Two Essential Volumes on Corruption

The study of corruption and what to do about it is no longer an academic or policy-studies backwater.  Matthew’s bibliography of corruption-related publications now lists over 6,000 books, articles, and reports and, as his regular updates show (thank you Matthew), the list continues to grow at the rate of some 50 plus per month.  That is the good news.  It is also of the course the bad news.  Few practitioners, and I suspect even academics, can claim to have absorbed the learning in the 6,000 current documents let alone keep up with the outpouring of new works.

For those who can’t , I recommend two recent books: Dan Hough’s Analysing Corruption and Alina Mungui-Pippidi and Michael Johnston’s Transitions to Good Governance: Creating Virtuous Circles of Anti-Corruption.  Both do an excellent job of synthesizing and extending recent scholarship on corruption issues, and both do so in a sophisticated but accessible manner.  Both have the added virtue of being available in reasonably priced paperback editions. Continue reading

India’s 2G Spectrum Case: The Scam That Wasn’t?

It all started in May 2009 with a report filed by an NGO, Telecom Watchdog, with India’s Central Vigilance Commission. The NGO claimed that there were gross irregularities, likely due to corruption, in the allocation of licenses to operators for the 2nd Generation mobile communication standard spectrum (2G spectrum for short). By October 2009, India’s premier investigating agency, the Central Bureau of Investigation (CBI), had opened an investigation into the allegations, and in November 2010, the Comptroller and Auditor General of India estimated the losses to the government from the alleged misconduct at a whopping US$29 billion. Indian media called it the “biggest scam in the history of Independent India.” Time Magazine put it just behind Watergate as the second worst case of abusing executive power.

Petitions were filed in the Supreme Court of India pressing for cancelling the allocation and making sure that those behind the corruption would be held responsible. In 2012, the Supreme Court obliged, canceling all 122 licenses and imposing huge fines. The Court declared that the then-Minister for Communications and Information Technology, A. Raja, had used an inappropriate allocation procedure (first-come-first-served rather than an auction) to “favor some of the applicants … at the cost of the exchequer.” In an unprecedented move, the Court also ordered the creation of a “Special Court” to try the cases, and modified regular criminal procedure by curbing intermediate challenges, in order to ensure a speedy trial. The first case was instituted against the former Minister, senior bureaucrats, and prominent businessmen for conspiring to rig the allocation process and cheat the government of revenue.

On December 21, 2017, the Special Court announced its verdict—and it was not what many had expected: The Special Court acquitted all the accused, declaring that “a huge scam was seen by everyone when there was none,” and that “some people created [the perception of] a scam by artfully arranging a few selected facts and exaggerating things beyond recognition to astronomical levels.” The Court also found that, notwithstanding the earlier 2010 report (which others had already suggested was methodologically problematic), the actual losses to the government were marginal at most.

Many commentators were stunned and dismayed by the Special Court’s decision, denouncing it as “shocking” and “flawed.” But after reading the Special Court’s decision, I find myself in agreement with the Special Court’s reasoning. While it’s impossible, in a short blog post, to wade through the merits of the Special Court’s analysis for each of its conclusions, here I want highlight some of the most important arguments in support of the Special Court’s controversial decision. Continue reading

Thoughts from the Menendez Trial: Preventing Corruption from the Start

Last fall’s corruption trial of U.S. Senator Robert Menendez (D-NJ) ended rather anticlimactically, with the presiding judge declaring a mistrial after the jury announced that it couldn’t reach a decision, and the Department of Justice eventually deciding not to retry him. Senator Menendez had been accused of taking donations and gifts from Florida ophthalmologist Salomon Melgen in exchange for advocating for visas for Melgen’s foreign girlfriends, the award of a government contract, and the resolution of a Medicare billing dispute. Plenty of digital ink has already been spilled on the broader implications of the Menendez case for other bribery prosecutions (on this blog here, and elsewhere here and here).

But putting aside the specifics of the case, what caught my eye about the allegations against Senator Menendez was a background feature of U.S. law that seems to have gone largely undiscussed: It’s perfectly legal (and normal) for non-constituents to contribute to political candidates. In other words, even if you are barred from voting for a candidate because you live outside that candidate’s district, you can still express your support by pulling out your checkbook. That lack of constraint on donations seems to invite the very kind of corruption the government alleged in the Menendez case, because it allows a wealthy donor to find and purchase his or her own “personal United States senator.”

I’m certainly not the first person to voice the concern that allowing non-residents to contribute to political candidates may facilitate corruption. Two states—Alaska and Hawaii—have recognized the risk posed by allowing non-residents to contribute to political candidates. They’ve responded by limiting those donations. But in the Lower 48 and in all federal elections, there are no differential limits on contributions from people residing outside the state, so long as they are American citizens or permanent residents. (Alaska’s law is currently facing a First Amendment challenge from an aspiring donor whose gift was returned because the candidate he supported had already reached the out-of-state contribution limits. A federal judge upheld the law as a “closely drawn” effort by the state to prevent “quid pro quo corruption or its appearance,” but the would-be donor has appealed.) Putting aside the constitutional defenses of the sorts of laws that Alaska and Hawaii have adopted (which you can find in the amicus briefs filed in the Alaska case here, here, and here), there are strong policy reasons for limiting contributions by people living outside a state or district—not least because such limits, as the judge in the Alaska case noted, can be a useful tool for preventing corruption or its appearance:

Continue reading

Why Samsung’s Recent Conviction Will Not Rid South Korea of Chaebols

Samsung is in search of a new leader after Jay Y. Lee, grandson of Samsung’s founder, was convicted of bribing South Korea’s President to approve a controversial merger between two Samsung affiliates. Many thought that the proposed merger, which had been heavily criticized by independent analysts and investors, would not receive the legally-required approval from then-President Park Geun-hye’s administration. Lee allegedly bribed President and people close to her, to the tune of $38 million, for her support. When this corruption was exposed, President Park resigned and Lee was prosecuted and ultimately convicted.

Some hope that these dramatic developments portend more far-reaching changes in South Korea’s economy—in particular, the destruction of the chaebols (literally “wealth clans”), the multinational conglomerates in which leadership is passed from person to person within a family. Many credit chaebols with the successful post-World War II transformation of South Korea’s agrarian economy into an international economic powerhouse, but others criticize chaebols on a number of grounds, including the claim that they concentrate power and wealth in the hands of a small family minority, pay low dividends to ordinary investors, and facilitate the sort of grand corruption exposed in the Samsung affair.

After President Park resigned in disgrace, she was replaced by President Moon Jae-in, promised to put an end to chaebols altogether. Alas, this is unlikely. Indeed, it’s looking increasingly like Samsung’s recent scandal will not have a lasting effect on chaebols, or even on Samsung’s long-term profitability. Continue reading

Governor Brown’s Missed Opportunity to Promote Political Transparency and Fight Trumpian Corruption

Last month, Republicans announced their plan for a comprehensive overhaul of the United States federal tax code, the first in decades. In characteristic fashion, President Trump promised, “I don’t benefit. I don’t benefit.” To clarify his point, he added, “I think very, very strongly, there’s very little benefit for people of wealth.” Lest those statements left any doubt, Trump later claimed, “I’m doing the right thing and it’s not good for me, believe me.” Notwithstanding the President’s promises, a New York Times analysis found that Trump could save over a billion dollars if his plan were to be passed into law. Seemingly responding to this reality, Trump later amended his sales pitch by claiming that “everybody benefits” from tax reform.

Tax reform fits squarely into the third category of conflicts tracked by this blog: government regulatory and policy decisions that benefit Trump and his family businesses. Americans deserve to know how the President would personally stand to gain if his proposal became law. Yet the extent of Trump’s conflict of interest remains unknown, and unknowable, because of his widely-criticized refusal to release his tax returns.

Unfortunately, California Governor Jerry Brown squandered an opportunity to force Trump to shed some light on his personal finances when he vetoed the Presidential Tax Transparency and Accountability Act, which had passed both houses of the state legislature with overwhelming support. The Act would have required all aspiring Presidential candidates to provide their tax returns to the California Secretary of State (who would then publish them online) before the candidate’s name could appear on the California primary election ballot. In his veto message, Governor Brown explained that while he “recognize[d] the political attractiveness—even the merits—of getting President Trump’s tax returns,” he worried about the “political perils of individual states seeking to regulate presidential elections in this manner.” Brown identified two specific concerns about the bill: its constitutionality and the potential “slippery slope” it might create.

Brown’s arguments ring hollow. They seem particularly unjustified in a time in which state action is one of the few viable bulwarks against Trump’s corruption. Fortunately, other states, including Massachusetts and New York, are considering similar proposals. Those states can do better than California. Here’s why they should: Continue reading

Jared Kushner, Ivanka Trump, Anti-Nepotism, and Conflicts of Interest

On the same day as President Trump’s swearing in, the Department of Justice’s (DOJ) Office of Legal Counsel (OLC) released a memorandum elaborating upon why President Trump’s appointment of his son-in-law Jared Kushner as a Senior White House Advisor did not violate the federal anti-nepotism statute (5 U.S.C. § 3110). That statute prohibits a public official (including the President) from appointing or employing a relative (which the statute defines as including a son-in-law or daughter-in-law). The OLC reasoned that despite the seemingly clear prohibition in 5 U.S.C § 3110, another federal statute, 3 U.S.C. § 105(a), exempted positions in the White House Office from the anti-nepotism law. The OLC recognized this conclusion was a departure from its own precedent, but with the aid of some selective reading of legislative history, the OLC argued that lawmakers intended to allow the president “total discretion” in employment matters when it passed 3 U.S.C. § 105(a). (For non-specialists, see this primer for an explanation of these and other federal laws and regulations which could be relevant for addressing corruption in the Trump Administration.)

Somewhat predictably, the OLC memo generated debate among legal commentators (see here, here, here, and here). Yet even if the legal arguments were not entirely convincing, the OLC ended with a practical point that was echoed by many of the commentaries: given that President Trump will seek Mr. Kushner’s advice, regardless of whether he is a formal employee, it would be better for Mr. Kushner to be formally employed as a White House advisor, and thus subject to the applicable conflict-of-interest (COI) and financial disclosure rules. The same argument applies to Ivanka Trump, who also recently became an employee of the White House.

Some anticorruption advocates, myself included, were persuaded at the time by the OLC’s practical point. It would be best if the President did not make major policy decisions on the advice of radically unqualified relatives. But unfortunately, he is going to turn to them for advice. Given that baseline, we should prefer those family members occupy formal appointments, where at least they will be constrained by the COI statute and disclosure rules. However, with the benefit of hindsight, we should never have been persuaded. The COI statute and the disclosure rules turn out to be ineffective devices for preventing corruption in the Trump era. While the disclosure rules did encourage Mr. Kushner to make some divestments, they do not contain enough details to identify potential conflicts. And when there are conflicts, the COI statute is unlikely to be enforced, either because Attorney General Jeff Sessions will choose not to, or because the White House will grant a waiver.

Continue reading

Three Valuable Additions to the Anticorruption Literature

March was a great month for the anticorruption community: two books and one report appeared that, in contrast to much that is published on corruption and related topics, are useful, insightful, and worthy of a careful read.

1) There is now no better introduction to the field of corruption studies than Ray Fisman and Miriam Golden’s Corruption: What Everyone Needs to Know, published in late March by Oxford University Press in an affordable paperback edition.  In nine readable chapters the authors summarize the main issues – what corruption is, why it is so harmful, the challenge of measurement, the forces behind it, and most importantly what can be done to reduce it.  The only group of readers that the book will disappoint is opportunistic politicians looking for quick and easy fixes.  There are, the authors remind readers at several points, “no easy fixes for a problem that been around for millennia.”

Theirs is not a counsel of despair, however.  Policy reforms can make a difference: higher salaries for public servants, the creation of an independent anticorruption agency, a “big bang” approach like Georgia’s wholesale dismissal of traffic police are three that are featured.  But such reforms can backfire, they warn, without complementary changes in the larger environment.  Wage hikes must be accompanied by more stringent enforcement of antibribery laws else the result may simply be to raise the bribe price. Quoting Gabe Kuris’ ISS study, they caution that anticorruption agencies will succeed only if they have built “alliances with citizens, state institutions, media, civil society, and international actors.”  With perhaps the disastrous results from disbanding the Iraqi army in mind, they discuss what could have befallen Georgia had its traffic police been let go under different circumstances.

Specialists will find nits to pick.  John Githongo never chaired the Kenyan anticorruption agency (he ran a unit in the President’s office); corporate interests are not the only ones that capture government agencies (labor and environmental interests can exercise undue influence over policy too); Switzerland long ago scrapped anonymous, numbered accounts.  But these are quibbles in what otherwise has to rank as the best one volume introduction to corruption and what can be done to fight it.

2) In the decade plus since my former World Bank colleagues Joel Hellman, Geraint Jones, and Daniel Kaufmann first advanced the idea that in some countries the forces of corruption are so powerful that they can be said to have “captured” the state’s policymaking machinery, the notion of “state capture” has been booted around academic and policymaking circles. Unfortunately not always with the greatest definitional or analytical clarity with the result that there is now a confusing mass of writing on what it means for a state to be captured and how it can be freed.  Thanks to the OECD, those looking for a source that makes sense of the welter of material on state capture now have a single volume to consult.  Preventing Policy Capture: Integrity in Public Decision Making, available here (free to read online, $20 to download) continues the high standards one has come to expect from OECD publications on governance, nicely synthesizing the massive literature Hellman and colleagues have inspired.

Just as Fisman and Golden warn that isolated interventions will not reduce corruption, the OECD authors stress that freeing a state from the bonds of corrupt interests requires a set of “actions that complement and reinforce each other.”  If anything, anti-capture policies are even trickier to implement than anticorruption policies, for, as the OECD warns, if not carefully constructed they can compromise fundamental democratic values of free expression and the right to petition government.  One of the volumes many strengths is that it never loses sight of these risks.

3) Perhaps the most salutary result of the international anticorruption movement is the spotlight it has cast on the massive theft of resources from poor countries by corrupt leaders.  There is no better guide to what has been dubbed “kleptocracy” than Cambridge Professor J.C. Sharman’s The Despots Guide to Wealth Management, just out in an inexpensive paperback edition from Cornell University Press.  The author of the leading text why tiny offshore jurisdictions were for so long able to help tax evaders and drug lords hide their money, Professor Sharman explains why kleptocracy — a practice wealthy nations once tolerated and one still facilitated by their banks, lawyers, and accountants — is now widely condemned.

Despite the sea change in attitudes, and accompanying changes in domestic and international law, however, corrupt money still gushes out of developing countries. Wealth Management is laden with pithy summaries explaining why efforts to halt the flow have failed. (Sanctioning international banks in the hopes concerns about a loss of reputation will deter them doesn’t work since “they appear to have little reputation left to lose.”)  Most importantly, Professor Sharman offers realistic recommendations for ending what has now become the most visible, and detestable, consequence of grand corruption.