Category Archives: Commentary

Innovative or Ineffective?: Performance-Based Lending as an Anticorruption Tool

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The Sustainable Development Goals’ (SDGs) new focus on fighting corruption and building institutions has generated quite a stir (including on this blog – see here, here, here, and here). But the Millennium Challenge Corporation (MCC) – a U.S. agency responsible for disbursement of assistance geared toward international development targets – has long been acting against corruption through its effort to achieve the SDG precursors, the Millennium Development Goals (MDGs). Institution-building does not appear among the substantive aims of the eight MDGs. Rather, the MCC made anticorruption central to its work by introducing corruption indices into its process for competitive selection of aid recipients. In brief, the MCC Board of Directors chooses aid-eligible countries by evaluating and scoring candidates countries’ “policy performance” on a number of measures. Crucially, in order to qualify for aid, countries must score above average for their income group on the Worldwide Governance Indicators (WGI) “Control of Corruption” score. The indicator is therefore known as the “hard hurdle.” The Board also assesses corruption trends in its analysis of a country’s ability to reduce poverty and generate economic growth, which, with policy performance, comprises the overall evaluation.

This strategy is known as performance-based lending, and the MCC has employed it to award over $10 billion in grants to nearly 40 countries over the past 12 years. Is the MCC approach a good one? Many critics say no. I say yes. Although it is a strategy that is still evolving, performance-based lending—including the corruption control “hard hurdle”—is not only innovative and effective, but important.

Continue reading →

Lessons from a Pathbreaking DfID Anticorruption Project in Tanzania

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Britain’s Department for International Development is funding thoughtful, ambitious projects in Ghana, Tanzania, and Uganda to help those governments step up the enforcement of national anticorruption laws.  What makes the three thoughtful is their recognition that improving anticorruption law enforcement requires the simultaneous strengthening of the entire criminal justice chain – from the entities that turn up possible corruption violations to the agencies which investigate these leads to prosecution services and courts – together with measures to improve  collaboration among them.  What makes the three projects ambitious is that they provide assistance from one end of the chain to another;  building capacity in a single agency can be challenge, building it in several simultaneously even more so.

Yet if developing countries are to do better at catching, prosecuting, and convicting corrupt officials and those who corrupt them, more programs like these three, whether donor- or self-funded, are needed.  It does no good to improve the ability of an anticorruption agency to investigate corruption if prosecutors don’t have the skill to present a convincing case.  And no matter how skilled the prosecution, it will be for naught if the courts don’t understand the law or the evidence.

The 4 ½ year, £11.3 million Tanzania project, dubbed “STACA” for Strengthening Tanzania’s Anticorruption Action, was the first of the three DfID projects to tackle the criminal justice chain in one fell swoop, and along with the U4 Anticorruption Resource Center and REPOA, a Tanzanian think-tank, I reviewed its progress at roughly the half- way mark in implementation.  While we trust close study of the review is merited, below I summarize three points that came out of it that I think are particularly critical, both for developing country policymakers looking for ways to enhance the enforcement of their nation’s anticorruption laws and for donor organizations wanting to help them. Continue reading →

A Different Kind of Quid Pro Quo: Conditional Asset Return and Sharing Anti-Bribery Settlement Proceeds

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In my last couple of posts, I’ve returned to a theme I’ve written about before: My skepticism about claims that the U.S. government either should (as a matter of policy) or must (under UNCAC or other legal obligations) share settlement proceeds in FCPA cases with the governments of the countries where the bribery took place. I’m also skeptical that there’s any obligation on the part of U.S. or other supply-side enforcers to use any of this settlement money to fund NGO-sponsored projects in (or for the benefit of) those countries.

Asset recovery, however, is different. When the U.S. (or some other country) identifies – at its own initiative or pursuant to the request of another government – assets held in the U.S. that have been stolen from a foreign government, my reading of the law (both conventional domestic legal principles and Chapter V of UNCAC) is that the U.S. has an unconditional legal obligation to return those assets to their rightful owner. At times, the U.S. has indicated that, although it has a general policy of returning stolen assets to the governments from which they were stolen, it does not view this as a legal obligation. Rather, the U.S. seems to want to leave open the option, in some cases, of attaching conditions to the return of the assets, or funneling them through NGOs or other bodies, rather than simply turning them over to the claimant government. I understand why the U.S. has taken this position: Returning assets stolen assets to a claimant government with a reputation for pervasive corruption—where it seems highly likely much of the money will be stolen again—seems awfully unappealing, and doubly so in those cases where the government officials who stole the money in the first place, or their family members and cronies, retain their power and influence in the claimant country. Hence the instinct to attach conditions to the return of the assets, or to use the money to fund NGOs rather than simply turn it over to the claimant government. The problem, though, is that I’m hard-pressed to come up with a legal basis (notwithstanding some valiant attempts) for doing anything other than handing over the money.

So, the situation as it stands looks something like this (and I acknowledge simplifying quite a bit to make things a tad neater than they actually are): On the one hand, many developing countries want wealthy countries like the U.S. to share foreign bribery settlement proceeds with the countries where the bribery took place, but for the most part the wealthy countries do not want to do this, and assert—correctly—that they are under no obligation to do this under UNCAC or any other legal instrument. On the other hand, many wealthy countries would like to retain the flexibility to attach conditions to asset return (or to use seized assets to fund NGO programs rather than turning the money over to the governments), but the claimant countries in the developing world assert—correctly—that there is a legal obligation (enshrined in UNCAC) to return stolen assets, without strings attached.

Framing the issue this way suggests a possible compromise. (In the interests of disclosure, I should say that this is not my original idea: It came up in a conversation I had recently with an analyst at an anticorruption NGO, but since I haven’t had the chance to clear it with him, I won’t name the person or organization here.) The trade would go like this: Continue reading →

Equity Crowdfunding: Considerations for Anti-Money Laundering Regulation

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Equity crowdfunding involves the use of an internet-based platform to market equity shares in a given company to a wide range of potential investors (the “crowd”). The result is financial democratization of sorts – harnessing the power of the crowd to make many small investments instead of relying on large capital infusions from a relatively small number of sophisticated investors. The key to equity crowdfunding is to keep transaction costs low, so that small businesses are able to participate, without sacrificing investor protection. This latter consideration is especially important given the potentially low financial sophistication of the crowd.

In my last post, I discussed how equity crowdfunding could help small and medium-sized enterprises (SMEs) in developing countries overcome corruption-related barriers to accessing finance. Because equity crowdfunding makes use of internet-based platforms, it is particularly useful for cross-border transactions. As a result, SMEs in developing countries that are unable to access finance through traditional means (often because of corruption in domestic capital markets) can use equity crowdfunding platforms to connect with investors outside of their home countries. As with other technology-based tools that have the potential to sidestep the effects of corruption and contribute to economic development, though, there is also reason to be concerned about the opportunities for corruption for which equity crowdfunding could be abused. In particular, equity crowdfunding platforms could be used to facilitate money laundering, in at least two ways: Continue reading →

Equity Crowdfunding: A (Partial) Corruption Solution for SMEs

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One of the most notorious phenomena in international development is the so-called “missing middle” problem: the scarcity and under-productivity of small and medium sized enterprises (SMEs) in developing countries. Around the world, SMEs can be a leading source of employment and an important driver of innovation. There is a strong positive correlation between the existence of a robust SME sector and high per-capita GDP. Yet in far too many countries, the potential of the SME sector is not being realized.

One cause of SME sector underdevelopment in developing countries is the inability of SMEs to access start-up capital and financing, which can be the “single most robust determinant of firm growth.” SMEs in developing communities face substantial challenges accessing capital, and as a result are often unable to scale or form in the first place. And corruption plays a central role in preventing access to finance among SMEs—by discouraging foreign direct investment, distorting the banking sector, and increasing the costs of equity capital. While corruption poses a significant problem for businesses in many developing countries, SMEs bear the brunt of the harm. Indeed, 70% of SMEs in the developing world cite corruption as a major barrier to their operations.

In the spirit of technological solutions to work around the barriers and distortions created by endemic corruption, equity crowdfunding is emerging as at least a partial solution for SMEs that require capital but are unable to get it because of corruption. Continue reading →

Victim-Compensation Arguments Cut Both Ways

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In my last post, I imagined what a frustrated U.S. official might have to say about the ever-increasing drumbeat of demands for the United States to “return” (that is, transfer) the “proceeds of crime” (that is, the fines collected from corporate defendants in Foreign Corrupt Practices Act (FCPA) cases) to the “victim countries” (that is, the governments whose officials took the bribes that gave rise to the FCPA violations). My imaginary rant was deliberately over-the-top, intended to be provocative and to stir up some more honest debate on this topic by cutting through the circumspection and diplomatic niceties that usually accompany pushback against the “give the settlement money to the victim countries” position. In this post, I want to continue on the same general topic, and in the same provocateur’s spirit, by asking the following question:

When (or if) demand-side countries start collecting serious fines against bribe-taking public officials and/or bribe-paying companies, does the logic of compensating “victims” dictate that these countries transfer some of the money they recover to the United States?

At the risk of seeming totally bonkers, I’m going to assert that the answer might well be yes if one accepts the logic for making transfer payments in the other direction (from the U.S. government to the governments of the countries whose officials took the bribes) in FCPA cases. Here’s the argument: Continue reading →

A Role for the Courts in Limiting Philippine Political Dynasties

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In an earlier post I wrote about Philippine political dynasties, I argued for the adoption of an anti-dynasty law that would bring into effect Article II, Section 26 of the 1987 Philippine Constitution, which states that “[t]he State shall guarantee equal access to opportunities for public service, and prohibit political dynasties as may be defined by law.” Since the Philippines gained its independence, political dynasties have dominated national and local government—70% of the last Congress, for example, belonged to a political dynasty. Because these families have maintained an effective oligarchy over the country for decades, they can easily abuse their discretion and commit corrupt acts without consequence.

While the Framers of the 1987 Constitution recognized the danger these elite families posed to fair governance and their propensity to engage in corruption, the Supreme Court has found that the constitutional ban on dynasties is not a self-executing provision. In May 2014, for the first time in history, an anti-dynasty bill made it out of committee and was sponsored before the House plenary. In his final State of the Nation Address, President Noynoy Aquino urged Congress to finally pass an anti-dynasty law. Politicians in Congress, however, have since blocked efforts to pass such a law. By October 2015, the Senate President publicly announced that no anti-dynasty law would be approved before the May 2016 election. Despite my hope that the recent bill would result in a new law at last, this outcome is not surprising. Political dynasties have controlled the majority of Congress for decades, and numerous politicians seeking office in this year’s election would have been prohibited from running if the law had passed.

Now the results of the May election are in, it looks as though Congress will continue to be dominated by dynastic politicians. President-elect Rodrigo Duterte’s stance on political dynasties is currently unclear, although he himself belongs to a political dynasty. Given this, legislative action may simply be out of reach for the time being. One interesting question is whether the courts could intervene to bring the constitutional ban into effect. Doing so would be a radical departure from past practice, and would require rethinking certain core judicial doctrines, but might be nonetheless be legitimate under the circumstances. Continue reading →

TNI’s Gold Mine: Corruption and Military-Owned Businesses in Indonesia

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The Grasberg Mine, located close to the highest mountain in West Papua, Indonesia, is the world’s largest gold mine and third-largest copper mine. The mine, owned by the corporation Freeport-McMoRan Copper & Gold, has been the site of strings of grave human rights abuses, linked to Indonesia’s own National Armed Forces (Tentara National Indonesia/TNI). TNI’s presence in the territory is ostensibly to protect the mine, and Freeport’s Indonesian subsidiary acknowledges having made payments of as much as US$4.7 million in 2001 and US$5.6 million in 2002 for such government-provided security. A report by Global Witness, however, revealed numerous other payments ranging from US$200 to US$60,000 that Freeport Indonesia allegedly made to individual military officers.

The TNI’s sale of security services to companies like Freeport is only one of the many business ventures conducted by the TNI and its officers. As Human Rights Watch has reported, the Indonesian military has been supplementing its income through both its formally established companies, and through informal and often illicit businesses such as black market dealing. Moreover, the military’s business activities (both lawful and unlawful) are largely shielded from public scrutiny: budgeting for military purposes is generally kept secret, and TNI members generally refuse to answer questions about institutional spending.

Military-owned business in Indonesia are problematic, not only because this private-sector activity impedes military professionalism and distorts the function of the military, but also because it also contributes to crime, human rights abuses, and especially corruption. This problem is greatly compounded by the fact that TNI officers generally enjoy immunity from corruption charges brought by civilian institutions. In fact, the Transparency International’s Defense and Security Program has deemed Indonesia one of the countries most prone to corruption in its defense and security institutions. It is therefore appalling that this issue has not been addressed more seriously by the Indonesian government. Although a 2004 law mandated the transfer of control over TNI businesses to the civilian government within five years, the law did not clearly specify which types of business activities were covered, and this legal loophole enabled the TNI to preserve many of its moneymaking ventures, including TNI’s infamous security services—to say nothing of already-illegal criminal enterprises and illicit corporations. Moreover, despite the five-year timetable in the law, the government has been notably reluctant to enforce the transfer of ownership, making repeated excuses alluding vaguely to the need for the TNI to compensate for the lack of budgeting for security purposes. As a result, despite some efforts to reform the way the TNI is allowed to handle its businesses, military-owned businesses in Indonesia continues to flourish, with the Indonesian people of Indonesia having to pay the price.

The government’s weak response towards the military’s non-compliance with the 2004 law is merely one of the many indicators of how impervious the TNI’s power and seeming impunity. There are factors that contribute to this impunity, along with the corresponding corruption and abuse of power in the operations of military-owned businesses: Continue reading →

Fraud and Corruption Risks in Procurement: A Thumbnail Sketch

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Public procurement is the government activity perhaps most vulnerable to fraud and corruption.  Not only are the sums involved enormous, $9.5 trillion a year by one estimate, but at every point in the process decision-makers enjoy great discretion.  They must first decide if government needs to buy a good or service.  If the decision is to make a purchase, government personnel must determine how government should make it: through a sole source contract or by competitive bid.  If they choose the former, they must decide from whom to buy; if the decision is to use competitive bidding, decisions about where to advertise the request, for how long, what personnel should select the winning bidder, and what criteria they should use are also required.

Because there are so many places where fraud and corruption can creep into the process, it is hardly surprising that the internet is brimming with books, articles, and brochures of all sorts on how to combat fraud and corruption at each stage in the procurement cycle, and indeed a Google search for material on “government procurement corruption” returns 15 million documents in less than half a second.  This wealth of material is itself part of the problem.  Those tasked to participate in a procurement who want a summary of what to watch for may be so overwhelmed by what’s available that they give up their search and hope their “gut” or a better trained colleague will pick up any irregularity.

For those looking for a short description of the areas where fraud and corruption is most likely to seep into the procurement cycle, a place to begin a search for more detailed material on a particular point, I offer a thumbnail sketch of procurement risks.  I thank colleagues at the Millennium Challenge Corporation and elsewhere who have helped in compiling and simplifying the list.  Suggestions for areas missed — or better (but still succinct!) ways to express the risks — warmly welcomed.   Continue reading →

What Might U.S. Officials Think of Demands that the U.S. Transfer FCPA Settlement Proceeds to Demand-Side Governments? An Imaginary Rant

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As the United States continues to settle Foreign Corrupt Practices Act (FCPA) cases with corporate defendants for large sums, the issue of whether the U.S. and other “supply-side” enforcers should transfer a portion of these settlement proceeds to the countries where the bribery took place has continued to attract attention and discussion. (This question is often framed as whether the U.S. should “return” some of these settlement proceeds to the “victim countries,” but that formulation is highly misleading, both because criminal fines were never the property of another government, and so cannot be “returned,” and because in many cases referring to these countries as “victims” is problematic, to put it mildly. So I’ll refer to this as “transferring settlement proceeds to demand-side countries.”) The push for transferring settlement proceeds to demand-side countries has gotten a bit more traction over the past year, and has become something of a talking point for certain demand-side governments, especially those in Africa, along with supporting NGOs. So, for example, a Nigeria-sponsored resolution at last year’s UN Convention Against Corruption Conference of States Parties (Resolution 6/2) called for “urgent attention” to the (utterly bogus and misleading) statistic that although US$6.2 billion has been recovered through settlements in foreign bribery cases, only 3% of this amount “has been returned to States whose officials were bribed and where corrupt transactions took place, which is a key aim of chapter V of the contention,” and further called on states that use settlements to conclude foreign bribery cases to “give due consideration to the involvement of the jurisdictions … where foreign officials were bribed.” (The original proposed language was far stronger, “noting with concern the prevailing narrow interpretation of the terms ‘proceeds of crime’ in settlements … that excludes … fines in order to avoid such proceeds from being returned to States and, by so doing, using settlements to create an artificial category of victims of corruption, thereby reducing the potency of chapter V of the Convention.”) One sees this push in several of the country statements coming out of last month’s London Anticorruption Summit, especially those of Nigeria and Tanzania.

Unsurprisingly, the United States has resisted these calls. Generally, U.S. officials have done so (at least in public) tactfully and diplomatically, emphasizing the U.S. government’s commitment to helping the victims of cooperation, its willingness to work with other countries to cooperate in ongoing investigations and improve the mutual legal assistance process, etc. But I’m beginning to sense a growing undercurrent of frustration on the U.S. side, as an increasing number of demand-side countries and NGOs are making the call for transfer of settlement proceeds to demand-side governments (which, again, they often characterize as “returning assets to victim countries”) a central theme of their presentations and diplomatic efforts. (And perhaps, I should acknowledge, some of the frustration I’m sensing is a reflection of my own skepticism – see here, here, and here.) Now, when I say I sense growing frustration or irritation on the U.S. side, I should be clear that I’m speculating. Though I’ve met a few officials from the U.S. Departments of State and Justice, and Treasury who work on corruption issues, I’m certainly no insider, and nothing in the rest of this post should be interpreted is reflecting any actual conversations or statements from current or former U.S. government officials, because it doesn’t. Nor should this be taken as fully reflecting my own views, even though part of what I’m going to write below is generated by introspection.

With those caveats, I’d like to try to imagine what’s going on in the heads of U.S. government officials as they smile politely while listening to the sorts of criticisms I noted above, and when they express, in measured language, their reservations about the proposals that the U.S. transfer FCPA settlement proceeds to demand-side countries. Just for fun, and to be a bit provocative, I’ll present this as a kind of unhinged rant – the sort of thing I imagine that a hypothetical U.S. official’s id might be screaming internally, behind the polite smiles and diplomatic language imposed by her superego. The imaginary rant, in response to demands that the U.S. transfer FCPA settlement proceeds to demand-side countries, might run something like this: Continue reading →