To Advance its Anticorruption Agenda, Brazil Must Reform its Conflict of Interest Laws

In the past five years, Brazil made significant advances in its anticorruption agenda, including both an aggressive effort to prosecute high-level politicians and business executives, and also a series of legislative reforms. But Brazil has not yet done enough to regulate conflicts of interest within the public administration.

One good example of the weakness of current regulation is the controversy involving the appointment of Leticia Catelani—a businesswoman who supported President Bolsonaro’s election campaign—to the Executive Board of Apex, the Brazilian Trade and Investment Promotion Agency. Apex is a state-owned entity in charge of promoting Brazilian exports. Ms. Catelani owns a company with a significant export business, raising concerns that she might use her Apex position to improperly favor her own business. (A group of Apex employees have filed a lawsuit challenging her nomination, and a formal complaint has also been filed with the Ethics Commission of the Presidential Office (CEP) asking for her removal.) Though this is but one recent illustration; the issue is much more general, and indeed it is likely that under the Bolsonaro administration concerns about conflicts of interest will increase.

Unfortunately, the existing mechanisms for controlling conflicts of interests in the federal administration—principally the 2013 Conflicts of Interest Act (COI Act) are inadequate and must be reformed. The COI Act applies to senior officials and ministers of state within the federal government. The Act lists a number of situations that trigger conflict-of-interest concerns, and it also requires public officials to file annual reports about their private assets and activities. The Act empowers the CEP to investigate cases, issue guidelines, clarify doubts, and grant waivers. But the current system is inadequate in several respects, and the overall system for dealing with conflicts of interest is in urgent need of reform. Three points in particular should receive special attention:

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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.

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Norway Divests Shares in Telecom Giant ZTE Over Gross Corruption: Will Others Follow?

On January 7 the manager of Norway’s sovereign wealth fund announced the fund would sell its $15 million holdings in Chinese telecom giant ZTE and make no future investment in the company because of the risk the company would become involved in corruption scandals.  The decision to divest for reasons of corruption is a significant advance in the battle to curb global corruption.  For while the investment community can be a powerful voice for change in corporate behavior, to now its efforts has been confined almost exclusively to entreaties to corporate management to make corruption prevention a priority (see pp. 1127-1130 of this article for a summary of recent efforts).  Divestment puts teeth in these entreaties, particularly when wielded by an investor of the size and influence of the Norwegian fund.

The Government Pension Fund Global, the fund’s formal name, was established in 1990 to invest the nation’s petroleum wealth for the benefit of future generations.  Its current holdings of roughly $825 billion make it not only the world’s largest sovereign wealth fund but one of the largest pools of investment capital in existence.  For comparison, Pimco Total Return, which Forbes ranks as the world’s largest mutual fund, has assets of $263 billion while UK Business Insider reports that Millenium Partners $181 billion in assets make it the globe’s biggest hedge fund.

It is not only the fund’s size that makes it influential, but the careful process it follows to ensure its investments reflect the values of beneficiaries, the citizens of Norway.  The fund’s investment guidelines provide that it may exclude any company where “there is an unacceptable risk that the company contributes to or is responsible for” activities that result in the violation of human rights, lead to severe environmental damage, or further “gross corruption.”  To decide whether disinvestment is appropriate, the fund’s five member Council on Ethics reviews a company’s conduct and issues a recommendation to fund managers. In the case of ZTE, the Council’s June 2015 divestment recommendation was based on an extraordinarily damning report it prepared recounting ZTE’s conduct over the past decade, a report that leaves no doubt the company was responsible for an enormous amount of “gross corruption.”

The only question the report left open is why other investors aren’t fleeing the company’s stock as well.  If not for social reasons — because the company’s repeated, flagrant violations of the corruption laws of so many countries has done so much harm to so many — for economic reasons.   A business model seemingly bottomed on the wholesale corruption of public officials is sure to crash soon in this heightened era of anticorruption enforcement.

Just look at what the Council’s report says about ZTE activities — Continue reading