Tag Archives: embezzlement

The Goldman Sachs 1MDB Settlement Was Just and Appropriate

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In late October, the United States Department of Justice announced a major settlement with the global investment bank Goldman Sachs for its involvement in the 1MDB scandal, an international bribery scheme in which high-level Malaysian officials embezzled an estimated $4.5 billion from a fund designed to finance infrastructure and other economic development projects. Between 2012 and 2013, Goldman Sachs helped raise $6.5 billion for 1MDB in three bond sales, and at least two Goldman bankers aided Jho Low, an advisor to the fund, in embezzling much of the capital. As part of the settlement with DOJ, Goldman agreed to pay over $2.9 billion to authorities in the US, Hong Kong, UK, and Singapore. Of the nearly $3 billion in fines, approximately $1.85 billion will go to the United States, over $600 million to Malaysia (on top of a $3.9 billion settlement the Malaysian branch of Goldman reached with the country in July), and $440 million to financial regulators in other nations.

Despite these eye-popping numbers—including what appears to be the largest fine to date levied under the U.S. Foreign Corrupt Practices Act—some experts have characterized the $2.9 billion penalty as “surprisingly small” or even “virtually meaningless” for a company that made $3.6 billion this last quarter alone. And, in what has become a common refrain among critics of these sorts of settlements with big firms, many complain that no senior Goldman Sachs executives were held personally, criminally liable for the bank’s role in the 1MDB fiasco.

Yet an assessment of the punishment must also include the penalties that extend beyond these government-imposed fines. Indeed, while some regard Goldman Sachs’ settlement as a slap on the wrist for a global corporation that’s a glutton for punishment, the implications of the settlement reveal a more just outcome than appears at first blush.

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Guest Post: Anonymous Companies Are Undermining Mexico’s Public Health

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Today’s guest post is by Miguel Ángel Gómez Jácome, the Communications Coordinator at the Mexican civil society organization Impunidad Cero (Zero Impunity).

The COVID-19 pandemic has already affected millions of people. (As of the time this piece was initially drafted, around 2 million people had been infected; the exponential spread of the virus means that by the time this piece is published, that number is likely to be much higher.) And while Mexico has not yet been as severely impacted as other countries, official statistics (which likely understate the true prevalence) already report thousands of infections and hundreds of deaths. To confront this problem, Mexico, like other countries, will need to marshal its resources effectively. Unfortunately, though, Mexico’s ability to manage the COVID-19 epidemic is threatened by Mexico’s epidemic of embezzlement in the health sector, much of it facilitated by anonymous shell companies. This widespread corruption drains away vital public resources needed to combat public health emergencies like the COVID-19 pandemic.

In March 2020, two civil society organizations (Justicia Justa (Just Justice) and Impunidad Cero (Zero Impunity)), documented the extent of the problem in a research report entitled Fake Invoices: The Health Sector Epidemic. The research found that between 2014 and 2019, 837 shell companies issued 22,933 fake invoices to 90 health institutions across the country (in 30 of Mexico’s 32 states, as well as the federal government), ultimately embezzling a total of over 4 billion pesos (roughly $176 million US dollars) from the health sector—an amount that could have paid for around 80,000 hospital beds or between 3,400 and 6,900 ventilators. (To put this in context, Mexico currently has 5,000 ventilators in the whole country, and the government is looking to acquire 5,000 more.) And the problem is only getting bigger: According to Mexico’s Tax Administration authority (the SAT), the number of anonymous shell companies in the country has increased from 111 in 2014 to over 9,000 in 2020.

To crack down on the abuse of shell companies to embezzle public funds from the health sector (as well as other sectors), the authors of the Fake Invoices report propose three responses: Continue reading →

Can Political Opposition Decrease Corruption? Evidence from Brazilian Municipal Governments

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The idea that checks and balances in the government—such as legislative oversight of the executive branch—can reduce corruption is intuitive, but quantitative empirical evidence for or against this hypothesis is relatively scant. Moreover, the effect of a separation of powers on the extent of corruption may depend on whether the same political party or faction controls both branches of government, or whether different factions control the legislature and the executive. Indeed, some legal scholars have argued that the true separation of powers is not between branches of government, but rather the political parties in the government, and that the traditional view of the separation of powers—ambition counteracting ambition—only works if different branches are controlled by different political parties. But the likely effect of such partisan separation on corruption is not entirely clear: If the legislature is controlled by a party or coalition opposed to the party that controls the executive branch, this could mean increased legislative oversight and lower corruption, but alternatively, increased opposition may simply drive the executive to bribe the opposition to go along with his or her agenda, leading to more corruption.

Carlos Varjão and I investigate this the question empirically in our recent working paper, “Political Opposition, Legislative Oversight, and the Performance of the Executive Branch.” We focus on municipal governments in Brazil, which are particularly suitable for this sort of study for a number of reasons: there are many municipalities with a similar overall government structure, there’s a wealth of data on various forms of corruption (mainly embezzlement, procurement fraud, and over-invoicing) from Brazil’s public audit reports, and there’s considerable variation in both the level of corruption and the political control of the branches of the municipal governments. Our findings are striking and unambiguous: increased representation of the political opposition in the local legislature is associated with more legislative oversight of the executive, less executive branch corruption, and better public service delivery. Continue reading →

A Low-Cost, No-Tech Solution to Petty Corruption: Stickers

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On a recent trip to Myanmar, I was surprised to find that all of my dining receipts came with government stickers on them. It turns out that these stickers are a solution to a tax fraud problem. Restaurants are supposed to charge sales tax, but the government has limited capacity to ensure that the tax collected from patrons actually reaches the government. So the government sells stickers to restaurants that say the price the restaurant paid, and restaurants post these stickers on each receipt for the amount of the tax. Compliance is secured through a combination of direct enforcement and public pressure. This low-cost, low-tech solution ensures the flow of money to the government instead of the pockets of unscrupulous business owners.

The same innovation could be applied to combat petty corruption, helping to ensure that the money from various charges paid by citizens—from license fees to road tolls to other government service charges—flows to official coffers rather than bureaucrats’ pockets. In any situation where an individual has to pay the government – from garbage collection to healthcare to speeding tickets – demanding a stickered receipt could ensure that the government agent doesn’t pocket some (or all) of the payment. Moreover, using these stickers would have a more subtle secondary benefit: fixing the price of government services. Consider a citizen who applies for a driver’s license and has to pay a cash fee. The bureaucrat in charge of processing the application not only has an incentive to not only pocket the cash, but also to exaggerate the size of the license fee in order to have more to steal. The stickers help ameliorate this problem, because a citizen who demands proof of payment in the form of stickers diminishes the incentives of the bureaucrat to inflate the price.

Of course, while the sticker system helps address petty embezzlement, it does not (directly) address the problem of petty bribery. A bureaucrat could demand an additional bribe on top of the official price for a service. Or a government agent could offer to not impose some charge or fine in exchange for a bribe paid directly to the official. The classic example here would be a police officer offering to look the other way on a traffic offense in exchange for a payment. Nonetheless, the sticker system may also help to curb these sorts of petty bribery, for a few reasons: Continue reading →

Can the KPK and the Indonesian Public Finally Root Out State-Sanctioned Corruption? Updates from Novanto’s Corruption Scandal

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Indonesia’s Corruption Eradication Commission (KPK), established in 2003, has had many successes, including prosecutions of several former Ministers, the former Governor of Indonesia’s Central Bank, and a former Chief of Police. As of the end of last year, the KPK had tried and convicted a total of 119 members of parliament and 17 governors, among others. Now, the KPK is on the verge of catching one of its biggest fish yet: Setya Novanto, former Speaker of Indonesia’s House of Representatives Speaker. Novanto was finally detained, indicted, and brought to trial at the end of last year for his alleged embezzlement of 2.3 trillion rupiah (approximately US$170 million) from a 5.9 trillion rupiah national electronic identity card (e-ID) project. Novanto allegedly played a central role in allowing the mark up e-ID procurement costs in order to steal millions and redistribute them to the pockets of around 100 public officials, including approximately $7.4 million for himself. Novanto had been implicated in many previous scandals, but had managed to avoid punishment. This time, prosecutors are seeking a jail term of at least 16 years, plus a repayment of $7.4 million he is suspected of plundering. Novanto denied all the allegations and blamed the Interior Ministry, but the evidence, gathered and submitted by the KPK, is against him. With the final judgment to be made soon, the KPK is on the verge of winning one of the biggest corruption cases against a senior politician.

If the KPK wins this case, it would be an important victory, demonstrating the KPK’s power, as an independent anticorruption agency, to hold accountable even the most powerful politicians, and inspiring the Indonesian public to hold politicians to higher ethical standards. At the same time, though, a victory in this case won’t mean that the war against endemic corruption of has been won: the legislature and other powerful state actors will continue to fight back, especially by weakening the power of the KPK. Civil society, and the public at large, must continue to be vigilant to provide the backing the KPK needs to retain its power and independence.

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The Opportunity to Address Kenya’s Corruption Problem

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With the Kenyan Presidential elections on the horizon in 2017, incumbent President Uhuru Kenyatta, who hopes to continue his regime, has spoken out against corruption, emphasizing that combating this widespread problem requires effort on the part of every Kenyan. In his first term, President Kenyatta had shown promising signs of staying true to his philosophy of holding everyone accountable by actually getting rid of members of the Cabinet. Yet Kenya’s recent history makes many skeptical. For over a decade, Kenyan presidents have been pledging to get corruption under control. In 2003, newly-elected President Kibaki promised to stamp out corruption in Kenya. He proceeded to enact two important pieces of legislation in his first year: the Anti-Corruption and Economic Crimes Act, which established the Kenya Anti-Corruption Commission (KACC) to investigate corruption and educate the public, and the Public Officer Act, which required all public officers to declare their wealth. Yet at the end of President Kibaki’s decade-long regime, the situation remained bleak, with corruption running rampant. Kenya’s education sector offers a particularly troublesome glimpse into the continued prevalence of the problem. A 2010 forensic audit of Kenya’s Education Sector Support Programme found that misappropriation of funds and leakages in transfer of cash and materials from the Ministry of Education to schools, as well as other types of private embezzling and mis-accounting of funds, had led to the loss of 4.2 Billion Kenya Shillings (US$55 million) that was originally intended for education. Furthermore, most of the suspected actors went unpunished; even when caught, the culprits were either transferred to new departments or at most suspended from their role.

As for President Kenyatta’s more recent efforts, the President claims that he has done his part in the anticorruption fight and is frustrated by the lack of complementary efforts by others. Yet many critics claim that President Kenyatta has not demonstrated the political will necessary to fight corruption. And some have gone further, accusing the president of suspect and excessive awarding of government contracts to companies like Safaricom without an open bidding process. Safaricom have been involved in multiple corruption scandals already, leading to suspicions of bribery. Critics have also been highlighting the fact that those close to Kenyatta seem immune from serious scrutiny for corrupt acts.

Even if we put those concerns to one side, and assume that both President Kenyatta and President Kibaki before him were acting in good faith, the numerous anticorruption initiatives undertaken by both administrations do not seem to have had much of an impact. There are a few things that Kenya’s next president—whether it is Kenyatta or someone else—could do that would go further in making progress against the corruption problem than the measures that have been adopted so far: Continue reading →

Malaysia’s Anticorruption Credibility Problem

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The biggest anticorruption news last week was almost certainly the announcement by Malaysia’s new Attorney General clearing Prime Minister Najib Razak of any wrongdoing in connection to the approximately $781 million that mysteriously appeared in his personal bank account. Early reports suggested that the money might have been embezzled from a state investment fund called 1MDB – and the controversy over this matter caused substantial political upheaval (and ended up being a major focus of last year’s International Anti-Corruption Conference, which was held in Malaysia at the height of the scandal). But last week, Attorney General Mohamed Apandi Ali, following up on an earlier statement by the Malaysian Anti-Corruption Commission (MACC), announced that the money was not in fact from 1MDB, but was instead a “political donation” from the Saudi royal family. Attorney General Apandi further stated that the money was given “without any consideration,” that Prime Minister Najib had not done anything unlawful, and that he’d returned $620 million of unused money to the Saudi royal family.

Is this true? Is it really the case that Prime Minister Najib did nothing wrong (or at least nothing illegal)? Of course, I have no idea (though Swiss investigators announced earlier this week that there is indeed evidence of massive misappropriation from 1MDB). I’m not privy to any of the evidence that the MACC and the AG investigated, and I’m at best a casual, intermittent outside observer of Malaysian politics. And it would be nice to live in a world in which, when the most senior justice official in a country announces that allegations of corruption are unfounded, I could simply believe those assertions. After all, not all allegations of corruption are true. Yet in this case, my reaction to the AG’s announcement (even before I read the news about the ongoing Swiss investigations) was cynical disbelief. I may not ever know what actually happened in this case, but what I do know is that pretty much everything that’s happened since news of the scandal broke has shattered any faith that I may once have had that Malaysian institutions undertook a genuine, impartial, investigation of this matter. Indeed, the Malaysian government’s handling of this matter is a textbook example of how a system can damage its credibility, perhaps irreparably.

Just to recap some of the highlights: Continue reading →