Western Anticorruption Policy in Ukraine: Success or Failure?

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A few weeks back, I came across an interesting point-counterpoint on the impact of Western-backed efforts to promote anticorruption reform in Ukraine. On one side we have an online piece in Foreign Affairs by Adrian Karatnycky (the Managing Partner of a consulting firm that “works with investors and corporations seeking entry into the complex but lucrative emerging markets of Ukraine and Eastern Europe”) and Alexander Motyl (Professor of Political Science at Rutgers University) entitled, “How Western Anticorruption Policy Is Failing Ukraine.” And then on the other side we have a response piece on the Atlantic Council blog from Daria Kaleniuk (Executive Director of the Anti-Corruption Action Centre in Kyiv) entitled “Actually, the West’s Anticorruption Policy Is Spot on.” I’m no Ukraine expert, and so I’m reluctant to take a strong position on which side has the better of the argument, but I found the debate interesting not only for its implications for Ukraine, but also because it raises a couple of more general issues that come up in many other contexts, issues that anticorruption advocates should pay attention to even if they have no particular interest in Ukraine. Those issues are, first, a question of messaging—what I’ll call the glass-half-full/glass-half-empty question—and, second, the relative importance of holding individual wrongdoers personally (and criminally) accountable for corrupt conduct.

Let me first try to give a flavor of the debate, and then say a bit about each of those two issues. Continue reading →

A Border Patrol Surge Will Lead to a Border Corruption Surge

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The United States Customs and Border Protection service (CBP) is the largest law enforcement agency in the United States—and one of the most corrupt. CBP employs 59,000 people, of whom almost 20,000 are Border Patrol agents. Every day, these agents process over a million incoming U.S. travelers, 300,000 vehicles, and 78,000 shipping containers. On any given day they might seize over 5,000 pounds of narcotics and apprehend nearly 900 people at or near U.S. borders. Yet according to “conservative [] estimate[s],” about 1,000 Border Patrol agents—5% of the total—violate their official duties in exchange for bribes. To take just a handful of some of the most egregious examples: One CBP agent permitted smugglers to bring over 612 kilograms of cocaine into the U.S. in exchange for $1,000 for each kilo he waved through his checkpoint. Another allowed 1,200 pounds of marijuana to enter into the U.S. in exchange for $60,000. Yet another CBP agent permitted vehicles containing undocumented immigrants to enter the U.S. at a price of $8,000-10,000 per vehicle.

In response to this widespread corruption, the Department of Homeland Security convened an independent Integrity Advisory Panel in 2015. But the Panel’s 2016 report fell on deaf ears, as almost none of its 39 recommendations were implemented. Instead, in line with his hardline stance on immigration, President Trump signed a 2017 executive order mandating hiring an additional 5,000 Border Patrol agents and “appropriate action to ensure that such agents enter on duty . . . as soon as practicable.”

Increasing the number of agents by 25% without devoting significant resources to combat the pervasive corruption in CBP is a terrible idea, and is likely to exacerbate current corruption problems, for three reasons: Continue reading →

Rewarding Whistleblowing to Fight Kleptocracy

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Last February, Massachusetts Congressman Stephen Lynch introduced the Kleptocracy Asset Recovery Rewards Act (KARRA), which seeks to improve detection of stolen assets housed in American financial institutions by paying whistleblowers for reports that lead to the identification and seizure of these assets. The logic of paying rewards to whistleblowers is straightforward, and nicely summarized in the draft KARRA itself:

The individuals who come forward to expose foreign governmental corruption and klep­toc­ra­cy often do so at great risk to their own safety and that of their immediate family members and face retaliation from persons who exercise foreign political or governmental power. Monetary rewards and the potential award of asylum can provide a necessary incentive to expose such corruption and provide a financial means to provide for their well-being and avoid retribution.

Paying whistleblowers for information is a sound economic idea.  But in light of the cogent explanation for these rewards, the original draft of the KARRA legislation doesn’t go nearly far enough. Indeed, this original proposal provides much weaker incentives and protections for whistleblowers than several other existing US whistleblower rewards programs. It is unlikely that this bill has a real chance of being enacted in the current Congress, but if its introduction this year is a harbinger of a more sustained effort to enact legislation of this kind—and I hope it is—then I also hope that the next time around KARRA supporters will introduce a more ambitious bill, one that provides much higher potential rewards, fewer limitations on which whistleblowers are eligible for rewards, and more robust anti-retaliation protections.

There are many ways to design a whistleblowing program, as demonstrated by the spectrum of existing programs that use whistleblowing to tackle fraud in other domains. We can examine the effectiveness of the proposed legislation through comparison to existing whistleblowing programs:

Continue reading →

Anticorruption Bibliography–June 2018 Update

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An updated version of my anticorruption bibliography is available from my faculty webpage. A direct link to the pdf of the full bibliography is here, and a list of the new sources added in this update is here. As always, I welcome suggestions for other sources that are not yet included, including any papers GAB readers have written.

What the U.N. Treaty Bodies Have Said About Human Rights and Corruption

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The nations of the world are parties to numerous treaties where they pledge to respect the rights of their citizens, everything from their civil and political rights to their right to economic development to the right to be free from torture.  Ten of these treaties have an expert body which periodically reports on a state’s compliance with the treaty’s provisions.  As the connection between corruption and human rights violations has become ever clearer, these treaty bodies have begun noting in their reports how corruption contributes to a state’s failure to comply with its human rights obligations.

The Geneva Centre for Civil and Political Rights recently combed through the hundreds of reports the treaty bodies have issued over the past decade to produce a summary and analysis of what they have said on the subject of human rights and corruption. Comments by UN treaty bodies on corruption is a valuable resource for both human rights advocates and anticorruption activists. My thanks to the Centre for producing it.

Dear People Doing Quantitative Research on Corruption: Please, Please, Please Stop Using Clearly Invalid Instrumental Variables.

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I will open this post with two apologies: First, this is going to be on a (seemingly) nerdy and technical subject (though one that non-technical folks who read statistical papers on corruption really need to understand). Second, this post is going to return to a subject that I wrote about two years ago, without adding much, except perhaps different examples and somewhat more intemperate language. But the issue is an important one, and one that I think needs more attention, both from the people who produce quantitative empirical studies on corruption and those who consume those studies.

The issue concerns a particular statistical technique sometimes deployed to figure out whether variable X (say, absence of corruption) causes variable Y (say, economic growth), when it’s possible that the correlation between X and Y might arise because Y causes X (or because some third factor, Z, causes both X and Y). The technique is to find an “instrumental variable” (an IV for short). To be valid, the IV must be sufficiently correlated with X, but could not conceivably have any affect on Y except through the IV’s casual effect on X. The actual estimation techniques used in most cases (usually something called “two-stage least squares”) involve some additional statistical gymnastics that I won’t get into here, but to get the intuition, it might help to think about it this way: If your instrumental variable (IV) correlates with your outcome variable (Y), and there’s no plausible way that your IV could possibly affect Y except by affecting your proposed explanatory variable (X), which then has an effect on Y, then you can be more confident that X causes Y. But for this to work, you have to be very sure that the IV couldn’t possibly affect Y except through X. This assumption cannot be tested statistically–it can only be evaluated through common sense and subject-area expertise.

OK, if you’ve slogged your way through that last paragraph, you may be wondering why this is important for corruption research, and why I’m so exercised about it. Here’s the problem: Continue reading →

What Is “Beneficial Ownership”? Why the Proposed TITLE Act’s Definition Is Sensible and Appropriate

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“Vague, overly broad, and unworkable.” Those were the words ABA president Hilarie Bass used in her February letter to Congress to criticize the definition of “beneficial ownership” that appears in the TITLE Act – a proposed bill that would require those seeking to form a corporation or limited liability company to provide information on the company’s real (or “beneficial”) owners to state governments. The TITLE Act defines a beneficial owner as “each natural person who, directly or indirectly, (i) exercises substantial control over a corporation or limited liability company through ownership interests, voting rights, agreement, or otherwise; or (ii) has a substantial interest in or receives substantial economic benefits from the assets of a corporation or the assets of a limited liability company.” Ms. Bass and other critics assert that this definition is unprecedented, unfair, and unduly vague, making it impossible for regulated entities to understand the scope of their legal obligations and rendering them vulnerable to arbitrary, unpredictable prosecutions.

But Ms. Bass is incorrect: The TITLE’s Act definition of “beneficial ownership,” though “vague” in the sense that it is flexible rather than rigid, is perfectly workable, and aligns with other US laws, European laws, and the G20’s 2015 principles on beneficial ownership. Moreover, the alleged “vagueness” is necessary to prevent the deliberate and predictable “gaming” of the system that would inevitably take place to circumvent a more precise numerical ownership threshold. Continue reading →

Applying Anti-Money Laundering Reporting Obligations on Lawyers: The UK Experience

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Anticorruption advocates and reformers have rightly been paying increased attention to the role of “gatekeepers”—bankers, attorneys, and other corporate service providers—in enabling kleptocrats or other bad actors to hide their assets and launder their wealth through the use of anonymous companies. An encouraging development on this front are the bills currently pending in the U.S. Congress that would require corporate formation agents to verify and file the identity of a registered company’s real (or “beneficial”) owners, and also would extend certain anti-money laundering (AML) rules, particularly those requiring the filing of suspicious activity reports (SARs) with the US Treasury, to these corporate formation agents.

Not everyone is thrilled. The organization legal profession, for example, is crying foul. American Bar Association (ABA) President Hilarie Bass wrote to Congress that the proposed expansion of SAR obligations to corporate formation agents, many of whom are attorneys or law firms, would compromise traditional duties of lawyer-client confidentiality and loyalty. As Matthew pointed out in a prior post, it’s not clear that this assertion is correct, as the proposed bills contain express exemptions for lawyers. But even putting that aside, it’s worth recognizing that applying SAR obligations to attorneys wouldn’t be unprecedented. Many European countries have had similar requirements in place since the early 2000s, when the European Commission issued directive 2001/97/EC, which required states to adopt legislation imposing obligations on non-financial professionals, including lawyers, to file suspicious transaction reports (STRs, essentially another term for SARs). As in the US right now, that aspect of the 2001 EC directive was extremely controversial. One EU Commission Staff Working Document went so far as to say it was “the most controversial element of the Directive” because it represented “a radical change to the principle of confidentiality that the legal profession has traditionally observed.” Some EU states and national bar associations launched an ultimately unsuccessful legal challenge to the requirement that attorneys file STRs, on the grounds that it violated the right of professional secrecy guaranteed by the Charter of Fundamental Rights of the European Union.

Yet in the end, the imposition of the STR obligations on lawyers does not seem to have radically altered the legal profession in Europe. Countries appear to have developed safeguards that preserve the essential aspects of attorney-client confidentiality, even while implementing the EC Directive. Consider, for example, how this all played out in the United Kingdom. Continue reading →

Guest Post: Are Public UBO Registers a Good or a Bad Proposition? A Further Reply to Professor Stephenson

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Today’s guest post, from Martin Kenney, the Managing Partner of Martin Kenney & Co., a law firm based in the British Virgin Islands (BVI), continues an ongoing debate/discussion we’ve been hosting here at GAB on the costs and benefits of public registries of the ultimate beneficial owners (UBOs) of companies and other legal entities. That debate was prompted by the UK’s decision to mandate that the 14 British Overseas Territories create such public registries, and Mr. Kenney’s sharp criticism of that decision in a post he published on the FCPA Blog. That post prompted reactions from Rick Messick and from me. Our pushback against Mr. Kenney’s criticisms stimulated another round of elaboration on the critique of the UK’s decision, with a new post from Mr. Kenney and another from Geoff Cook (the CEO of Jersey Finance). I subsequently replied, explaining why I did not find Mr. Kenney’s or Mr. Cook’s criticisms fully persuasive. Today’s post from Mr. Kenney continues that exchange:

Public [UBO] registers are rather cheap political playing to the gallery, saying “Aren’t we wonderful to have done this?” – ignoring the fact that what we have established in the UK does not work properly….  It seems to me outrageous that the UK Government, who lack a lot in the area of anti-money laundering, should thus seek to impose on their overseas territories measures – often, where they cannot be afforded economically, that go far beyond what the UK has.

Lord Flight (Conservative), Member of the House of Lords, Speech to the House of 21 May, 2018, Debate on the Sanctions and Anti-Money Laundering Bill [HL] 

The fact that Professor Stephenson welcomes a good discussion and has opened the doors to his blog once again, means it would be impolite of me to not provide a response to his latest observations.

From the outset, I will stress that I will not seek to address every point Professor Stephenson makes. However, having addressed those below, if there are others he wishes me to respond to, I will endeavor to do so. Continue reading →

Putting Corruption on the Human Rights Agenda

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The Office of the United Nations High Commissioner for Human Rights along with the UNODC will hold an expert workshop this Monday, June 11, on what the human rights bodies within the United Nations system can do to advance the fight against corruption.  A cross-section of human rights and anticorruption experts will discuss ways to link anticorruption measures with efforts to promote and protect human rights, examine methods for assessing the impact corruption has on the enjoyment of human rights, and consider what more the UN-system, particularily the Human Rights Council, can do to assist member states adopt a rights-based approach to combatting corruption.  More information on the session here.

The workshop will be followed by a meeting jointly organized by Center for Civil and Political Rights, the Geneva Academy of International Humanitarian Law and Human Rights, and the Office of the High Commissioner for Human Rights to develop new advocacy tools for the UN human rights mechanisms, in particular the bodies that oversee compliance with the various human rights treaties, to address the issue of corruption.  More information on this meeting here.

This writer is one of several activists concerned with both human rights and corruption who identfied eight actions that should be immediately taken to align efforts to promote human rights with those aimed at fighting corruption.  The eight are listed in the following letter that will be provided to all those attending the two meetings. Continue reading →