dealers.

These developments show that legislators on both sides of the Atlantic are taking the challenge of art corruption seriously, which is an encouraging development. Unfortunately, expanding SAR requirements, while appropriate in other contexts, is misguided when it comes to the art world, for two reasons:

Continue reading →

Improving Brazil’s Whistleblower Regime

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Because corruption is usually conducted in secret, without readily identifiable victims, effectively tackling corruption often requires evidence from insiders. Therefore, providing adequate protections and incentives to whistleblowers is crucial. Brazil, like many countries, does not have a strong tradition or culture of whistleblowing, making it all the more important that the legal system provides sufficient protections and incentives for insiders to provide material information about corrupt schemes. In the past few years, Brazil has made important progress in this area, but much remains to be done.

Two years ago, a specific statute introduced the practice of rewarding people who furnished information about criminal conduct. This legislation provided that Brazilian states could establish telephone hotlines for reporting unlawful activities, and also authorized all levels of government to establish rewards for whistleblowers who provide information that lead to the prevention, detection, and punishment of crimes and administrative offenses. That statute, while a good first step, was vague and incomplete. Near the end of last year, Brazil took another important step in the direction of modernizing its whistleblower laws with the enactment of the 2019 Anti-Crime Act. This Act requires that national, state, and local governments, as well as their agencies and companies, establish an ombudsman office to ensure that all people can report crimes against public administration (including corruption), administrative offenses, and any action or omission damaging to the public interest. The law further provides that whistleblowers cannot be held criminally or civilly liable for the report (as long as the information was not provided falsely and maliciously), that whistleblowers are entitled to the protection of their identities, and that whistleblowers are entitled to the same protections against retaliation as are witnesses and victims. Violation of the prohibitions on retaliation against whistleblowers can entitle the whistleblower to double damages and punitive damages. The new law also includes a clearer provision on financial rewards for whistleblowers, expressly providing that if a whistleblower who provides information leading to the recovery of proceeds from crimes against public administration, the corresponding government can grant to whistleblowers financial rewards of up to 5% of the recovered assets.

Despite this progress, though, the legal framework on whistleblowers in Brazil still suffers from a number of important deficiencies, and needs further improvements:

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