Category Archives: Commentary

Who’s at the Wheel of China’s Anticorruption Drive?

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Since China’s anticorruption drive kicked off five years ago, it has had a tremendous impact on the country’s politics. The Central Commission for Discipline Inspection (CCDI), until recently led by President Xi Jinping’s close ally Wang Qishan, has targeted officials both high and low—so-called tigers and flies. According to the CCDI’s own data, more than 70,000 officials at or above the level of county head have been investigated, and close to two million officials have been punished in some way. The drive has also ensnared a few senior figures who, during their days of freedom, where among the most powerful men in China, including Zhou Yongkang and Bo Xilai. The CCDI’s power does not stop even at China’s borders: According to official statistics, by the end of August 2017, over three thousand fugitives had been repatriated from more than 90 countries.

But the drive is now shifting gears. Last October, in his speech opening the Chinese Communist Party’s (CCP) 19th Party Congress, President Xi laid out plans to “deepen reform of the national supervisory system” and establish a new body, the National Supervisory Commission (NSC), to spearhead anticorruption efforts. The NSC is expected to consolidate and institutionalize the hitherto campaign-style anticorruption efforts of the CCDI. (While the exact structure of the NSC is still unknown, it will be based on lessons learned from pilot projects – the so-called Provincial Supervisory Commissions (PSCs) established in the city of Beijing, as well as Shanxi and Zhejiang provinces.) The new anticorruption system outlined by President Xi for the national level is likely to have four major effects: Continue reading →

A Dangerous Retreat from Anticorruption Aid

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The US government’s drive to cut foreign aid in favor of increased military spending is shortsighted, even if one focuses only on national security objectives. This is especially true for aid devoted to supporting anticorruption efforts, which can act as a powerful tool for improving regional stability without direct, overbearing involvement in a region. The past decade has shown how difficult on-the-ground involvement can be, and anticorruption-focused aid can help secure dangerous regions and allow the US to withdraw some of it physical presence abroad.

One striking example of the danger that corruption poses to security and stability can be seen in the context of land use and land rights. When corrupt officials deprive people of their land, destroying both their livelihoods and often their local communities in one move, they may push those affected into a situation where violence may seem like the only option. For example, recent land seizures in the Kurdistan Region of Iraq—with Kurdish members of the community either relying on tribal connections or direct bribery to convince local judges to push through illegal land transfers—have caused an outcry among the primarily Christian and Yazidi victims and partially contributed to the formation of religious minority militia units that now threaten to create more violence if they cannot return to their seized homelands. Similar pairings of violence following land seizures were also found in Zimbabwe in the early 2000s. And in Afghanistan, corrupt land seizures have been a consistent issue throughout the past decade. This danger remains a concern not just for those affected, but for the international community, as violent movements can lead to destabilization. Continue reading →

A New BOSS in Town: Changes to BVI Beneficial Owner Information Regime

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As the British Virgin Islands (BVI) continue to recover from the devastation of Hurricane Irma, attention is properly focused on humanitarian relief and the repair of the BVI’s physical infrastructure. But there have also been important recent developments associated with the BVI’s legal infrastructure—changes designed to address the BVI’s reputation as one of the world’s premier tax havens, and as a popular destination for money laundered by corrupt public officials, organized crime networks, and others.

Thanks in part by a campaign by former UK Prime Minister David Cameron to remove the “cloak of secrecy” from Britain’s offshore territories, and in part to the embarrassing publication of the Panama Papers, the BVI recently enacted a new Beneficial Ownership Secure Search System (BOSS) Act, which went into effect last June.

The BOSS Act is the latest in a series of steps designed to clean up the BVI’s image. Previous moves have included signing an intergovernmental agreement with the United States on Foreign Account Tax Compliance and becoming a signatory to the OECD’s Common Reporting Standard for the automatic exchange of tax and financial information. In 2016, the BVI changed the law to make it mandatory – for the first time – for companies to report their lists of directors to the government. Overall, it’s not yet clear whether these moves have had any effect on the island’s offshore economy. Indeed, the BVI’s interest in preserving its status as a center of the world’s offshore economy has prevented more drastic steps and weakened those that have been taken. (The 2016 law changes, for instance, did not require the reporting of ownership stakes.) Half-measures are unsurprising given the centrality of secrecy to the BVI’s economic success – after all, you can’t expect turkeys to vote for Thanksgiving. While the BVI points out in its defense that its level of transparency is no worse than that of other UK offshore territories, and is in fact better than that of some US states, the fact remains that most of the BVI’s legal reforms have weighed business interests in secrecy more heavily than public interests in transparency.

The BOSS Act unfortunately seems to suffer from the same problem, though it is a step in the right direction. Continue reading →

Enlisting the Private Sector in the Fight Against Corruption — Part 1

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Governments need all the help they can get in the war against corruption.  The enemy is resourceful, well-financed, and will engage in tactics legal and illegal to frustrate an investigation, defeat a prosecution, or undermine prevention policies.  When looking for allies, though, many governments have until recently ignored an obvious source of recruits: the corporations they license to do business.  Doing business in a country is not a right but a privilege, one commonly conditioned on a corporation’s agreement to register, hold an annual meeting, and publish a yearly financial report.  There is no reason, however, why the privilege of conducting business should not also be conditioned on the corporation’s willingness to join the fight against corruption.

As the chart below shows, more and more governments now realize the advantages of enlisting the corporate sector in the fight against corruption.  By my count (additions/corrections welcome) today 21 countries plus the Canadian province of Quebec require corporations to help in someway in the fight against corruption.  The movement to enlist the private sector is picking up steam.  Of the 22 jurisdictions shown below, 15, or almost three-quarters, have enacted legislation in 2016 and 2017.  Argentina is the most recent additon, where a law was approved November 9, and if press reports are accurate Vietnam is about to become the 23rd.

Country Date Country Date Country Date
Argentina 2017 Colombia 2016 Germany 2010
France 2017 Czech Rep 2016 U.K. 2010
Malaysia 2017 South Korea 2016 Chile 2009
Mexico 2017 Spain 2015 Switzerland 2005
Peru 2017 Brazil 2014 Tanzania 2005
Thailand 2017 Russia 2013 U.S. 2004
Ukraine 2017 Quebec 2012 Italy 2001
South Africa 2012

The approaches vary.  In a later post I will discuss the differences and also flag some of the ways these laws can be abused.   In the meantime, I again solicit readers help in ensuring the chart is accurate.

 

Fixing India’s Anti-Money Laundering Regime

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In the past year, India has been among the most zealous countries in the world in stepping up the fight against money laundering and related economic and security issues. The effort that probably got the most attention was last year’s surprise “demonetization” policy (discussed by Harmann in last week’s post), which aimed to remove around 85% of the total currency in circulation. But to assess India’s overall anti-money laundering (AML) regime, it’s more important to focus on the basic legal framework in place.

The most important legal instrument in India’s AML regime is the Prevention of Money Laundering Act, which was enacted in 2002, entered into force in 2005, and has been substantially amended since then. The Act defines a set of money laundering offenses, enforced by the Enforcement Directorate (India’s principal AML agency), and also imposes a range of reporting requirements on various institutions. Furthermore, the law gives the Enforcement Directorate the authority to freeze “tainted assets” (those suspected of being the proceeds of listed predicate offenses), and to ultimately seize those assets following the conviction of the defendant for the underlying offense.

How effective has India been in its stepped-up fight against money laundering? On the one hand, over the past year (since the demonetization policy was announced), banks logged an unprecedented increase of 706% in the number of suspicious transaction reports (STRs) filed, and reports from last July indicated that the total value of the assets frozen under the Prevention of Money Laundering Act in the preceding 15 months may have exceeded the cumulative total of all assets frozen in the prior decade-plus of the law’s operation. And the government further reported that its crackdown on shell companies had discovered around $1.1 billion of unreported assets.

Yet these encouraging numbers mask a number of serious problems with India’s AML system, problems that can and should be addressed in order to build on the momentum built up over the past year. Here let me highlight two areas where greater reform is needed: Continue reading →

Compensating Victims of Corruption

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That corruption is not a victimless crime is no longer in doubt.  The once fashionable argument that corruption advances human welfare by “greasing the wheels” of clunky bureaucracies has been entombed thanks to a plethora of academic studies, media reports, and first-person accounts showing the undeniable, often enormous, harm corruption wreaks on individuals and society as a whole.  As UN Secretary General António Guterres told this week’s seventh meeting of the parties to the UN Convention Against Corruption, that harm ranges from denying citizens access to such basic rights as “health services, schools and economic opportunities” to undermining the very foundation of the state through enabling “a small elite in positions of power to prosper” thus destroying citizens’ “faith in good governance.”

While the damage corruption does is now clear, how to recompense the losses it causes is anything but.  The definitive legal text, the UN Convention Against Corruption, offers little help.  To be sure, article 35 requires state parties to give those “who have suffered damage as a result of an act of corruption … the right to initiate legal proceedings against those responsible … to obtain compensation and article 57 directs governments that have recovered the proceeds of corrupt acts to give priority to “compensating the victims of the crime.” Nowhere, however, does the convention offers any guidance on how to determine who is a victim of corruption or how their damages should be determined.  As a result, both international and domestic law on victim compensation will have to develop through court decisions, learned commentary, and legislation.

An important step in developing this law is the paper the UNCAC Coalition, a network of some 350 civil society groups from over 100 countries, submitted to this week’s meeting of UNCAC state parties.  “Recovery of Damages and Compensation for Victims of Corruption” draws on international law and emerging law and practice in both developed and developing states to guide the creation of laws governing corruption victim compensation.   The Coalition urges governments to: Continue reading →

US Anticorruption Policy in a Trump Administration Revisited: An Evaluation of Last Year’s Doom-and-Gloom Predictions

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Almost exactly one year ago, the day after the U.S. presidential election, I published a deeply pessimistic post about the likely future of U.S. anticorruption policy under a Trump presidency. As I acknowledged at the time, “the consequences of a Trump presidency are potentially so dire for such a broad range of issues–from health care to climate change to national security to immigration to the preservation of the fundamental ideals of the United States as an open and tolerant constitutional democracy–that even thinking about the implications of a Trump presidency for something as narrow and specific as anticorruption policy seems almost comically trivial.” That statement is, alas, still true. But what about the impact on anticorruption specifically? In my post last year, I made a bunch of predictions about the likely impact of a Trump presidency on corruption, anticorruption, and related issues. What did I get right and where did I go wrong?

This may seem a bit self-indulgent, but I think it’s often useful to go back and assess one’s own forecasts, not only in the interests of accountability and self-criticism, but also because examining where we got things right and, more importantly, where we went wrong can help us do a better job in the future. Of course, one difficulty in assessing my own predictions is that many of them concerned longer-term effects that we can’t really assess after one year (really 9+ months). And in some cases the predictions concern things that it’s hard to assess objectively. But it’s still a useful exercise. So, here goes: Continue reading →

India’s Demonetization One Year Later: A Failed Tool to Combat Corruption

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One year ago, in an unscheduled live televised address, India’s Prime Minister Narendra Modi announced that within weeks the ₹500 and ₹1000 banknotes would become worthless. Prime Minister Modi framed this so-called “demonetization” policy as part of the battle against corruption and illicitly-obtained “black money,” which had “spread their tentacles” through the India economy. The Prime Minister identified two ways that demonetization would combat corruption. First, the surprise devaluing of currency would leave criminals, including corrupt officials, with millions of rupees’ worth of currency that would suddenly become worthless, and those holding large stashes of black money would be unwilling or unable to exchange it without having to explain where the money came from. Second, going forward, demonetization would make it more difficult to hold, transport, or exchange large quantities of cash (particularly since the Indian government was demonetizing the two largest notes in circulation); as the Prime Minister emphasized, “[t]he magnitude of cash in circulation is directly linked to the level of corruption.”

One year out, it is increasingly clear that India’s demonetization experiment imposed tremendous social and economic costs but failed to achieve either of these objectives (see here, here, and here). A closer examination of the reasons for this failure may help us understand both the potential and limits of demonetization as a tool to combat corruption and the underground economy.

Continue reading →

Fixing Everything But What’s Broken: Malaysia after the 1MDB Scandal

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The Malaysian 1MDB scandal sparked the largest investigation in the history of the U.S. Department of Justice Kleptocracy Asset Recovery Initiative and has revealed serious problems with Malaysia’s anticorruption infrastructure. The DOJ has filed civil forfeiture claims for $1.7 billion in assets obtained with funds diverted from 1MDB, a sovereign wealth fund ostensibly intended to promote economic development in Malaysia. The money ended up in a stunning variety of locations around the globe. Nearly $700 million found its way into the Malaysian Prime Minister’s personal bank accounts. His stepson’s production company suddenly had the funds needed to back the Hollywood movie The Wolf of Wall Street. A financier with close ties to the government bought an Australian model jewels worth $8.1 million.

Meanwhile, the Malaysian government insists there is nothing to see here. The newly-installed Malaysian Attorney General cleared Prime Minister Najib Razak of all wrongdoing and put a stop to the investigation by the independent Malaysian Anti-Corruption Commission (MACC). As an earlier post explained, the previous Attorney General, who headed an inter-agency task force investigating the 1MDB scandal, resigned under suspicious circumstances, and Najib appointed his replacement. Najib also replaced several cabinet members who had called for investigations into 1MDB. The breakdown of justice in the 1MDB scandal may seem all the more surprising to outside observers, since Malaysia had appeared to be making strides in addressing its corruption problem, and the MACC—which was founded in 2009 and modeled on Hong Kong’s Independent Commission Against Corruption—had received fairly good reviews (see here, here, and here).

In the wake of the 1MDB scandal, there have been a variety of proposals for improving Malaysia’s anticorruption efforts. Most of these proposals, especially those emanating from the government, involve a flurry of activity and the creation of new anticorruption institutions. For example, the government has recently proposed creating a new National Integrity and Good Governance Department. The Malaysian Bar has called for the establishment of an Independent Anti-Corruption Commission (IACC) to provide oversight for MACC. The MACC itself, despite its inaction on 1MDB, is ramping up other anticorruption campaigns. This all fits an unfortunate pattern in Malaysia: creating lots of new agencies or new structures, or undertaking other actions that make the government “look busy,” but that don’t actually get to the heart of the main problem: the lack of a politically independent anticorruption prosecutor.  Continue reading →

Governor Brown’s Missed Opportunity to Promote Political Transparency and Fight Trumpian Corruption

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Last month, Republicans announced their plan for a comprehensive overhaul of the United States federal tax code, the first in decades. In characteristic fashion, President Trump promised, “I don’t benefit. I don’t benefit.” To clarify his point, he added, “I think very, very strongly, there’s very little benefit for people of wealth.” Lest those statements left any doubt, Trump later claimed, “I’m doing the right thing and it’s not good for me, believe me.” Notwithstanding the President’s promises, a New York Times analysis found that Trump could save over a billion dollars if his plan were to be passed into law. Seemingly responding to this reality, Trump later amended his sales pitch by claiming that “everybody benefits” from tax reform.

Tax reform fits squarely into the third category of conflicts tracked by this blog: government regulatory and policy decisions that benefit Trump and his family businesses. Americans deserve to know how the President would personally stand to gain if his proposal became law. Yet the extent of Trump’s conflict of interest remains unknown, and unknowable, because of his widely-criticized refusal to release his tax returns.

Unfortunately, California Governor Jerry Brown squandered an opportunity to force Trump to shed some light on his personal finances when he vetoed the Presidential Tax Transparency and Accountability Act, which had passed both houses of the state legislature with overwhelming support. The Act would have required all aspiring Presidential candidates to provide their tax returns to the California Secretary of State (who would then publish them online) before the candidate’s name could appear on the California primary election ballot. In his veto message, Governor Brown explained that while he “recognize[d] the political attractiveness—even the merits—of getting President Trump’s tax returns,” he worried about the “political perils of individual states seeking to regulate presidential elections in this manner.” Brown identified two specific concerns about the bill: its constitutionality and the potential “slippery slope” it might create.

Brown’s arguments ring hollow. They seem particularly unjustified in a time in which state action is one of the few viable bulwarks against Trump’s corruption. Fortunately, other states, including Massachusetts and New York, are considering similar proposals. Those states can do better than California. Here’s why they should: Continue reading →