Exposing Secret Offshore Bank Accounts: American Law

Kleptocrats, drug traffickers, and other big-time crooks face a common problem: How to hide their money from the authorities while retaining easy access to it.  Yesterday former Senate staffer Elise Bean described one common, low-cost, easy solution and how a recent U.S. law has made it far more difficult for American criminals to turn to it. The solution, create a corporation in another country and then open a bank account in that country in the corporation’s name, is now widely known thanks to the Panama Papers.  What Bean offered in her April 26 testimony before a Congressional committee was a step-by-step explanation of how the scheme works and the U.S. law’s success in making it far harder for Americans to take advantage of it.

Committee members peppered her with questions about the law, its effect, and ways to improve its operation.  About the only question they didn’t ask is why more countries don’t have a similar law.  That would be one for anticorruption advocates to put to legislators in countries lacking one.

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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.


How Should the U.S. Anticorruption Community Respond to Trump? Engagement vs. Confrontation

So Donald Trump is now the President of the United States, and has been for almost two weeks. Yes, this is really happening. And yes, this is really frightening. As has been pointed out countless times, Donald Trump poses a unique and unprecedented threat to American political institutions. It’s not mainly the hard-right policies that President Trump and the Republican Congress will push. People can strongly disagree with much of that policy agenda (as I do), but those policy positions are, alas, within the American political mainstream. And it’s not just Trump’s obvious narcissism, racism, and ignorance, bad as those are. On top of all that, Trump seems to view the presidency mainly as an opportunity for personal enrichment, and many of his top-level advisors and appointees seem to have a similar attitude. Notwithstanding his (obviously disingenuous) “drain the swamp” rhetoric, Trump—and many congressional Republicans—seem to have little regard for basic ethical norms and principles. And there are reasonable fears, based on what we’ve seen so far, that much of the Trump Administration’s policy agenda, though couched in familiar conservative market-oriented rhetoric, will in fact be oriented toward enriching the friends and families of senior administration officials, including but not limited to Trump’s own organization.

A democratically elected head of government who ran on a populist platform, but whose agenda seems to be oriented primarily toward using political power to enrich himself and his cronies? This might be a new experience for Americans, but as Professor Palifka pointed out in her post last week, this is a familiar story in many other countries (including Mexico, Ms. Palifka’s lead example). Think Silvio Berlusconi in Italy, Nestor and Cristina Kirchner in Argentina, Thaksin Shinawatra in Thailand, Jacob Zuma in South Africa, and countless others. Now that the U.S. seems to be facing a similar situation, the U.S. anticorruption community—which I’ll define loosely as the diverse set of activists, advocacy groups, commentators, researchers, scholars, and others who focus on anticorruption in their professional work—needs to be actively involved in responding.

Unfortunately, the U.S. anticorruption community is not especially well-prepared to deal with this situation. Put aside for the moment that the most prominent international anticorruption advocacy group—Transparency International (TI)—recently voted to strip its U.S. chapter (TI-USA) of its accreditation, triggering an ongoing internal fight that has, I gather, left the chapter in limbo. (That’s a whole other story.) Much more important than any internal organizational drama is the fact that most U.S. anticorruption advocacy groups have typically focused on questions of U.S. anticorruption policy—such as FCPA enforcement, asset recovery, corporate transparency, and the like—not on systemic corruption in the U.S. government itself. True, some groups have in the past positioned themselves as fighting systemic corruption in the U.S. government, but those groups generally use a broad (in my view, overly broad) definition of “corruption” that emphasizes primarily campaign finance and lobbying reform—noble causes, to be sure, but not really the main worry right now. The U.S. anticorruption community faces a challenge that’s more akin to the challenge anticorruption communities have faced (or are still facing) in places like Mexico, Italy, Argentina, Thailand, and South Africa, though perhaps with even higher stakes.

My sense is that many leading figures in the U.S. anticorruption community are already thinking hard, and having many constructive conversations, about how to respond to the unique challenges posed by the Trump Administration. In the remainder of this post, I want to focus on a basic strategic question that I’ve seen come up many times in these conversations: Engage or confront? Continue reading

Guest Post: Living in a Kleptocracy–What to Expect Under President Trump

Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:

The news regarding President Donald Trump appointments and nominations, and the increase in foreign governments’ business at Trump properties, has caused considerable concern regarding possible conflicts of interest, nepotism, insider trading, and other types of grand corruption. Many are worried about what this means—if President Trump’s tendencies toward crony capitalism, or quasi-kleptocracy, are as serious as his critics fear, what can we expect will happen over the next four or eight years?

While grand corruption among the political elite may be new for US citizens, this challenge is all too familiar in many other parts of the world. As a long-time resident of Mexico and corruption scholar, I have some insight regarding life in a relatively corrupt environment, which might be relevant to what the US is about to face: Continue reading

Donald Trump Will Probably Violate the Foreign Emoluments Clause. So What?

Those of us who are still reeling from the shock and horror of Donald Trump’s election are going through many of the typical stages of grief: denial, anger, depression, etc. To these I’d add an additional stage of (political) grief, which seems to disproportionately afflict my fellow law professors: the desperate concoction of legally plausible but politically dead-on-arrival constitutional theories designed to stop Trump from becoming President (or stop him from doing lots of the things he wants to do).

Enter the Foreign Emoluments Clause of the U.S. Constitution (Article I, Section 9, Clause 8), which provides that “no person holding any office [of the United States government] … shall, without the consent of the Congress, accept of any present, emolument, office, or title, of any kind whatever, from any king, prince, or foreign state.” Many legal scholars, including my colleague Larry Tribe, as well as a number of legal ethics experts, have argued (persuasively, in my view) that Donald Trump’s global business dealings may well put him in violation of this Clause: If any foreign state pays above-market-value for any goods or services provided by the Trump business empire, or does any other favor (with a cash value) designed to benefit President Trump’s businesses, that could well be deemed a “present … of any kind.” The wording of the Emoluments Clause is broad: It does not require a quid pro quo, it does not require a showing that the gift was intended to influence a decision or an expression of gratitude for a decision already made. In contrast to the conflict-of-interest statutes, there is no explicit exemption from the Foreign Emoluments Clause for the President (though some scholars have sought to argue that the President is not covered, for reasons I don’t find all that persuasive). Furthermore, the “of any kind” modifier would seem to defeat many of the otherwise-plausible claims that the terms “present” and “emolument” should be read narrowly. (I imagine that there might still be a “de minimis” exception from the Emoluments Clause, allowing for ceremonial gifts of various kinds, but that’s not really what we’re talking about in the Trump case.) Though I’m no expert, based on what I’ve read thus far I’m prepared to accept the claim that should foreign governments provide benefits to the Trump Organization while Donald Trump is President—including paying above-market-rates, or steering business to Trump’s companies—then President Trump would be in violation of the Foreign Emoluments Clause.

The question is: So what? What’s the remedy for this constitutional violation?

There are three possibilities—a judicial remedy, an “elite” political remedy, and a public opinion remedy. None of them seems especially promising. Continue reading