Tag Archives: cartels

To Fix the United States’ Corrupt Border Agency, Defeat Its Union

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Immigration reform is likely to be a high priority for the Biden Administration, and while most of the attention will focus on substantive reforms and enforcement strategy, the agenda should also include rooting out corruption in U.S. Customs and Border Protection (CBP), the agency charged with protecting the United States’ land borders. CBP is the nation’s largest federal law enforcement agency. It is also among its most corrupt. Border Patrol agents and CBP officers are regularly arrested—at a much higher rate than other federal law enforcement personnel—for a variety of corrupt activities, including accepting bribes, smuggling drugs, collaborating with organized crime groups, and selling government secrets. (In one case, a Border Patrol agent even gave a cartel member a literal key to a border gate.) All told, U.S. border guards accepted an estimated $15 million in bribes over the 2006–2016 period. Senior CBP officials have estimated that as many as 20% of CBP employees may be corrupt, and almost half of CBP personnel say that they’ve witnessed four or more acts of misconduct by their colleagues in the preceding three years.

The story of CBP’s corruption has been well told, including in voluminous investigative reporting, an advisory panel report, and congressional hearings. Yet little has changed. And this is not because nobody has figured out what policy reforms could make a difference. Indeed, experts who have studied the problem have laid out, clearly and consistently, a package of recommendations that would make a substantial difference. That package includes two main elements. First, CPB must devote more resources to monitoring and investigating CBP personnel. For example, the agency should hire substantially more internal affairs investigators; subject exiting personnel to regular reinvestigations (including periodic polygraph examinations); and equip all officers and agents with body cameras and mandate their consistent use. Second, leadership must reform CBP’s culture, which too often tolerates bad actors and punishes whistleblowers, and must provide better training in how to respond to misconduct.

The failure to address the CBP’s corruption problem, then, has not been due to a lack of viable, feasible reforms. The main problem is political—perhaps most importantly, the entrenched opposition of the National Border Patrol Council (NBPC), the powerful union that represents Border Patrol agents. The NBPC has systematically blocked efforts to crack down on corruption. Indeed, according to James Tomsheck, who led CBP’s internal affairs unit from 2006­–2014, NBPC leadership opposed each and every one of his integrity proposals over his eight year tenure. (For example, the union opposed CBP’s initiative to proactively identify corrupt officers and agents through polygraphing.) If the Biden Administration is serious about rooting out CBP corruption, it will need to take on the NBPC.

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How Anticorruption Enforcement Can Undermine Antitrust Amnesty Programs, and What To Do About It

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One of the most important law enforcement techniques that has emerged in the last few decades to combat cartels (anticompetitive collusion between competitors) is the use of programs that promise automatic amnesty to the first member of a cartel to self-report the illegal enterprise. These amnesty programs enable law enforcement authorities to gather the evidence they need to build strong cases against other members of the scheme, and, perhaps more importantly, these amnesty programs destabilize cartels—and might even deter their formation—by taking advantage of the incentive that individual cartel members have to cheat on each other. Since the 1990s, after the success of the amnesty program pioneered by the Antitrust Division of the U.S. Department of Justice (DOJ), antitrust amnesty programs have been replicated in many jurisdictions, leading some to declare a “leniency revolution” in competition law.

But the existing amnesty programs have a weakness They usually only offer protection for violations of antitrust laws, leaving even the firm that self-reports the antitrust violations potentially liable for other unlawful conduct that the cartel members engaged in as part of their anticompetitive scheme. And many of these anticompetitive schemes turn out to involve corruption, especially in the public procurement context. Cartels often bribe the official in charge of the procurement process, because a corrupt official can monitor and punish defections from the cartel, facilitate the exclusion of non-aligned competitors, and ensure an equal distribution of cartel profits. A firm that hopes to take advantage of an antitrust amnesty program might have to report all of this to qualify for amnesty, as often the programs require, as a condition for amnesty, reporting on the involvement not only of other cartel members, but of any public officials who may have facilitated the collusive conduct. But the fact that a self-reporting cartel member is not guaranteed amnesty from prosecution for corruption or other associated wrongdoing (such as money laundering) complicates the operation of antitrust amnesty programs, because this lack of guaranteed amnesty weakens the incentive of cartel members to self-report in cases where the cartel has engaged in bribery. The problem is especially pronounced when the penalties for bribery are much more severe than those typically imposed in cartel cases.

This is less of a problem in jurisdictions where anticorruption and antitrust authorities are departments of a single agency, as with the US Department of Justice (DOJ). But in many other jurisdictions, such as the EU, Brazil, and Mexico, competition law enforcement—and administration of the antitrust amnesty programs—are handled by enforcement agencies that do not have authority to prosecute corruption cases. From a potential self-disclosing company’s perspective, this poses a challenge: Disclosing participation in a bribe-paying cartel to the competition authority may also trigger an enforcement action by the separate agency responsible for prosecuting corruption, meaning the company will have to negotiate with both agencies, with the anticorruption agency not bound by the antitrust amnesty program. Indeed, in many countries anticorruption agencies may not have the same authority as antitrust agencies to grant leniency to self-reporting companies. In Brazil, for instance, though an antitrust amnesty program has been in place since 2000, settling corruption cases only became possible in 2014. In Mexico, the antitrust amnesty program was created in 2006, but a program for self-reporting bribery cases only entered into force in 2016. In both countries, although there is an established process for settling corruption investigations, there is no immunity provision for self-reporting; a discount in the applicable fines is often the best a firm can hope for. And even when both the antitrust agency and the anticorruption agency have authority to settle and grant leniency, the mere fact that a company knows it will need to enter into two or more separate negotiations increases the uncertainty and costs associated with self-disclosure, undermining the effectiveness of the amnesty program.

How should this problem be addressed in those countries where merging authority over antitrust and anticorruption enforcement in a single agency is not feasible or desirable? There are several possibilities:

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

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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 →

Shedding Sunlight on Procurement

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In a previous post, I extolled the virtues of Big Data in the fight against corruption, including in the important realm of government procurement. From the UK to Georgia to the Czech Republic, government procurement agencies have been collaborating with civil society groups to analyze their data, uncovering inefficiencies that range from the mundane to the outright corrupt. Governments are not alone: international development agencies like the World Bank are embarking on similar projects.

But there’s a problem. Big Data needs lots of data to work, entailing a high degree of government transparency and massive disclosures — sometimes called Open Government — that are sometimes at odds with the goals of anticorruption. In the case of government procurement, public data watchers need to know which firms bid for the project, at what price, and who won on what terms before they can play a useful watchdog role. However, as Rick has pointed out on this blog, public disclosure rules in procurement has the perverse effect of enabling private collusion. Cartels of contractors can agree amongst themselves to inflate their prices and select which among them will receive the contract, and are able to enforce their shady agreement because, of course, all offers are public.

Rick’s concerns seem to be directly implicated by the newly-proposed Open Contracting Data Standard, a push to “enhance and promote disclosure and participation in public contracting.” The project essentially asks every procurement agency in the world to upload their contracting documents onto the internet in a standardized manner that would encourage public oversight, including through the use of Big Data tools. So, is the push for open government procurement data doomed to backfire, creating collusion where perhaps it did not even exist before? Fortunately not. The increased risk of collusion is completely outweighed by the potential for the use of Big Data and other civil society monitoring techniques. Continue reading →

Dollar for Dollar, Procurement Collusion Is Still Better Than Outright Bribery

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In a piece on this blog last March, Rick highlighted a perverse consequence of requiring transparent bidding in government procurement. Although bid disclosure is intended to prevent public officials from secretly favoring companies that pay bribes, it can facilitate collusion among bidders by making it impossible for cartel members to defect from collusive agreements without getting caught.  As a result, the cartel is easily enforced and the public pays an inflated price for the goods or services being supplied, yielding improper profits for the winning firm just as if it had paid a bribe to secure the contract.

Rick’s example reminds us of the importance of considering the collateral consequences of anti-corruption remedies before employing them.  Nonetheless, public procurement reform could be an instance in which it is desirable to shift the method of corruption, even if we can’t reduce the total loss to corruption on a dollar-for-dollar basis.  Even if the private cartel problem worsens, this could be a cost worth bearing if it leads to less collusion between government procurement officers and favored private firms.

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The New Chinese-Backed Infrastructure Bank: Will it Tame the Corruption Dragon?

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Asian governments are welcoming China’s recent decision to establish a bank to finance infrastructure across Asia.  As Devex reported June 2, China plans to capitalize it with an initial $50 billion with the possibility of increasing it by an additional $100 billion.  For China, the bank is one more way to assert leadership in the Asian region.  For Asian states leery of relying on the Western-led World Bank and Asian Development Bank for financing public works, the bank is a chance to diversify.  For both the lender and borrowers alike, the bank offers the chance to profit from Asia’s economic dynamism.

The Chinese-led bank will have to overcome many challenges to realize these objectives, the most difficult of which may well be preventing corruption from infecting the projects it finances.  Infrastructure corruption produces half-built roads, dilapidated ports, and white elephants of all kinds.  It leaves borrowing governments indebted for under-performing, over-priced assets while stirring a backlash against the lender.  Will the new bank and its principal backer be able to keep the corruption dragon at bay?   There are at least three reasons to worry that it won’t.  Continue reading →

What the World Bank Can Do About Bid Rigging

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I took the World Bank to task last week for its failure to tackle bid rigging and other forms of collusion in its new procurement framework.  Despite mounting evidence that prices on many Bank-financed projects are jacked up 25%, 50%, or even more thanks to bidder cartels, the new framework does not even mention the problem let alone recommend steps to combat it.  The omission is all the worse because developing country governments and other donor agencies generally follow the Bank’s lead on procurement policy.  With upwards of $1 trillion likely to be spent on power plants, water works, and other big-ticket items in developing nations over the next decade, if the rest of the development community, like the Bank, remains blind to the risk of collusion, the potential losses could be staggering.

What might the Bank do were it to decide to amend the new framework to confront the risk of collusion in public procurement? Continue reading →

Ignoring Corruption in Procurement: The World Bank’s New Procurement Policy

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In a recent post Matthew spotlighted a handful of academics that are in denial about the extent of corruption in developing countries.  As bad as it is for armchair analysts to ignore the facts about corruption, it is far worse when a leading development policy maker does.  Yet that is what the World Bank is on the verge of doing as it puts the finishing touches on its new procurement policy. Continue reading →

The Quality of Contract Execution Depends on the Process of Contract Selection

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Last week I complained about the dearth of practical, policy-relevant literature available to help governments oversee contracts for the construction of civil works, the development of complex software programs, and other products which take months if not years to complete.  This is but one of many examples where governments must navigate the procurement process without rigorous, empirically grounded work on what procedures to employ when and how.  Absent such guidance, the procurement community falls back on rules of thumbs, old saws, and folk wisdom — the accuracy of which is always suspect.

One of the more suspicious sounding old saws in the procurement practice is the notion that contract execution and contract selection are independent activities — the belief, in other words, is that that how one selects a contractor is of little or no import for how well the contract is performed. But economic theory and recent empirical work both cast doubt on the accuracy of this bit of folk wisdom.
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When Transparency Makes Corruption Worse: Cartels in Public Procurement

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Yesterday Matthew commended the work of Mihály Fazekas, István János Tóth, and their colleagues to those concerned with corruption in public procurement.  I second that recommendation.  In their July 2013, slyly-named “Corruption Manual for Beginners”, the authors describe better than anyone yet how a government buyer can connive to steer a contract to a particular seller — from skewing the contract specifications so that only the favored firm can meet them, to failing to notify others about the procurement, to disqualifying on specious grounds firms that submit bids lower than the favored firm’s bid.

Yet despite the value of the contribution, the authors have not (yet) provided a similarly penetrating analysis of another form of public procurement corruption: that which results not from a conspiracy between a government buyer and one seller but that between the buyer and a group of sellers organized into an industry cartel.  Judging from the results of investigations in settings as different as the American states, the Netherlands, the Philippines, Nepal, France, Columbia, Uganda, Slovakia, and India, this type of corruption maybe be at least as common as the single seller form.  Costly too.  More than half the time, the price a buyer pays in a cartelized market is 25 percent or more higher than what it would have been had there been no collusion among the sellers.

The distinction between these two types of collusion–one involving a single favored seller, the other involving a cartel of sellers–is important, because the appropriate policy response is quite different. When the procurement process is corrupted by a cartel, the standard prescription for combating corruption–transparency–is not only ineffective but self-defeating.  Continue reading →