Fixing India’s Anti-Money Laundering Regime

In the past year, India has been among the most zealous countries in the world in stepping up the fight against money laundering and related economic and security issues. The effort that probably got the most attention was last year’s surprise “demonetization” policy (discussed by Harmann in last week’s post), which aimed to remove around 85% of the total currency in circulation. But to assess India’s overall anti-money laundering (AML) regime, it’s more important to focus on the basic legal framework in place.

The most important legal instrument in India’s AML regime is the Prevention of Money Laundering Act, which was enacted in 2002, entered into force in 2005, and has been substantially amended since then. The Act defines a set of money laundering offenses, enforced by the Enforcement Directorate (India’s principal AML agency), and also imposes a range of reporting requirements on various institutions. Furthermore, the law gives the Enforcement Directorate the authority to freeze “tainted assets” (those suspected of being the proceeds of listed predicate offenses), and to ultimately seize those assets following the conviction of the defendant for the underlying offense.

How effective has India been in its stepped-up fight against money laundering? On the one hand, over the past year (since the demonetization policy was announced), banks logged an unprecedented increase of 706% in the number of suspicious transaction reports (STRs) filed, and reports from last July indicated that the total value of the assets frozen under the Prevention of Money Laundering Act in the preceding 15 months may have exceeded the cumulative total of all assets frozen in the prior decade-plus of the law’s operation. And the government further reported that its crackdown on shell companies had discovered around $1.1 billion of unreported assets.

Yet these encouraging numbers mask a number of serious problems with India’s AML system, problems that can and should be addressed in order to build on the momentum built up over the past year. Here let me highlight two areas where greater reform is needed: Continue reading

India’s Demonetization One Year Later: A Failed Tool to Combat Corruption

One year ago, in an unscheduled live televised address, India’s Prime Minister Narendra Modi announced that within weeks the ₹500 and ₹1000 banknotes would become worthless. Prime Minister Modi framed this so-called “demonetization” policy as part of the battle against corruption and illicitly-obtained “black money,” which had “spread their tentacles” through the India economy. The Prime Minister identified two ways that demonetization would combat corruption. First, the surprise devaluing of currency would leave criminals, including corrupt officials, with millions of rupees’ worth of currency that would suddenly become worthless, and those holding large stashes of black money would be unwilling or unable to exchange it without having to explain where the money came from. Second, going forward, demonetization would make it more difficult to hold, transport, or exchange large quantities of cash (particularly since the Indian government was demonetizing the two largest notes in circulation); as the Prime Minister emphasized, “[t]he magnitude of cash in circulation is directly linked to the level of corruption.”

One year out, it is increasingly clear that India’s demonetization experiment imposed tremendous social and economic costs but failed to achieve either of these objectives (see here, here, and here). A closer examination of the reasons for this failure may help us understand both the potential and limits of demonetization as a tool to combat corruption and the underground economy.

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Prosecuting Public Officials for their Mistakes

In July 2011, Yingluck Shinawatra became Prime Minister of Thailand after her party (founded by her brother, former Prime Minister Thaksin Shinawatra) won a decisive electoral victory. One of her principal campaign promises was to establish a program to purchase rice from farmers at above-market prices then store the rice to reduce supply. The hope was that doing so would increase world prices—because of Thailand’s position as the leading global rice exporter—ultimately allowing the government to sell at a profit. Shortly after the election, Yingluck’s government implemented this program, and it worked well for a few months—until other global players increased their supply of rice, causing Thailand to lose billions of dollars in the process. This economic debacle was entirely predictable—and indeed was predicted by many experts. And the program itself was beset by allegations of fraud and corruption in its implementation.

But should the failure of the rice-buying program be the basis of a criminal charge of corruption and a prison sentence against Yingluck herself, in the absence of evidence that she was directly involved in any embezzlement, bribery, or other more conventional forms of graft? Section 157 of Thailand’s Penal Code allows for just such a prosecution, as this section makes it a crime for a public official to either dishonestly or “wrongfully discharge or omit to discharge a duty so as to expose any person to injury.” And last month, the Thai Supreme Court found Yingluck (out of power since she was deposed by a military coup in 2014) guilty and sentenced her to five years in prison. She fled the country before the verdict.

Thailand is not alone in adopting anticorruption laws that criminalize not only dishonest conduct (bribery, embezzlement, conflict of interest, etc.), but also negligence or incompetence. When India updated its anticorruption law in 1988, it added a new provision that makes it a criminal offense for a public official to “obtain for any person any valuable thing or pecuniary advantage without any public interest.” This broad offense was interpreted by a state High Court to not require any proof of dishonesty or criminal intent, and the Central Bureau of Investigation (India’s premier anticorruption agency) has routinely employed the provision in grand corruption cases to avoid the problem of having to prove corrupt intent. In perhaps the most high-profile such prosecution, the agency went after an ex-Prime Minister, Dr. Manmohan Singh. Dr. Singh was the Minister of Coal at a time when the Government decided to liberalize allocation of coal-blocks and to sell mining rights to private parties. In 2014, the Comptroller and Auditor General’s office reported the policy had caused losses worth billions of dollars because the rights had been sold for too little, through a process that was too ad hoc to be considered legal. Dr. Singh was subsequently charged under India’s broad law, though his trial has currently been stayed while his challenge to the constitutionality the law is pending before India’s Supreme Court. (There are clearly concerns in other quarters about the breadth of this statute: In 2016 a Select Committee of the Upper House of India’s Parliament submitted a report that suggested India eliminate this offense. Parliament hasn’t yet acted on this recommendation, but there are signs that it has some support.)

Is it appropriate to enact broad anticorruption laws that allow government officials to be convicted for dereliction of duty, acting in a manner contrary to the public interest, and the like? Anticorruption activists and prosecutors may find such statutes appealing: It is easier to secure convictions of elected officials who are suspected of corruption, but where it is too difficult to prove the specific intent necessary for traditional corruption offenses. But in fact these broad laws are likely to do more harm than good, and countries like Thailand and India would be better off without them. There are three main reasons for this: Continue reading

The 2016 CPI and the Value of Corruption Perceptions

Last month, Transparency International released its annual Corruption Perceptions Index (CPI). As usual, the release of the CPI has generated widespread discussion and analysis. Previous GAB posts have discussed many of the benefits and challenges of the CPI, with particular attention to the validity of the measurement and the flagrant misreporting of its results. The release of this year’s CPI, and all the media attention it has received, provides an occasion to revisit important questions about how the CPI should and should not be used by researchers, policymakers, and others.

As past posts have discussed, it’s a mistake to focus on the change in each country’s CPI score from the previous year. These changes are often due to changes in the sources used to calculate the score, and most of these changes are not statistically meaningful. As a quick check, I compared the confidence intervals for the 2015 and 2016 CPIs and found that, for each country included in both years, the confidence intervals overlap. (While this doesn’t rule out the possibility of statistically significant changes for some countries, it suggests that a more rigorous statistical test is required to see if the changes are meaningful.) Moreover, even though a few changes each year usually pass the conventional thresholds for statistical significance, with 176 countries in the data, we should expect some of them to exhibit statistical significance, even if in fact all changes are driven by random error. Nevertheless, international newspapers have already begun analyses that compare annual rankings, with headlines such as “Pakistan’s score improves on Corruption Perception Index 2016” from The News International, and “Demonetisation effect? Corruption index ranking improves but a long way to go” from the Hidustan Times. Alas, Transparency International sometimes seems to encourage this style of reporting, both by showing the CPI annual results in a table, and with language such as “more countries declined than improved in this year’s results.” After all, “no change” is no headline.

Although certain uses of the CPI are inappropriate, such as comparing each country’s movement from one year to the next, this does not mean that the CPI is not useful. Indeed, some critics have the unfortunate tendency to dismiss the CPI out of hand, often emphasizing that corruption perceptions are not the same as corruption reality. That is certainly true—TI goes out of its way to emphasize this point with each release of a new CPI— but there are at least two reasons why measuring corruption perceptions is valuable: Continue reading

How Corrupt Are Your Courts? Too Corrupt To Be Fair?

In complex transnational litigation, ensuring the rights of all parties is especially challenging. Consider the following situation: A plaintiff brings a lawsuit against a US multinational in US court, alleging wrongful conduct in some foreign country; the defendant corporation moves to dismiss the case on the ground that the courts of the country where the alleged conduct took place are a more appropriate forum for adjudicating the suit, and the plaintiff should therefore be required to pursue the suit there; but the plaintiff opposes the motion to dismiss on the grounds that the foreign country’s courts are so corrupt that it would be impossible to get a fair trial. What should the US court do when confronted with that sort of situation?

The technical legal term for a motion to dismiss a case because the plaintiff ought to file the suit in a different (and more convenient) judicial forum is the forum non conveniens motion. To successfully win on such a motion in a US federal court, the defendant must convince the court that an alternative forum would provide “basic fairness.” When the alternative forum is the judiciary of a foreign country, plaintiffs sometimes try to oppose these motions by pointing to judicial corruption in the foreign forum. But as one court highlighted, “the argument that the alternative forum is too corrupt to be adequate does not enjoy a particularly good track record.” Indeed, as I noted in my previous post on the Chevron-Ecuador litigation, the district judge in that case rejected the plaintiff’s claim that Ecuadorian judicial corruption made it impossible to get a fair trial in Ecuador, remarking that “the courts of the United States are properly reluctant to assume that the courts of a sister democracy are unable to dispense justice.” Even when confronted with clear and undisputed evidence of corruption in a foreign court, US courts have generally been unwilling to accept this as a sufficient reason to keep the case in US court. (In one case a US court reaffirmed a forum non conveniens decision even after the plaintiff successfully bribed a Mexican judge to have the case sent back to the US court.) Consistent with this deferential approach, there are very few cases where a US court has found a foreign forum inadequate due to credible allegations of widespread judicial corruption. (There are admittedly a handful of such cases, including Bhatnagar v. Surrendra Overseas, Ltd., in which the court found that the extensive delay, unreliability, and general corruption of the Indian judiciary made it an inadequate forum for the plaintiff.)

By contrast, other jurisdictions take allegations of foreign judicial corruption more seriously as a reason not to dismiss a lawsuit and insist that it remain in the forum of the plaintiff’s choice. Notably, although the forum non conveniens analysis is very similar in US and Canadian courts, Canadian courts have been more willing to find foreign forums inadequate because of pervasive corruption. For example, in Norex Petroleum Limited v. Chubb Insurance Company of Canada, a US court dismissed the case on forum non conveniens grounds, while the Canadian court took jurisdiction, denying the defendant’s forum non conveniens motion in light of the Canadian court’s finding that—even though every other factor weighed heavily in favor of Russia as the better forum—extensive judicial corruption in Russia would prevent the plaintiff from accessing a fair and impartial court. It’s certainly not the case that Canadian courts have been consistently receptive to these sorts of arguments—for example, a recent Canadian ruling found Guatemala an appropriate forum despite significant corruption concerns—but the contrast between Canada and the US demonstrates that the US courts’ “see no evil” approach is far from inevitable.

Although it may be helpful for the purposes of international comity for courts to presume that foreign judiciaries are fair, and there are legitimate reasons to dismiss a case in favor a foreign forum (such as easier access to evidence and witnesses), the reluctance of US courts to accept credible allegations of judicial corruption as a reason to deny a forum non conveniens motion likely goes too far. Respect for foreign courts is a good thing in principle, but in practice it can undermine the ability of plaintiffs to get a fair hearing. US courts should hesitate before dismissing cases to foreign forums when there are plausible claims of corruption for two reasons:  Continue reading

Cash Crunch: How Will India’s Supreme Court Respond to Modi’s Radical Move?

Last November 8th, the same day the United States elected a kleptocrat to its highest office, an executive on the other side of the world—Indian Prime Minister Narendra Modi—launched what Larry Summers called “the most sweeping change in currency policy that has occurred anywhere in the world for decades.” Prime Minister Modi’s surprise “demonetization” drive gave citizens fifty days to exchange all 500 and 1000 rupee notes (valued at about 8 and 15 USD respectively). Modi’s radical move, which will remove approximately 86% of all currency in circulation, is an attempt to combat endemic petty corruption, money laundering, terrorist financing, and tax   evasion (only 2% of Indians pay income tax). Prime Minister Modi was elected on an anticorruption platform in 2014, and pledged during his campaign to target hidden cash (so-called “black money”). Yet the demonetization campaign came as a surprise. Indeed, it probably had to be a surprise, lest those hiding fortunes in cash would have been able to prepare for the policy change.

While the Indian public generally supports aggressive anticorruption efforts, it would be hard to exaggerate the disruption resulting from demonetization. The real estate and wedding industries run largely on cash, as do most small businesses. And the demonetization program has hit regular citizens hard: People have been waiting in lines for hours to exchange their cash, which can be especially difficult for the four-fifths of women who don’t have a bank account. In the short term, consumption, the stock market, and growth forecasts have all plummeted and the agricultural sector is expected to suffer as well. Prime Minister Modi acknowledged the campaign would cause pain for many honest people, but believed it was worth it, stating that black money and “corruption are the biggest obstacles in eradicating poverty.” (Since then, the official justification for the campaign appears to have shifted to an attack on the cash economy as a whole, rather than a campaign against black money specifically.)

The fate of the demonetization program now lies with India’s judiciary: Continue reading

Corruption’s Gendered Double Standard

On November 8, 2016 the United States almost elected Hillary Clinton as its first female president. But, if Donald Trump and many of his supporters were to be believed, Secretary Clinton was also one of the most corrupt politicians of all time. This argument appears to have swayed many American voters, who ended up electing Donald Trump (who might actually be the most corrupt person recently elected to the presidency, see here, here, and here). That Trump’s unprecedented accusations of corruption were leveled against the first female presidential candidate nominated by a major political party was not a coincidence.

A great deal of commentary has considered whether women (and especially female politicians and public officials) behave less corruptly than men. (For some prior discussion on this blog, see here.) But I’d like to focus on a different question: Are female politicians accused of corruption treated differently—and judged more harshly—than male politicians? Existing research suggests that they are, which in turn may explain both why allegations of corruption can be more damaging to female politicians, and why female public officials are on the whole less corrupt. Continue reading