How We Did It: the U.S. Congress’ Exposure of the Grand Scale of Global Corruption

 Over the past two decades the U.S. Senate Permanent Subcommittee on Investigations has laid bare how Gabonese President Omar Bongo, Chilean dictator Augusto Pinochet, Equatorial Guinean President Teodoro Obiang, and a gaggle of friends and relatives of the leaders of Mexico, Pakistan, Nigeria, Angola, Saudi Arabia, and other countries conspired with large, prestigious banks to hide the enormous sums they stole from their nation’s citizens.  Financial Exposure, the new book by subcommittee investigator and later staff director Elise Bean, recounts how Democrats and Republicans united not only to document egregious cases of grand corruption but to enact legislation making banks’ complicity in future cases a crime.

Americans depressed by the rancorous polarization now gripping Congress will find her book a welcome reminder that Democrats and Republicans can work together to advance the public interest.  Scandals involving money laundering by banks in other nations, most recently Denmark’s Danske Bank and Latvian bank ABLV, should prompt non-Americans to send their parliamentarians a copy of Ms Bean’s book.  Below Ms. Bean offers a few morsels from the book to whet readers’ appetites.    

There isn’t room here to recount all the subcommittee’s anti-corruption investigations, but a few examples will illustrate what they showed and what results they produced.

Citibank Private Bank.  Corruption was the subject of a key investigation by the subcommittee in 1999, which was led by then subcommittee chair Republican Senator Susan Collins of Maine. Rumors were flying then that the United States had become the preferred banker for corrupt foreign officials around the world. Working with Democratic Senator Carl Levin of Michigan (my boss), the subcommittee elected to zero in on so-called “private banks,” banking units that opened accounts only for wealthy individuals with at least $1 million in deposits.

The inquiry ended up detailing four accountholders at Citibank Private Bank: Raul Salinas, brother to the then president of Mexico; Omar Bongo, then president of Gabon; Asif Ali Zardari, then known for his marriage to Benazir Bhutto, former prime minister of Pakistan; and the sons of Sani Abacha, recently deceased president of Nigeria.  Senate hearings exposed how Citibank had not only accepted tens of millions of suspect dollars from the accountholders, but also created offshore shell companies to hide their identities, helped them secretly move millions of dollars around the globe, and continued servicing them even after learning of corruption allegations. Continue reading

The Role of Judicial Oversight in DPA Regimes: Rejecting a One-Size-Fits-All Approach

IIn late March 2018, the Canadian government released a backgrounder entitled Remediation Agreements and Orders to Address Corporate Crime that outlines the contours of a proposed Canadian deferred prosecution agreement (DPA) regime. DPAs—also appearing in slightly different forms such as non-prosecution agreements (NPAs) or leniency agreements—are pre-indictment diversionary settlements in which offenders (almost exclusively corporations) agree to make certain factual admissions, pay fines or other penalties, and in some cases assume other obligations (such as reforming internal compliance systems or retaining an external corporate monitor), and in return the government assures the corporation that it will drop the case after a period of time (ordinarily a few years) if the conditions specified in the agreement are met. Such agreements inhabit a middle ground between declinations (where the government declines to file any charges, but where companies still might forfeit money) and plea agreements (which require guilty pleas to criminal charges filed in court).

While Canada has been flirting with the idea of introducing DPAs for over ten years, several other countries have recently adopted, or are actively considering, deferred prosecution programs. France formally added DPAs (known in France as “public interest judicial agreements”) in December 2016, and entered into its first agreement, with HSBC Private Bank Suisse SA, in November 2017. In March 2018, Singapore’s Parliament installed a DPA framework by amending its Criminal Procedure Code. And debate is underway in the Australian parliament on a bill that would introduce a DPA regime for offenses committed by corporations.

The effect of DPAs in the fight against corruption, pro and con, has been previously debated on this blog. One critical design component of any DPA regime is the degree of judicial involvement. On one end of the spectrum is the United States, where courts merely serve as repositories for agreements at the end of negotiations and have no role in weighing the terms of any deal. On the other end of the spectrum is the United Kingdom, where a judge must agree that negotiations are “in the interests of justice” while they are underway, and a judge must declare that the final terms of any DPA are “fair, reasonable, and proportionate.” British courts also play an ongoing supervisory role post-approval, with the ability to approve amendments to settlement terms, terminate agreements upon a determined breach, and close the prosecution once the term of the DPA expires.

Under Canada’s proposed system of Remediation Agreements, each agreement would require final approval from a judge, who would certify that 1) the agreement is “in the public interest” and 2) the “terms of the agreement are fair, reasonable and proportionate.” While the test used by Canadian judges appears to parallel the U.K. model—including using some identical language—the up-or-down judicial approval would occur only once negotiations have been concluded. This stands in contrast to the U.K. model mandating direct judicial involvement over the course of the negotiation process.

The decision by the Canadian government to chart a middle course on judicial oversight is all the more notable given that an initial report released by the Canadian government following a several-month public consultation regarding the introduction of DPAs appeared to endorse the U.K. approach, noting that the majority of commenters who submitted views “favoured the U.K. model, which provides for strong judicial oversight throughout the DPA process.” Moreover, commentators have generally praised the U.K. model’s greater role for judicial oversight of settlements, especially judicial scrutiny of the parties charged (or not) in any given case, the evidence (or lack thereof), and the “fairness” (or not) of any proposed deal.

Despite these positions, one should not reflexively view the judicial oversight regime outlined in Canada’s latest report as a half-measure. Perhaps the U.K. model would be better for Canada, or for many of the other countries considering the adoption or reform of the DPA mechanism. But the superiority of the U.K. approach can’t be assumed, as more judicial involvement is not categorically better. Rather than a one-size-fits-all approach favoring heightened judicial oversight, there are several factors that countries might consider when deciding on the appropriate form and degree of judicial involvement in DPA regimes: Continue reading

For Foreign Aid and Fighting Corruption, Less Is More

The US government learned many hard lessons from its military occupation of Iraq. With respect to corruption in security and reconstruction projects, one of the clearest lessons—emphasized by the 2013 final report from the Special Inspector General for Iraq Reconstruction (SIGIR), among others—was that smaller, short-term projects were more effective, and less susceptible to massive and debilitating corruption, than big, long-term projects. Indeed, a month after publication of the SIGIR report, Paul Cooksey, the Deputy Special Inspector General for Iraq Reconstruction, testified to Congress that large amounts of money should not be injected into an unstable region without enough well-trained, experienced personnel to oversee it. The better strategy, he argued, was to use small projects that could be more tightly managed. For example, one battalion commander in Iraq mentioned that greenhouse and drip irrigation projects—which allowed farmers to use water more efficiently and grow vegetables year-round—were small enough to be easily monitored to completion. This may not be as grandiose as building massive infrastructure, but it can still have a meaningful impact on people’s lives.

Yet despite the clarity and consistency of this message, it has not been heeded in Afghanistan. Continue reading

New York City Pays a Steep Price for Failing to Guard a Guardian

This past Monday, April 28, U.S. federal trial court judge George B. Daniels sentenced three persons at the center of a corrupt scheme that cost New York City some $600 million to 20 years each in prison.  Despite the massive loss and the large number of firms and individuals that participated, the scheme was quite simple.  Its simplicity, and the vulnerability of a government as large and sophisticated as that of New York City to it, is a stark reminder of how critical contract administration — one of the more prosaic-sounding responsibilities of government — is to controlling corruption.

The New York scam arose from a $63 million contract to modernize its payroll system. Software contracts, like construction contracts, can take months if not years to perform and may need to be modified as the contractor runs into issues not anticipated when the contract was drafted.  More computer code than initially foreseen may be required to capture the way employees in some departments record their hours; a road may have to be re-routed because the ground along the original route turns out to be unstable.  But it may also be that more code isn’t needed or that the original routing of the road is fine.  Instead, it may simply be that the contractor is looking for a way to squeeze more money out of government.

To deal with this concern, governments typically rely on expert professionals to evaluate a contractor’s requests for change orders. Often these professionals also decide whether the completed project meets contract specifications.  They thus serve as guardians of project quality and integrity.  What happened in New York was simple: the guards deserted their post, conspiring with the contractor to bilk the city of out hundreds of millions of dollars. Where the city erred was its failure to heed the famous question attributed to the Roman satirist Juvenal:  Who guards the guardians?

Heeding that question and coming up with a satisfactory answer are, of course, two different things.  What can a government do to avoid the sort of collusion that cost New York City so much money? Continue reading