Category Archives: Commentary

Congressional Corruption During the Coronavirus Crisis: The U.S. Must Do More to Eradicate Insider Trading in Congress

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Four U.S. Senators have been accused of trading stocks based upon non-public information about the coronavirus outbreak. The most disturbing cases appear to be Republican Senators Richard Burr and Kelly Loeffler. Senator Burr, who as Chair of the Senate Intelligence Committee attended a daily confidential briefing on the pandemic, divested between $628,033 and $1.72 million from industries hardest hit by coronavirus restrictions, including two major hotel chains. Senator Loeffler, who attended a confidential meeting about the coronavirus on January 24th, divested $1.275 million to $3.1 million from industries most hit, while also purchasing stock in teleconferencing companies. (Two other Senators, Democrat Dianne Feinstein and Republican Jim Inhofe, both also made significant stock sales during this time, but Senator Feinstein’s funds are in a blind trust, and Senator Inhofe has said his financial decisions are made by his financial advisors without consulting him.)

This is not the first time that concerns have been raised about Members of Congress corruptly taking advantage of their privileged access to inside information to enrich themselves, though the fact that Senator Burr engaged in these transactions shortly after having co-authored a piece claiming that “the United States today is better prepared than ever before to face emerging public health threats, like the coronavirus” makes his case particularly egregious. In 2004, a quantitative study found that the investment portfolios of U.S. Senators consistently outperformed the market, a result that at least suggests that Senators were using non-public information to inform their investment decisions. In response to this concern, in 2012 Congress enacted a bipartisan bill called the Stop Trading on Congressional Knowledge (STOCK) Act. (Senator Burr, it should be noted, was one of only three Senators to vote against it.) The main purpose of the STOCK Act was to expressly affirm that Members of Congress and their staffers were covered by the general prohibition on insider trading. The Act also increased transparency by requiring that Members of Congress and senior staff release financial disclosures within 45 days of major trades.

The STOCK Act was a step in the right direction, but it does not do nearly enough to prevent federal legislators from using their privileged positions to enhance their own wealth. To eliminate this form of corruption, the law should impose much more aggressive, prophylactic restrictions.

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An Inside View of Corruption in a Tax and Customs Agency

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Information derived from the direct observation of corrupt behavior provides insights no other source can match.  From first-hand reports of the number and amount of bribes Indonesian truck drivers paid to traverse different provinces, Barron and Olken reached important conclusions about centralized versus decentralized bribery schemes. Data Sequiera and Djankov gathered from South African and Mozambican clearing agents on bribery at their nations’ ports and border posts allowed the two to show how differences in tariff rates and uncertainties over the expected bribe amount affected firms’ behavior. The resourcefulness these and other researchers displayed in compiling direct evidence of corruption and the thoughtful, sometimes counter-intuitive conclusions their analysis yielded are summarized in this first-rate review essay by Sequiera.

As rich a source of learning on corruption as it is, collecting direct observation data is no mean feat.  Those committing corruption crimes don’t generally invite nosy observers to watch and record their actions. That is why it was especially welcome when a friend and colleague shared the parts of an interview with the head of a Latin American customs and tax agency that touched on corruption. The agency head’s insider view, though informed by training as a professional economist and a background in academia, offers nothing close to what readers can take from Barron and Olken, Sequiera and Djankov, and other full-blown academic studies.  Nonetheless, what he reports raises interesting, provocative issues of use to reformers and to those looking for hypotheses worth testing.

The portion of the interview dealing with corruption, anonymized to protect the source, is below.  Would other insiders please come forward?  Again, it is doubtful your observations will be anywhere near as valuable as the data the Barrons, Olkens, Sequieras, and Djankovs of  the world have so cleverly and painstakingly collected, but in an information scarce environment, all contributions are welcome. GAB would be more than happy to publish what you have observed about corruption in your organization with safeguards to protect your identity. Continue reading →

Why Hasn’t the IACC Meeting Been Postponed Yet?!?!

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As many readers of this blog are likely aware, one of the biggest international anticorruption conferences, aptly named the International Anti-Corruption Conference, scheduled its 2020 meeting for June 2-5 in Seoul, South Korea. It should be patently obvious to anybody that’s been paying attention that this conference absolutely must be postponed in light of the COVID-19 situation. Even if, three months from now, most of the hardest-hit countries have succeeded in “flattening the curve” to some degree, hosting a major international conference–one that will bring together people from all over the world, to meet and interact at close quarters for four days in a country that’s been a COVID-19 hotspot (albeit one that has done a good job getting the outbreak under control) before dispersing back to their countries of origin–is the height of irresponsibility.

So it came to me as a something of a shock that the IACC meeting has not (yet) been postponed. Indeed, just yesterday the IACC sent around an announcement encouraging young journalists to apply for the conference’s Young Journalist Program (offering those selected air travel and accommodations for the Seoul meeting). On the IACC website, the most recent COVID-19 update is from March 11 (over two weeks ago), and says:

We are very mindful of the current situation regarding the Coronavirus (COVID-19) outbreak and we understand that many of you are concerned on how it will affect the 19th International Anti-corruption Conference (IACC) in Seoul, Korea, from 2-5 June.

While our strong wish is to get together in early June for the IACC2020 in Seoul to learn from each other and join forces to be more effective in our efforts to end corruption in the coming years, our priority is the safety of all the participants and our staff.

The IACC team is regularly monitoring the global health situation and is in dialogue with the IACC Council and our partners in Korea. A decision to hold the conference, postpone to a later date or any other decision will be made in coming weeks. In the meantime, we will continue our planning.

We appreciate your understanding and recommend caution when making any financial commitments, like purchasing non-refundable flight tickets, until a final decision is reached. We will be updating you as soon as an informed and collectively [sic] decision is taken.

That’s all fine and good, but I think by now and informed decision to postpone the conference can and should be taken (and at the very least, the IACC shouldn’t be posting announcements encouraging people to apply). Come on guys! If the IOC can finally get its act together and postpone the Tokyo Olympics until 2021, surely the IACC can reach a similar decision without further deliberations. After all, shouldn’t the anticorruption community be at the forefront of emphasizing the importance of prioritizing the public welfare over other concerns?

How Can Ukraine’s High Anti-Corruption Court Succeed?

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Following more than two years of advocacy efforts by Ukrainian civil society and pressure from the international community, Ukraine established a specialized High Anti-Corruption Court (HACC) to try high-level officials accused of serious corruption offenses. The HACC, which was authorized in June 2018 and began operating this past September, is rightly seen as a major victory for Ukrainian anticorruption activists, and the first round of judicial selection for this court (a process that entailed special procedures, including the participation of a foreign expert panel in assessing candidates’ integrity) appears to have gone well. But the HACC faces daunting challenges—it is a brand-new institution, operating in an uncertain but pervasively corrupt environment, tasked with addressing extremely complicated and sensitive cases under intense public scrutiny. Its success is by no means guaranteed.

Some of the factors that will affect the HACC’s performance are external to the court itself. For example, the HACC’s success depends in part on the quality of the work done by Ukraine’s anticorruption investigative and prosecutorial bodies, the National Anti-Corruption Bureau (NABU) and Specialized Anti-Corruption Prosecutor’s Office (SAPO). And given the history in Ukraine of political interference with the courts (despite the constitution’s guarantee of judicial independence), one must always worry about whether the HACC will face similar threats. But even if we put those concerns aside, there are several additional steps that can and should be taken to help ensure that the HACC lives up to its potential. Continue reading →

A Welcome Analysis of Where Mozambique’s Goats Eat

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To say that a successful attack on corruption begins with a political economy analysis is commonplace.  To declare that absent such an analysis of the political, economic, and social conditions that foster a particular type of corruption, an anticorruption policy has little chance of succeeding is hardly remarkable.  What remains noteworthy is in the two decades plus since the global war on corruption began how few such analyses have been done.

Of the more than 7500 entries in Matthew’s corruption studies bibliography, titles of fewer than 50 indicate a political economy focus. The corruption and development “gray literature,” reports on corruption in developing nations commissioned by donor organizations, is little better.  Perhaps a larger number of studies, but few quality ones, and perhaps surprisingly, a real dearth of analyses of petty corruption, the kind that citizens of developing nations, most often the poor, regularly encounter in their daily life.

That’s why it was a pleasure to discover Inge Tvedten and Rachi Picardo’s recent study of where Mozambican goats eat.  The Mozambican expression cabrito come onde está amarado (“goats eat where they are tied up”’) refers, as they explain, to the two-legged species rather than the four-legged one.  The kind that exploit their place in government to enrich themselves, friends, and supporters.  The two draw upon years of accumulated research to show how, in a variety of thickly described situations, “a set of structuring principles and common schemes” lead to the “internalization” or “embodiment” of corruption.  (Others might term the principles and schemes “institutions” and internalization or embodiment a “Nash equilibrium.”) An especially thought-provoking example is how traditional norms of deference to authority figures interacts with the way the District Development Fund, a program to help the poorest, is managed to keep beneficiaries marginalized.

Whether hunting for how to deprive a greedy Mozambican goat of nourishment or for a first-rate example of political economy analysis of petty corruption, readers will profit from perusing Tvedten and Picardo’s article.

The Swiss U-Turn on Asset Return Explained

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Historically, a Swiss bank has been the bank of choice for corrupt leaders wanting to hide money. The reality is quite different today.  Just ask Tunisia’s ousted strong man Ben Ali, deposed Ukrainian president Victor Yanukovich, or the relatives of deceased former Haitian president Jean-Claude Duvalier, of the late Nigerian dictator Sani Abacha, or of Hosni Mubarak, the recently passed Egyptian president.  All believed money stolen from their nations’ citizens was safe in a Swiss bank.

At the time, they were not wrong. Dating back to when its secrecy rules protected the wealth of France’s Catholic kings from the prying eyes of nosey Protestant journalists, Swiss law permitted banks to take money with few questions asked and sanctioned those disclosing information about an account or its holder. Strict bank secrecy laws gave the Swiss financial industry an enormous advantage over other financial centers; it’s one reason why today financial services plays an outsized role in the Swiss economy — accounting for 10 percent of the GDP, twice the average of other OECD nations.

As the Duvaliers, Abachas, and Murabanks of the world learned to their chagrin  however, over the past decade Swiss policy has made a sharp U-turn.  Despite the weight of history and tradition, and the economic interest of so many Swiss citizens, current Swiss policy not only no longer condones the deposit of stolen assets in its banks, it now demands that banks and others in the financial services industry come to the aid of governments searching for money stolen by former rulers and cronies.  No other nation today goes to such lengths to help countries recover stolen assets.

Swiss lawyers François Membrez and Matthieu Hösli document this extraordinary change in Swiss policy in How To Return Stolen Assets: The Swiss policy pathway. Just published by the Geneva Centre for Civil and Political Rights, the two explain how Swiss  asset recovery law has turned Switzerland from the destination of choice for stolen funds into the least hospitable jurisdiction in the world.  The paper is an essential guide to Swiss law on asset recovery and provides a blueprint for other nations wanting nothing to do with stolen assets.

 

An Anticorruption Success Story: India’s Aam Aadmi Party Has Made Delhi Politics Much Cleaner

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In 2011, India witnessed the largest anticorruption uprising in its history, as hundreds of thousands of people mobilized to protest against entrenched corruption and to push for the passage of national anticorruption legislation that had been stuck in parliament for decades. The movement failed to achieve that objective, but out of its ashes was born a new political party, the Aam Aadmi Party (AAP). The AAP, founded in 2013, made anticorruption its main focus, choosing as its symbol a broom to represent its goal of cleaning up Indian government. The AAP achieved its first major victory in 2015, when it won a landslide victory in the state elections in Delhi, India’s capital city. Many inside and outside of India naturally wondered: Would the AAP achieve its goals? Could it effectively govern a city of 19 million people, and succeed in curtailing entrenched corruption? After all, the challenges are enormous, and the international track record of anticorruption parties is rather mixed.

The AAP’s journey wasn’t smooth, and its first few months in office were marked by significant infighting and a general perception of dysfunction. But the AAP managed to turn things around, and in the February 2020 elections, the AAP won handily, gaining a decisive majority for the next five years. The AAP’s success is partly due to its popular policies on things like increasing spending on education and reducing the cost of electricity and water. But the AAP also succeeded in the polls because it followed through on its anticorruption agenda. Although it’s always hard to gauge the success of anticorruption efforts, there are two major pieces of evidence that indicate that the AAP really has taken major steps to clean up politics: 

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The Brazilian Courts’ Indefensible Double Standard: The Disparate Treatment of Harmless Procedural Errors in Corruption and Non-Corruption Cases

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Before Brazil’s so-called Lava Jato (“Car Wash”) Operation, almost every attempt to prosecute high-level corruption in Brazil failed. Many cases were never investigated or prosecuted, but even in those cases where prosecutors started investigations, identified crimes, and brought charges, appeals courts ended up nullifying the proceedings, often before trial, on technical grounds for failure to comply with procedural rules (see, for example, here, here, here, and here). The result was a culture of impunity, in which grand corruption thrived. The Lava Jato Operation has been hailed as a historic breakthrough not only because of the breadth of the corruption it uncovered, but also because the convictions secured by prosecutors had, by and large, been affirmed on appeal. Unfortunately, there are troubling signs that the Brazilian judiciary is reverting to its old ways. Last October, for example, the Brazilian Supreme Court issued a procedural ruling  concerning the sequence of closing arguments that the Court held required the nullification of two Lava Jato convictions (so far), and may end up doing more widespread damage. The larger issue here, though, is the double-standard that Brazilian appellate courts seem to have embraced: adopting an (excessively) stringent and unforgiving view of even minor technical procedural noncompliance in corruption cases involving elite defendants, while at the same time relying (properly) on “harmless error” doctrines to excuse similar sorts of procedural noncompliance in cases involving other sorts of crimes, such as drug trafficking. Continue reading →

Recovering Damages for Mozambican Victims of the Hidden Debt Scandal: Possible Suits in the United Kingdom

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A recent post explained that Mozambicans harmed by the corruption behind the “hidden debt” scandal may well be able to sue the perpetrators for damages in the courts of many nations.  Mozambique, where the harm was suffered, and most probably France, Lebanon, Russia, Switzerland, the United Arab Emirates, and the United Kingdom, countries where one or more of the alleged perpetrators is located or does business.  The legal basis would be article 35 of the United Nations Convention Against Corruption.  It requires convention parties to open their courts to actions by corruption victims against “those responsible” for the corruption “in order to obtain compensation.”

The U.N. Office of Drugs and Crimes reports that all 187 parties accept the principle of compensation for corruption.  Suits for corruption damages are a relatively recent development, however, and in its latest review of the convention’s implementation, UNODC explains that establishing causation and proving damages remain to be elaborated through application of parties’ domestic law principles governing harm caused by intentional acts.  At the same time, it noted that in corruption damage cases article 35 mandates that these principles be interpreted broadly.  There need be no direct interaction between the perpetrators of corruption and the victim; nor is recovery limited to cases where the perpetrators foresaw the injury the victim would suffer.

In a just released paper, London barrister James Mather shows how English law would apply to claims Mozambicans brought for hidden debt damages in the United Kingdom. He opines that recovery could be had on the basis of an unlawful means conspiracy and perhaps too on the tort of bribery and dishonest assistance.  English law, he writes, incorporates the liberal principles of causation of damages enshrined in article 35. “The approach to the award of damages for conspiracy in particular is quite liberal in English law and extends to losses which cannot be strictly proved.”  English law also offers Mozambican claimants a procedural advantage.  Rather than each person having to file a separate suit, a group action could be filed with a single claimant suing on behalf of all those who suffered a similar injury.

Mather, a distinguished member of Serle Court in London, cautions that while based on what has been reported it would appear Mozambicans injured by the hidden debt scandal could recover damages in the United Kingdom, much factual research is required to be sure. His paper is an important step forward in seeing that those who suffered enormous harm thanks to the corruption behind the hidden debt scandal are made whole by the perpetrators.  Click on Mather paper to download a copy of his first-rate analysis.

Are Financial Declaration Systems Creating Opportunities for Corrupt Extortion?

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One of the most popular reform measures for combating public corruption is the establishment or strengthening of requirements that public officials regularly file declarations of assets and income sources. Mandatory financial disclosure rules are not exclusively about fighting corruption, of course, but anticorruption is certainly one of their principal justifications. Requiring public officials to formally submit and update income and asset declarations, and attaching meaningful penalties for false or misleading declarations, is thought to help suppress corruption in at least three ways:

  • First, identifying assets and income sources makes it easier to identify, and hopefully to avoid, conflicts of interest.
  • Second, public officials who report suspicious asset growth during their time in office might attract unwanted scrutiny from law enforcement investigators—and also, if the declarations are public, from journalists and activists. Submitting false reports or finding clever ways to hide assets are of course possible, but are costly and risky.
  • Third, precisely because corrupt public officials will often lie on their financial declarations in order to avoid scrutiny, these mandatory disclosure laws can sometimes provide the hook to hold corrupt officials legally or politically accountable even when it is impossible to prove the underlying corruption. We might not be able to nail the corrupt official for bribe-taking or embezzlement, but if we can show that he owns substantial undeclared assets, we can still nail him for lying on his financial declarations.

There are important ongoing debates about the appropriate design of financial disclosure systems, including questions about whether the disclosures should be public or kept confidential, who should be required to submit disclosures (and how often), what sort of information should be required (and at what level of detail), whether and how declarations should be independently verified, the appropriate institution to manage the system, and the appropriate penalties for noncompliance (see also here). And the efficacy of mandatory financial disclosures in reducing corruption is still unsettled (see here, here, here, here, and here). Nevertheless, the basic anticorruption case for some form of mandatory financial disclosure system seems strong. Both domestic anticorruption activists and the international community therefore regularly push for the creation of such systems where they do not already exist, as well as for the strengthening and expansion of existing systems.

While acknowledging the uncertainties and complexities of the issue, I find the basic case for some form of (strong) mandatory financial declaration system persuasive. That said, I’ve recently had some interesting conversations with a couple of experts who have highlighted a potential problem that I confess I hadn’t previously thought about or seen discussed in the published literature: In countries where corruption is widespread and institutional checks are weak, the government agents who administer the financial disclosure system could abuse their power to extort bribes from the public officials who are subject to the declaration requirements. Continue reading →