Why Western Accounting and Consulting Firms Are Facilitating Global Corruption, and How To Stop Them

In 2016 the then-president of Angola, José Eduardo dos Santos, appointed his daughter, Isabel dos Santos, as chairwoman of Sonagol, Angola’s struggling state oil company. Ms. dos Santos quickly recruited the management consulting firms Boston Consulting Group (BCG) and McKinsey and Company to help restructure the company. BCG and McKinsey were not paid directly by Sonangol, however, but rather by a holding company controlled by Ms. dos Santos, Wise Intelligence Services. On paper, Wise Intelligence Services oversaw the consulting firms’ work, but in reality this payment plan enabled Ms. dos Santos to embezzle millions of dollars from the Angolan treasury by overcharging for the consultants’ work and then pocketing the difference. The firms, of course, still received enormous fees, and do not appear to have raised any concerns or objections regarding the highly unusual and suspicious payment arrangements. BCG and McKinsey were not the only Western professional services firms to profit from working with Ms. dos Santos. The accounting firms PwC, Deloitte, KPMG, and Ernst and Young all audited some of the companies owned by Ms. dos Santos and signed off on those companies’ contracts with the Angolan government. In January 2020 Angolan prosecutors announced that they would charge Ms. dos Santos—whose personal wealth is estimated at around $2 billion—with embezzlement of state funds in connection with her business relationships with the Angolan government.

This is far from the first corruption scandal that has implicated the same cohort of large professional services firms. McKinsey has received enormous criticism for its partnership with a company connected to the kleptocratic Gupta family in a $700 million contract with the South African government to resuscitate the country’s failing state-owned power company. Deloitte, Bain, and KPMG have also faced scrutiny for their respective roles in facilitating or otherwise enabling South Africa’s myriad corruption scandals. In Mongolia, McKinsey partnered with a firm owned by a top government official in a contract to reshape the country’s rail system; Mongolian officials ultimately levied corruption charges against three different Mongolians involved in brokering that deal.

These and numerous other scandals illustrate that, far too often, professional services firms have either facilitated, or at best been passively complicit in, the theft of massive sums from state coffers. Why have professional services firms been repeatedly implicated in corruption scandals involving their public sector work? Part of the explanation is simply the inherent risk associated with settings in which developing-country governments, where corruption risks are high to begin with, are handing multi-million dollar contracts to Western firms in an effort to modernize their national infrastructure. But in addition, two structural issues help to explain why accounting and management consulting firms are particularly susceptible to these sorts of problems.

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Financial Asset Recovery Conditions: The IMF’s New Anticorruption Playbook

Since the Euromaidan revolution in 2014, the IMF has provided substantial macroeconomic stabilization assistance to Ukraine, but has conditioned disbursements on, among other things, significant anticorruption reforms—an approach that has been hotly debated, including on GAB (see here, here, here, and here). The most recent financial assistance agreement also targets corruption, but in a more indirect fashion. Last December, the IMF and Ukraine provisionally agreed to a $5 billion financial assistance program. It soon became clear, though, that the launch of the new program hinged on the Ukrainian parliament successfully passing legislation on land and banking reform. Ukraine complied, and the new agreement is likely to be signed in the coming weeks.

The banking bill, which provides a more general bank resolution framework, is clearly designed to address outstanding issues for the country’s largest commercial bank, PrivatBank, which was nationalized in December 2016. The PrivatBank case is particularly complicated due to the historically close relationship between President Volodymyr Zelensky and the bank’s former owner, the oligarch Igor Kolomoisky. (Prior to winning Ukraine’s presidential election in April 2018, Zelensky—a former TV comedian—had no political experience, and his only political connection appeared to be his friendship with Kolomoisky, who owned the television network that broadcast the TV program that catapulted Zelensky’s political career.) Many commentators speculated that the IMF had been delaying a bailout for Ukraine due to concerns that Zelensky’s administration would not aggressively pursue efforts to recoup money stolen from PrivatBank. By successfully leveraging and re-purposing past conditionalities, the IMF has driven a wedge between the Zelensky and Kolomoisky, forcing the new President to abandon his toxic personal relationship with this oligarch in order to unlock international financial assistance. While Ukraine is an interesting case study in its own right, the IMF should make more frequent use of financial asset recovery conditions in other countries. Not only can such conditions support a country’s fiscal sustainability framework, but they may be especially helpful if and when well-intentioned political leaders struggle to break ties with corrupt allies. Continue reading

Asset Recovery: Report from Angola

Angola appears at last to have turned the corner in the fight against corruption.  The long-awaited trial of two “big fish,” the son of the former president and a former central bank governor, for looting the sovereign wealth fund began December 9.  While the international media have focused on what the trial means for the government’s fight against corruption  (Reuters story here, Bloomberg here, and BBC here), a less heralded equally significant development is quietly unfolding in Eduarda Rodrigues’ office. Deputy prosecutor general and since January head of the newly created asset recovery agency (Serviço Nacional vai Recuperar Activos), Rodrigues has begun slowly clawing back assets corrupt Angolan officials have stolen over the years. 

Below is an account the results to date taken from a November presentation to the Norwegian Corruption Hunters Network.

AssetQuantityAmount Kz
Properties2519,438, 912, 257
Cash Kwanza33,879,229
Cash Dollars322,832
approx $40 million

As the table shows, Rodrigues’ agency has recovered assets worth more than 19 billion Angolan Kwanza or some $40 million along with more than $300,000 in U.S. currency. 

Rodrigues’ efforts began with the expiration of the Law of Repatriation of Financial Resources.   Passed June 26, 2018, it gave those holding stolen assets 180 days to voluntary return them without sanction.  Few took the government up on its offer (here), apparently believing the law was meant simply to show the international community the government was doing something to fight corruption. 

As Rodrigues and her growing team of experts expand their work, an ever larger number of corrupt official will regret passing on amnesty.   Law enforcement authorities in jurisdictions where Angolan stolen assets may be stashed now have a trustworthy partner to work with to see that monies stolen from the Angolan people are returned.


U.S. to Honor Corruption Fighters from Afghanistan, Angola, Guatemala, Malaysia, and Ukraine

Afghanistan NGO leader Khalil Parsa, Angolan journalist Rafael Marques de Morais, Guatemalan judge Claudia Escobar, Malaysian civil society activist Cynthia Gabriel, and Ukrainian investigative journalist Denys Bihus will share the 2017 Democracy Award for their work promoting democracy in their countries.  Bestowed annually by the National Endowment for Democracy, the U.S. democracy promotion agency, the ceremony will be held June 7 at the U.S. Capitol.  Republican House of Representatives Speaker Paul Ryan and the House Democratic Leader Nancy Pelosi will both speak.

This year’s award is significant for three reasons.  In the wake of concerns Trump Administration rhetoric has raised about America’s commitment to human rights and democracy, Speaker Ryan and Leader Pelosi’s participation is a reminder that a strong, bipartisan consensus on these basic, universal values remains deeply embedded in U.S. political culture.  Second is the recognition by the National Endowment, perhaps the world’s leading advocate of democracy, that the fight against corruption is an essential element in building a democratic state.  Finally, the award is one more sign that those fighting corruption at home are not alone, that the international community supports them and stands with them.

More on the ceremony, biographies of each recipient, and the National Endowment’s democracy promotion work here.

The 2016 CPI and the Value of Corruption Perceptions

Last month, Transparency International released its annual Corruption Perceptions Index (CPI). As usual, the release of the CPI has generated widespread discussion and analysis. Previous GAB posts have discussed many of the benefits and challenges of the CPI, with particular attention to the validity of the measurement and the flagrant misreporting of its results. The release of this year’s CPI, and all the media attention it has received, provides an occasion to revisit important questions about how the CPI should and should not be used by researchers, policymakers, and others.

As past posts have discussed, it’s a mistake to focus on the change in each country’s CPI score from the previous year. These changes are often due to changes in the sources used to calculate the score, and most of these changes are not statistically meaningful. As a quick check, I compared the confidence intervals for the 2015 and 2016 CPIs and found that, for each country included in both years, the confidence intervals overlap. (While this doesn’t rule out the possibility of statistically significant changes for some countries, it suggests that a more rigorous statistical test is required to see if the changes are meaningful.) Moreover, even though a few changes each year usually pass the conventional thresholds for statistical significance, with 176 countries in the data, we should expect some of them to exhibit statistical significance, even if in fact all changes are driven by random error. Nevertheless, international newspapers have already begun analyses that compare annual rankings, with headlines such as “Pakistan’s score improves on Corruption Perception Index 2016” from The News International, and “Demonetisation effect? Corruption index ranking improves but a long way to go” from the Hidustan Times. Alas, Transparency International sometimes seems to encourage this style of reporting, both by showing the CPI annual results in a table, and with language such as “more countries declined than improved in this year’s results.” After all, “no change” is no headline.

Although certain uses of the CPI are inappropriate, such as comparing each country’s movement from one year to the next, this does not mean that the CPI is not useful. Indeed, some critics have the unfortunate tendency to dismiss the CPI out of hand, often emphasizing that corruption perceptions are not the same as corruption reality. That is certainly true—TI goes out of its way to emphasize this point with each release of a new CPI— but there are at least two reasons why measuring corruption perceptions is valuable: Continue reading

The 2014 CPI Data Demonstrates Why, Even Post-2012, CPI Scores Cannot Be Compared Over Time

A little while back, I expressed some skepticism about whether Transparency International’s Corruption Perceptions Index (CPI) scores can be compared across time, even after TI changed its methodology in 2012 and claimed that its new scores would now be comparable across years.  More recently, I criticized TI’s 2014 CPI for burying the information on the margins of error associated with the CPI values, and for wrongly asserting that changes in the CPI score between 2013 and 2014 for certain countries (most notably China) were substantively meaningful.  (In fact, not only does the change in China’s score between 2013 and 2014 seem not to be statistically significant, but the change was due almost entirely to the dropping of a source in which China did abnormally well in 2013, and an abnormally large movement in a single other source.) I decided to follow up on this by taking a closer look at the other ten countries that TI singled out as having experienced significant CPI changes (in either direction) between 2013 and 2014.

Upon closer examination, I’m even more certain that CPI scores cannot be compared over time. I’m also more confident in my judgment that TI has been unforgivably sloppy — and downright misleading — in how it, and its representatives, have portrayed the substantive significance of these CPI changes. It turns out that the problem I found with the China calculations was not unusual. For almost all of the eleven countries TI identified as big movers, the CPI changes were driven by (1) the addition or elimination of sources from year to year for particular countries, and/or (2) abnormally large (indeed, implausibly large) movements in a single source. Until TI fixes its methodology, the safest thing to do is to ignore year-to-year changes in the CPI. And for the sake of preserving its own integrity and credibility, TI should either (A) persuasively explain why I am wrong in my analysis of the data (in which case I will gladly concede error), or (B) issue some sort of retraction or correction to its earlier press releases, and either drop the claim that post-2012 CPI scores can be compared across time or fix its methodology going forward.

Allow me to elaborate my analysis of the data: Continue reading

Policing Private Parties: How to Get Kleptocrats’ Seized Assets to their Citizens

As Rick has pointed out, it is exciting to see the successful forfeiture of U.S.-based assets owned by sitting Vice President of Equatorial Guinea, kleptocrat and international playboy Teodoro Nguema Obiang Mangue (“Obiang”). The Department of Justice estimates that the assets are worth an estimated $30 million. Also encouraging is the fact that the bulk of the settlement funds will be returned to the people of Equatorial Guinea. This is the first case in which the assets of a current leader’s cronies will be seized and repatriated to the country of origin by the U.S. Disbursing millions of dollars transparently in country that ranks 163/177 on Transparency International’s Corruption Perception Index will be challenging.

In stolen asset repatriation cases, the debate over disbursement typically boils down to whether to channel reclaimed cash through the government or through private actors. In Equatorial Guinea, returning the money directly to the government is a non-starter: the Obiang family has an extensive record of human rights and corruption abuses and a tight grip on power. The DOJ settlement accordingly cuts the government and its henchmen out of the forfeiture proceeds and channels repatriated funds through a private charity. But simply relying on private actors will not eliminate corruption challenges; there are pitfalls in channeling aid through private NGOs as well.

The DOJ should keep the following risks in mind as works out a disbursement plan for the Obiang settlement funds: Continue reading