Category Archives: Commentary

Too Many Cooks in the Kitchen? Why Commodity Futures Trading Commission’s New Anticorruption Enforcement is Not Superfluous

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In March 2019, the Commodity Futures Trading Commission (CFTC)—the US federal regulator of commodity markets—issued a new Enforcement Advisory concerning foreign bribery in the commodities sector. According to the Advisory, the CFTC will presumptively decline to pursue civil monetary penalties against parties that timely and voluntarily self-report acts of foreign corruption that would otherwise violate the Commodities Exchange Act (CEA), so long as the self-reporting party fully cooperates, provides appropriate remediation, and there are no other aggregating factors. Of course, this Advisory implies that when these conditions are not satisfied, the CFTC will seek to impose sanctions in foreign bribery cases. And indeed, only a couple of months after the Advisory was published, the CFTC informed Glencore, a Swiss mining and trading company, that it was being investigated for corrupt practices that violated the CEA. The CFTC’s new Advisory and the Glencore investigation are a wakeup call for all market participants, especially broker-dealers and future commission merchants, that the CFTC is serious about cracking down on foreign corruption in the commodity trading sector.

This is notable because typically we think of the US addressing foreign bribery through the Foreign Corrupt Practices Act (FCPA), which is enforced by the Department of Justice (DOJ) and the Securities and Exchange Commission (SEC). Yet while bribing foreign officials would indeed violate the FCPA, such conduct could also amount to violations of the CEA or its implementing regulations whenever commodity prices in the US are affected by the foreign corrupt practices: in such cases, the bribery could qualify as a form of prohibited fraud, false reporting, or market manipulation. For example, a commodities trader could violate CFTC regulations if it uses bribes to secure swaps or derivative contracts. Likewise, a company that paid bribes to foreign officials for purposes of monopolizing crude oil production in order to increase the commodity price and manipulate benchmarks for related derivative contracts would be in violation of the CEA’s anti-manipulation provision. The possibility of CFTC enforcement raises concerns about “piling on,” with duplicative penalties levied by separate US agencies for the same underlying conduct, but to address that concern CFTC Enforcement Director James McDonald has emphasized that the CFTC would “will give dollar-for-dollar credit for disgorgement or restitution payments in connection with other related actions.”

Of course, that only raises another question: Why not just leave the foreign bribery problem to the DOJ and SEC to address through FCPA enforcement actions? Does CFTC enforcement in the foreign bribery context really add any value? The answer to that latter question is likely yes, for at least two reasons:

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The Biggest Beneficiary of the Lava Jato Leaks Is Jair Bolsonaro

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As most GAB readers are likely aware, one of the biggest stories in the anticorruption world in the last couple of months has involved the disclosure of private text messages by Brazilian officials involved in the so-called Lava Jato (Car Wash) Operation. Lava Jato, which has been in progress for five years, is one of the largest anticorruption operations ever, not just in Brazil but worldwide. The operation has secured the convictions of scores of high-level Brazilian political and business leaders once thought to be untouchable, including former President Lula of the Workers Party (PT). Lula’s conviction rendered him ineligible to run in the 2018 presidential election—which he likely would have won—and this factor, many believe, helped far-right candidate Jair Bolsonaro win the presidency. The prosecution of Lula, and a number of other PT figures, triggered accusations, mainly from PT supporters and others on the political left, that the Lava Jato Operation was a politically motivated conspiracy against Lula and the PT. That view had not been taken very seriously by Brazilian or international experts outside of a relatively small circle of left-wing activists, though when Judge Moro, who had presided over most of the Lava Jato cases, including Lula’s, accepted a position in Bolsonaro’s cabinet, it certainly fed into that narrative.

Then, last month, The Intercept published a series of stories based on leaked/hacked/stolen private text messages among the prosecutors on the Lava Jato Task Force, and between Task Force prosecutors and then-Judge Moro. According to The Intercept and others reporting on this these revelations (dubbed “VazaJato” on social media), the disclosed texts corroborate the longstanding PT narrative that the Lava Jato prosecutors and Judge Moro were ideologically biased against the PT, especially Lula, and that Lula was denied a fair trial as a result. The Intercept described its own reporting as “explosive,” and while one might quibble with the lack of humility (guys, it’s generally better form to let other people praise the importance of your work), the characterization is accurate. Now, I think the evidence of misconduct is less clear than The Intercept and other commentators have suggested (see a useful debate on the legal and ethical issues here), and I find the claims of ideological bias especially flimsy (see here and here). But there’s no doubt that the revelations have tarnished Judge Moro’s reputation, and have also damaged the credibility of the Lava Jato Task Force prosecutors (though unfairly and excessively so, in my view).

Who has benefited from these stories? The conventional wisdom seems to be that the VazaJato stories hurt not only Sergio Moro, but also the Bolsonaro administration—both because Moro is a senior figure in that administration, and because the VazaJato stories imply, or state outright, that Bolsonaro’s election was illegitimate due to the fact that the strongest alternative candidate was barred, on trumped up charges, from running. And the biggest beneficiaries of the VazaJato stories, the conventional view maintains, are Brazil’s left-wing parties (the PT and its allies), mainly because the VazaJato stories show (allegedly) that the PT activists were right all along when they claimed a right-wing conspiracy against Lula. That view is plausible, and seems widely shared (not least by The Intercept’s reporters and editors, who makes no pretense of journalistic neutrality). But I think it’s wrong.

Indeed, I worry that the biggest beneficiary of VazaJato may be President Bolsonaro, and the biggest loser may be the Brazilian left. I say “worry” because I view Bolsonaro as a dangerous bigot and wanna-be authoritarian, one who is also likely to worsen Brazil’s corruption problem. But my personal political views are not really important for present purposes—I mention them in the interests of full disclosure (much as I have been careful, in previous posts, to disclose my cordial professional relationship with Lava Jato Task Force lead prosecutor Deltan Dallagnol). Rather, my goal here is to explain why I think the VazaJato leaks, and the narrative they have helped to amplify, are likely to help Bolsonaro, while hurting the Brazilian left. There are four reasons for this perhaps counter-intuitive conclusion: Continue reading →

Can Political Opposition Decrease Corruption? Evidence from Brazilian Municipal Governments

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The idea that checks and balances in the government—such as legislative oversight of the executive branch—can reduce corruption is intuitive, but quantitative empirical evidence for or against this hypothesis is relatively scant. Moreover, the effect of a separation of powers on the extent of corruption may depend on whether the same political party or faction controls both branches of government, or whether different factions control the legislature and the executive. Indeed, some legal scholars have argued that the true separation of powers is not between branches of government, but rather the political parties in the government, and that the traditional view of the separation of powers—ambition counteracting ambition—only works if different branches are controlled by different political parties. But the likely effect of such partisan separation on corruption is not entirely clear: If the legislature is controlled by a party or coalition opposed to the party that controls the executive branch, this could mean increased legislative oversight and lower corruption, but alternatively, increased opposition may simply drive the executive to bribe the opposition to go along with his or her agenda, leading to more corruption.

Carlos Varjão and I investigate this the question empirically in our recent working paper, “Political Opposition, Legislative Oversight, and the Performance of the Executive Branch.” We focus on municipal governments in Brazil, which are particularly suitable for this sort of study for a number of reasons: there are many municipalities with a similar overall government structure, there’s a wealth of data on various forms of corruption (mainly embezzlement, procurement fraud, and over-invoicing) from Brazil’s public audit reports, and there’s considerable variation in both the level of corruption and the political control of the branches of the municipal governments. Our findings are striking and unambiguous: increased representation of the political opposition in the local legislature is associated with more legislative oversight of the executive, less executive branch corruption, and better public service delivery. Continue reading →

Colombia’s Harsh Criminal Penalties for Corruption Are an Illusion. Here’s How To Fix That.

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Whenever a new corruption scandal comes to light, many politicians instinctively react with strong punitive rhetoric, and this rhetoric often translates into action, usually in the form of amendments to criminal codes that make penalties for corruption offenses harsher. Latin America supplies plenty of examples of this (see here, here, here, and here.) Yet despite this emphasis on punishment, many corrupt politicians avoid justice altogether, and in the rare cases where they are found guilty, many end up doing only short stints in comfortable detention centers. Consider, for example, Colombia, which has unusually good public data on corruption convictions and sentences thanks to the work by the Anticorruption Observatory of the Secretary for Transparency. According to this data, between 2008 and 2017, criminal courts in Colombia have convicted 2,178 individual defendants for corruption (51.2% for bribery, 23% for embezzlement, and the remainder for other corruption-related offenses), but only about one-quarter of these convicted defendants actually went to prison. Approximately half of these defendants received suspended sentences, while another quarter were sentenced to house arrest. And of those who did go to prison, the time served was only about 22 months on average, much lower than the penalties on the books for corruption offenses. No wonder many Colombians believe the criminal justice system is too lenient.

The reason that actual Colombian sentences end up being so light, despite the penalties on the books being so heavy, is that Colombian law includes a set of provisions that allow for a variety of sentence reductions if certain conditions are met. For example, a defendant who accepts guilt can receive a 50% reduction in his prison term. Inmates may also reduce their prison term through work, with very generous terms: An inmate reduces his sentence by one day for every two days of ordinary work (8 hours of work per day), or for every four hours of work as a teacher. An inmate can also reduce his sentence through in-prison education, with  six hours of study translating into one day of sentence reduction. Furthermore, once an inmate has served 60% of his sentence, he can petition for release for good behavior. 

This excessive leniency needs to be addressed, not only in corruption cases but in all cases. Specifically, Colombia should adopt the following revisions to its criminal laws: Continue reading →

What Was the Holdup on the Walmart FCPA Settlement? Some Wild Guesses

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Most Foreign Corrupt Practices Act (FCPA) cases don’t attract much attention outside of a relatively small circle of lawyers, compliance specialists, anticorruption activists, and other FCPA nerds. But every once in a while a case comes along that gets a bit more attention from the mainstream media, or at least from the general business press. The Walmart case is one such example. The greater attention to that case is probably due to some combination of the Pulitzer Prize winning New York Times reporting on bribes allegedly paid by Walmart’s Mexican subsidiaries—allegations that helped get this case rolling—as well as the fact that the retail giant is more of a household name than, say, Alcatel or Och-Ziff.

As most readers of this blog (a group in which I imagine FCPA nerds are overrepresented) are likely aware, the Walmart case finally settled in late June, with the total monetary penalties coming to about $283 million. I already did a bunch of blog posts on the Walmart case while it was in process—including, perhaps most relevant now, a piece two years ago reflecting on what lessons we might learn if the case settled for somewhere in the neighborhood of about $300 million, which several news outlets had declared was about to happen. And since the announcement of the settlement this past June 20, there’s been no shortage of commentary on the case in the FCPA blogosphere (see, for example, here, here, here, and here). So I don’t have too much to add to the discussion.

I did, however, want to address one relatively small but intriguing puzzle. As I just mentioned, back in May 2017, news outlets reported that the Walmart case was on the verge of settling, for somewhere in the vicinity of $300 million. Over two years later, in June 2019, the Walmart case settled… for an amount very close to $300 million. So, what was the holdup? If the parties had basically worked out the amount that Walmart was going to have to pay back in May 2017, why did it take another two years to finalize the settlement? Neither side has an obvious incentive to delay: Walmart would like to put this behind it and stop paying its expensive lawyers, and the DOJ and SEC’s respective FCPA units have limited staff and a ton to do, and would also like to get the case over and done with. It’s possible that the delay was due to haggling over the exact penalty amount, or that Walmart thought maybe it could get a better deal from the Trump Administration and so decided to hold out, or perhaps there was some last-minute development that one side or the other thought might justify substantial shift in the settlement amount, even if in the end it didn’t. But I would guess (and it really is just a guess) that the two-year delay was due to one or both of the following two factors: Continue reading →

No More Mozambiques! No More Hidden Debts!

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Surely the most egregious corruption offense of the decade is Mozambique’s “hidden debt” scandal.  According to a January U.S. indictment, executives of the Lebanese shipbuilding company Privinvest and Swiss banking giant Credit Suisse paid senior Mozambican officials tens of millions of dollars to approve loans to finance a coastal protection service, a tuna fishing fleet, and a shipyard to maintain the vessels.  The scam produced little more than a cluster of overpriced boats rusting in the Maputo harbor while saddling the citizens of one of the world’s poorest countries with billions in debts they cannot repay.

The key to the scam was the debts were incurred without the executive telling auditors, the parliament, or citizens.  As Mozambique’s Constitutional Court recently affirmed,  Mozambique law requires the disclosure and parliamentary approval of government debt.  Part of the bribe allegedly went to ensuring then Minister of Finance Manuel Chang and his accomplices would keep the debts secret. It will take years to repair the damage done by these hidden debts.  Full recovery may never be realized.

One scandal is enough.  The international community must make ending “irresponsible lending” a priority.  At a July conference the Open Society Initiative for Southern Africa held in Johannesburg, I was on a panel that discussed what can be done to end hidden debts.  While the other members, all from borrowing countries, offered measures borrowers could take, I advanced five that financial regulators in the countries where private lenders are located should take.  Largely stolen from a paper by Tim Jones of Debt Jubilee Campaign and a forthcoming Illinois Law Journal article co-authored by Fordham Law Professor Susan Block-Lieb and University of North Carolina Law Professor W. Mark C. Weidemaier, they follow.  Comments welcome. Continue reading →

Where Should U.S. State Governments Put Their Anticorruption Agencies?

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As other contributors on this blog have argued, U.S. states should assume a greater role in investigating and prosecuting corruption crimes, rather than leaving anticorruption enforcement efforts entirely to the federal government. But the call for a greater state role in anticorruption naturally invites a follow-up question: which office or unit within the state government should have principal responsibility for anticorruption? For starters, should the state have a specialized unit dedicated to investigating or prosecuting corruption crimes? And if so, where within the state government should that unit be located?

There are a range of potential answers to these questions. A 50-state survey from the Center for the Advancement of Public Integrity (CAPI) finds that although the vast majority of states have some kind of anticorruption commission, roughly half have no specialized anticorruption unit dedicated to investigating or prosecuting corruption crimes. States that do have such units house them in one of three places: (1) the state attorney general’s office, (2) local prosecutors’ offices, or (3) the state police.

State Unit Dedicated to Prosecuting Corruption?

Source: Center for the Advancement of Public Integrity at Columbia Law School

Having a specialized unit to prosecute corruption promotes the development of the expertise critical to successfully prosecuting corruption cases. Maintaining specialized anticorruption units also ensures resources are dedicated specifically to combating corruption, fosters norms of (and a reputation for) impartiality, and enhances deterrence by increasing officials’ perception that they’ll get caught if they do something wrong. But where a specialized anticorruption unit is located within state government affects the degree to which these benefits will be realized. In this respect, the three models of current state practice, as discussed in the CAPI survey and illustrated in the above map, differ along two dimensions: (1) the level of government (state or local); and (2) the nature of the law enforcement agency (prosecutors or police). An examination of both dimensions indicates that state-level prosecutors—state attorneys general—are best-equipped to house specialized anticorruption units.

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The OECD Anti-Bribery Convention Should Ensure a Fair Distribution of Settlement Recoveries

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In December 2016, the United States, Brazil, and Switzerland announced that they had concluded plea agreements with the Brazilian construction firm Odebrecht and its affiliate Braskem, in which the companies admitted their culpability in extensive bribery schemes involving upwards of US$800 million in bribes paid in a dozen countries—mainly though not exclusively in Latin America—and agreed to pay approximately US$3.5 billion in penalties to the US, Brazilian, and Swiss authorities. But with the exception of Brazil, none of the countries where the bribes were actually paid were entitled to receive any compensation under these plea agreements.

In fairness, the plea agreement with Odebrecht did require the company to cooperate with foreign law enforcement and regulatory agencies in any future investigation into related misconduct by Odebrecht or any of its current or former officers, directors, employers, or affiliates. The plea agreement further required Odebrecht to truthfully disclose all non-privileged factual information, and to make available its officers, employees, and affiliates, to foreign law enforcement authorities. Additionally, under the terms of the plea deal Odebrecht consented to US federal authorities sharing with foreign governments all documents and records that the company had provided to the US authorities in the course of the investigation into Odebrecht’s violation of US law. 

These well-intentioned provisions seem to have been included specifically to ensure that enforcement agencies of other countries could pursue their own actions against Odebrecht and its officers. But the plea agreements did not create a formal mechanism that enables foreign enforcement agencies to ask the DOJ, Swiss authorities, or Brazil to impose sanctions for breach of these conditions. If Odebrecht fails to fully cooperate with foreign enforcement agencies, that foreign government’s only recourse would be to try to convince (presumably through informal channels) the US, Brazilian, or Swiss authorities to sanction Odebrecht for breaching the plea agreement. But it’s unlikely that those governments will have much appetite for assessing these claims of non-cooperation. Furthermore, even if other countries do bring their own cases, the penalties imposed by the US, Switzerland, and Brazil were so high that Odebrecht simply doesn’t have the money to pay sufficient fines to other countries, at least in the short run.

The Odebrecht case may be unusual in its size, but it is not unique. It is therefore useful to reflect on whether the international community should adopt new mechanisms governing how the fines or reparations recovered in settlements of cross-border bribery cases are distributed, in order to ensure proportionality and fairness, particularly to victim nations. The most promising way forward would be to amend the OECD Anti-Bribery Convention.The Convention already requires (in Article 4) that Convention parties shall consult with each other to determine which is the most appropriate jurisdiction for prosecution, and also requires (in Article 9) that Convention parties provide, to the fullest extent possible, “prompt and effective legal assistance” to any other Convention party concerning investigations and proceedings within the scope of the Convention. But the Convention does not explicitly address other forms of cooperation, such as ensuring fairness in the distribution of monetary recoveries. The Convention should be amended to include additional language that covers this topic, as follows: Continue reading →

The Stream of Benefits Theory of Bribery Doesn’t Criminalize Ordinary Politics

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Bribery of a public official can take one of at least two forms. In the most straightforward case, a public official accepts a one-off bribe in exchange for a particular official act. This kind of one-to-one exchange is illustrated by a recent case out of Puerto Rico, in which a territorial senator agreed to a direct trade: he would support legislation favorable to a local businessman’s security company, and in return he would receive an all-expenses-paid trip to Las Vegas. Things aren’t always so neat, however. Sometimes bribery involves a series of gifts to a public official in exchange for a series of official acts, and seldom do these gifts and official acts line up in a one-to-one fashion. An example of this kind of bribery can be seen in a recent case out of Texas, where, over an extended period of time, a local developer provided a town mayor cash, home renovations, hotel stays, airline upgrades, and even employment, and the mayor repeatedly voted for zoning changes that ultimately allowed a developer to build apartments.

Anticorruption officials in the United States prosecute the latter form of bribery under a “stream of benefits” theory of liability. Rather than requiring prosecutors to demonstrate tit-for-tat trades—in which a specific “thing of value” is offered or exchanged for a specific official act—under the stream of benefits theory unlawful bribery has also occurred when the prosecution can show a “course of conduct of favors and gifts flowing to a public official in exchange for a pattern of official actions favorable to the donor.” Some courts and commentators have described the idea as the briber regularly paying the public official to keep her “on retainer” with the expectation that she will help the briber out as opportunities arise. The stream of benefits theory recognizes that most bribes aren’t one-off trades of a thing of value for a particular official act. Instead, bribery often takes place in the context of a long-term, multifaceted relationship where there’s a general understanding along the lines of “I’ll scratch your back if you scratch mine.” Where gifts flow regularly to the official and the official occasionally acts for the benefit of the gift-giver, it would be difficult for prosecutors to prove that any particular gift instigated a particular official act. But as then-Judge Sonia Sotomayor once reasoned: “[A] reading of the [bribery] statute that excluded such schemes would legalize some of the most pervasive and entrenched corruption, and cannot be what Congress intended.” Accordingly, the stream of benefits theory has been approved by every federal circuit court that has ruled on the issue.

Yet despite the stream of benefits theory’s intuitive appeal, it has recently come under attack. Most prominently, a federal judge threatened to derail the trial of U.S. Senator Robert Menendez before it began by questioning the theory’s continued validity in light of the U.S. Supreme Court’s 2015 decision in the McDonnell case (which, as explained in more detail below, adopted a strict interpretation of what constitutes an “official act” under the U.S. bribery statute). Although the judge in the Menendez case ultimately determined that the stream of benefits theory was still good law, many commentators aren’t so sure. The Cato Institute, for one, speculates that McDonnell’s strict reading of the bribery statute requires the identification of a specific official act to be performed, rather than accepting as adequate the promise of future, undefined official acts in the briber’s favor. Others, like Professor Randall Eliason, argue that the Supreme Court already (albeit implicitly) rejected the stream of benefits theory on those grounds in a 1999 case called Sun-Diamond.

These attacks reflect a broader policy concern: fear that overly broad bribery statutes criminalize ordinary politics. Professor Albert Alschuler, for instance, asserts that the “principal danger” with the stream of benefits theory is that it “invites slippage” from a “quid pro quo requirement” to a “favoritism” standard. Favoritism, he argues, is endemic in politics––a politician will naturally favor allies and stakeholders who have supported him politically (and financially). Criminalizing favoritism is akin to criminalizing innocent political conduct, which, in turn, has far-reaching secondary effects, such as deterring good people from government service and giving prosecutors too much power to enforce the law selectively. The Supreme Court’s decision in McDonnell, though technically on a different issue, also expressed worries about how a “boundless interpretation of the federal bribery statute” could wind up criminalizing ordinary politics.

These fears are overblown. As other commentators have persuasively argued, the stream of benefits theory remains viable, and has not been expressly or implicitly repudiated by the Supreme Court in McDonnell, Sun-Diamond, or elsewhere. (See, for example, here and, on this blog, here.) I agree, but my main argument here concerns the detractors’ underlying policy concern. Put simply: the stream of benefits theory doesn’t criminalize ordinary politics.

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Returning Stolen Assets to Kazakhstan: Did the World Bank Flub It?

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In 2012, Kazakhstan and Switzerland agreed to return $48.8 million that Switzerland had confiscated in a money-laundering case involving Kazakh nationals. This is the second time Switzerland has returned stolen assets to Kazakhstan. In the first, out of a fear the funds might be stolen again, the two had created an independent foundation with stringent oversight mechanisms to administer the money (details here).  This time the two decided to rely on the World Bank alone to see that returned funds were not misused.

One of the projects being funded is a $12 million grant program to instill a public service ethic in the nation’s youth, and a consortium of Kazakh NGOs has been selected to manage it. Although the consortium only recently began making grants, questions about the integrity of the grant-making process are already being raised.  In February, the Corruption and Human Rights Initiative identified several apparent irregularities. Among them: 1) The consortium’s lead NGO is headed by Dariga Nazerbayev, at the time of the award to the consortium she was the daughter of the country’s president and is now Speaker of the Kazakh Senate; 2) The youth wing of the ruling party was awarded a grant for “awareness-raising activities among vulnerable youth groups” across the country in seeming violation of the ban in the World Bank’s charter on political activities; 3) numerous grants have been awarded for an amount just under that which would trigger World Bank review; and 4) program managers have coached grant applicants on how to circumvent Bank procurement rules.

A full report on the irregularities is here. At the request of the Swiss government, the World Bank is said to be investigating.