When and Why Do Corrupt Politicians Champion Corruption Reform? A Character Study

Can corrupt leaders enact effective anticorruption reform? The brief answer seems to be yes: Leaders who are (perceived as) corrupt can initiate and support effective anticorruption reform efforts. For example, as this blog has previously discussed, President Peña-Nieto (who has repeatedly been accused of corruption and graft) supported constitutional anticorruption reforms in Mexico. Egypt’s current President, Abdel Fattah al-Sisi, has similarly launched various anticorruption campaigns, even while fending off numerous corruption allegations.

But why do corrupt leaders institute anticorruption reforms? While there’s no universal explanation, there appear to be at least three archetypes that might help anticorruption activists identify and push unlikely reformers: The Power Player, The Top-Down Director, and The Born-Again Reformer. Continue reading

The Backstory on Brazil’s Extraordinary War on Corruption

 

Hardly a day passes without news from Brazil that a senior politician or business person has been charged with corruption or has admitted guilt or found guilty of a corruption offense or is cooperating with authorities in their ever-expanding investigation into the rot that has infected Brazilian politics.  Brazil is not only the envy of corruption hunters everywhere, but for those living in countries where big time, grand corruption is the norm, it provides enormous inspiration and hope.  “If the Brazilians can do it, we [fill in the blank] can do it too,” is a refrain I have heard in more than one country.

But just how Brazil has “done it” has remained a mystery.  Or at least it has until the recent release of The Sum Of Its Parts: Coordinating Brazil’s Fight Against Corruption, 2003 – 2016, the latest in a series by Princeton University’s Innovations for Successful Society on how countries are combating corruption. Through revealing interviews with key participants and observers, author Gordon LaForge chronicles how a handful of reformers built the law enforcement institutions now bringing corrupt Brazilian politicians and their private sector co-conspirators to heel. Investigating and prosecuting complex corruption cases takes coordinated action across numerous agencies, and the emphasis throughout is on the painstaking, time-consuming efforts required to build the needed inter-agency cooperation.

The Sum of its Parts is essential reading for those trying to make their country “the next Brazil.”  It should also be valuable for those trying to understand the process of political change in developing nations.  One of its strengths is that it never loses sight of the fact that human agency is critical element.

Why the Repeal of the U.S. Publish-What-You-Pay Rule Is a Major Setback for Combating Corruption in the Extractive Sector

Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:

Last Friday, following the U.S. House of Representatives, the Senate voted to repeal a Securities and Exchange Commission (SEC) regulation that required oil, gas, and minerals companies to make public (on interactive websites) their payments to foreign governments, including taxes, royalties, and “other” payments. The rule was mandated by Section 1504 of the 2010 Dodd-Frank Act, but had only been finalized last year. President Trump’s expected signature of the congressional resolution repealing the rule will represent a major blow to anticorruption efforts, and a demonstration of just how little corruption matters to his administration and to Congressional Republicans.

The extractive industry had lobbied against this rule, arguing that having to report such payments is costly to firms and puts them at an international disadvantage. Some commentators have supported their efforts, arguing, for example, that the Section 1504 rules are unnecessary because the Foreign Corrupt Practices Act (FCPA) already prohibits firms under SEC jurisdiction—including extractive industry firms—from paying bribes abroad. This argument misses the mark: The extractive sector poses especially acute and distinctive corruption risks, which the FCPA alone is unlikely to remedy if not accompanied by greater transparency. Continue reading

Guest Post: Why Disclosures in Foreign Settlements Don’t Spur Domestic Prosecutions in Argentina

Natalia Volosin, a doctoral candidate at Yale Law School and clerk in the Asset Recovery Unit at Argentina’s Attorney General’s Office, contributes the following guest post (adapted and from an op-ed previously published in Spanish in the Argentine newspaper Infobae):

The so-called “Lavo Jato” investigation into bribery and money laundering at Brazil’s state-owned oil company Petrobras led to the biggest transnational bribery settlement in history: In December 2016, the Brazilian construction conglomerate Odebrecht reached a settlement with law enforcement authorities in the United States, Brazil, and Switzerland; in exchange for its guilty plea, Odebrecht and its affiliate Braskem agreed to pay the three countries a total of $3.5 billion, of which the first firm alone will pay $2.6 billion. (Odebrecht agreed that the total criminal penalty amounts to $4.5 billion, but the final number will be determined according to its ability to pay, though it will be no less than $2.6 billion.) According to the agreement, Brazil will get 80 per cent of the penalty, while the United States and Switzerland will get 10 per cent each.

Some hope that the Odebrecht settlement will provide a boost to anticorruption investigations in other countries. After all, in the settlement documents, the firm acknowledged to having made illegal payments worth $788 million between 2001 and 2016, not only in Brazil, but in a dozen countries including Angola, Argentina, Colombia, Mexico, and Venezuela. In Argentina specifically, Odebrecht admitted that between 2007 and 2014, in three separate infrastructure projects, it paid intermediaries a total of $35 million knowing that they would be partially transferred to government officials. These criminal practices earned the company a $278 million benefit—a return on “investment” of over 694% (the highest among all the recipient countries). Will these revelations have significant consequences for the prosecution of corruption cases in Argentina?

The answer is probably no, at least not in the short term. Continue reading

Leniency Agreements Under Brazil’s Clean Company Act: Are They a Good Idea?

Brazil’s 2013 Clean Company Act, the country’s first anti-bribery statute applicable to companies, has grabbed Brazilians’ attention due to its recurrent use in the context of the so-called Car Wash operation. The Clean Company Act has provided the main legal basis for Brazilian public authorities (especially federal prosecutors) to sign leniency agreements with construction corporations whose top executives stand accused of bribing officials in exchange for contracts from Petrobras, Brazil’s state-owned oil giant. Under the Act, Brazilian authorities may enter into a leniency agreement as long as the company admits its participation in the illicit act, ceases any further participation, provides full restitution for damage caused, and cooperates fully and permanently with the ongoing investigation. In exchange, the fines can be reduced by up to two-thirds and, more importantly, the cooperating company may be exempted from judicial and administrative sanctions, including suspension or debarment from public contracts. Over the course of the Car Wash investigation, Brazilian authorities have already signed five leniency agreements with some of Brazil’s largest engineering firms, and at least twelve more companies are currently negotiating leniency deals with Brazilian authorities.

But do these sorts of leniency agreements provide for sufficient deterrence of corrupt behavior? And are they consistent with the interest in punishing those companies that have committed a serious crime? Those who defend Brazil’s increasing use of leniency agreements emphasize that a similar approach has proven to be effective in countries like the United States, one of the most successful countries in the world in the fight against corruption. Indeed, the leniency agreements authorized by the Clean Company Act were modeled on the Non-Prosecution Agreements (NPAs) and Deferred Prosecution Agreements (DPAs) used by US authorities in white-collar criminal law enforcement. However, Brazil is following the US model precisely at a time when the widespread use of NPAs and DPAs is becoming more controversial, in part because of concerns that these sorts of agreements fail to deter economic crimes and allow high-ranking executives to escape accountability for their crimes (for a summary of the criticisms of those agreements, see here and here). Perhaps more importantly, even if one views the US experience with NPAs and DPAs as successful overall, there are several reasons why this model might be more problematic in the Brazilian context. Continue reading

Guest Post: Behavioral Economics, Punishment, and Faith in the Fight Against Corruption

The following guest post, by Roberto de Michele, Principal Specialist in the Institutional Capacity of the State Division at the Inter-American Development Bank (IDB), is a translated and slightly modified version of a post that Mr. de Michele originally published in Spanish on the IDB’s governance blog on August 29, 2016:

Last August, Hugo Alconada Mon, one of Argentina’s most prestigious investigative journalists, published an article (in Spanish) describing how road construction firms in Argentina created a cartel to fix public work contracts. Members of the cartel would meet in the board room of the sector chamber to conduct their business. The room has a statue of Our Lady of Luján, patroness of Argentina. Before commencing negotiations to fix contracts, assign “winners,” and distribute earnings, members of the cartel would turn around the image of Our Lady of Luján to face the wall, with her back to those gathered there. It was, as one of the sources candidly put it, “so that she doesn’t see what we were about to do.” This remark got me thinking about two possible explanations on why we break the law, cheat, and lie both to the government and to others. Continue reading

The Walmart FCPA Investigation Revisited (Again): Some Musings and Speculations on the Most Recent Reports

Earlier this month, there was yet another intriguing story about new developments in the US government’s investigation into possible Foreign Corrupt Practices Act (FCPA) violations by the Walmart’s foreign operations. The Walmart case is probably the most high-profile (and controversial) FCPA case of the last decade, and the reports suggest that it may finally be lurching toward a conclusion, though the recent story raises as many questions than it answers.

Before proceeding to the most recent developments, here’s a quick, and admittedly oversimplified, recap: In 2005, Walmart received a report from a disgruntled former employee that its Mexican subsidiary had engaged in an extensive bribery scheme to pay off government officials to speed the opening of new stores. After internal investigation, however, Walmart’s executives decided in 2006 not to take meaningful action or disclose the apparent FCPA violations to the US government. In 2011, Walmart’s new general counsel initiated a review of Walmart’s anticorruption compliance worldwide; this audit revealed evidence of significant problems in several countries, including Mexico, China, Brazil, and India. Around the same time, Walmart learned that reporters from the New York Times were conducting an extensive investigation into bribery allegations involving Walmart’s Mexico operations. In attempt to get out in front of the story, in December 2011 Walmart disclosed to the DOJ and SEC potential FCPA problems in its Mexican subsidiary, but indicated that the problems were limited to a handful of discrete cases. In April and December 2012, the New York Times published two lengthy articles (here and here) detailing extensive bribery by Walmart’s Mexican subsidiary, orchestrated by the subsidiary’s CEO and general counsel—allegations that went far beyond the isolated incidents Walmart had disclosed the previous year. Since then, the DOJ and SEC investigation into Walmart’s alleged FCPA violations—not only in Mexico, but in other foreign subsidiaries as well—has been ongoing.

There have been quite a few twists and turns in the story. Perhaps the most dramatic was the Wall Street Journal’s surprising report, from almost exactly one year ago. The highlights from that report included the claims (from “people familiar with the probe”) that (1)the investigation was nearly complete (and, by implication, the case would be resolved soon); (2) the US government’s investigation had found “few signs of major misconduct in Mexico”; and (3) although the investigation had uncovered evidence of “widespread but relatively small payments” in India, the Walmart case turned out to be “a much smaller case than investigators first expected” that “wouldn’t be likely to result in any sizeable penalty.”

The first of those three claims has been refuted by the passage of time—it’s more than a year after the WSJ story, and the case has still not been resolved. The latter two claims are flatly contradicted by the more recent report published by Bloomberg (also based on anonymous “people familiar with the matter”). According to the Bloomberg report: Continue reading