New Podcast Episode, Featuring Sergei Guriev

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this episode, I interview Professor Sergei Guriev, who until last month served as the Chief Economist for the European Bank for Reconstruction and Development (EBRD). In the conversation (which took place a couple of months ago, when Professor Guriev was still in his EBRD post), we discuss a range of topics, including his academic work (both his research on the role of oligarchs in the Russian economy and his more recent work on how expanded high-speed internet access affects both perceptions of and political responses to widespread corruption); the question why some post-socialist countries were more successful than others in making a transition to a market economy and reasonably well-functioning democratic government, while others remain mired in corruption; and some of the major challenges and opportunities confronted by international organizations, like the EBRD, that want to help advance the fight against corruption in challenging political environments.

You can find this episode, along with links to previous podcast episodes, at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

Guest Post: An Austrian Political Corruption Scheme was Caught on Video–But Most Probably Aren’t

Today’s guest post is from Jennifer Kartner, an anticorruption researcher who recently received her Ph.D. in political science from Arizona State University:

On Friday, May 17, 2019, the German newspapers Der Spiegel and the Die Sueddeutsche Zeitung released an explosive video showing two key politicians of the far-right Austrian Freedom Party (FPÖ), Heinz-Christian Strache and Johann Gudenus, scheming with a woman who claimed to be a wealthy Russian citizen. Their meeting took place in July 2017, a few months before the October 2017 Austrian parliamentary elections. In the video, Strache and Gudenus discuss how, with the help of the woman, they could ensure that the FPÖ wins the upcoming elections. The plan was that the Russian would buy 50% of the Austrian newspaper Die Kronen Zeitung—a newspaper reaching a third of all Austrian news consumers—before the elections, and then she would ensure that the already-populist newspaper would drum up more support for the FPÖ. (Mr. Strache estimates in the video that the newspaper takeover would help push the FPÖ’s expected vote share from 27 to 34 percent.) Once the FPÖ won the election, FPÖ elected officials would return the favor by helping the oligarch win contracts for public construction projects; all she had to do was to establish a construction company that could plausibly compete with the Austrian firm Strabag. The three meeting participants also talked about the possibility of privatizing the Austrian public broadcast station ORF, and Mr. Strache spoke of wanting to build a media landscape “just like Viktor Orbán built in Hungary.” But the deal never actually came together. Die Kronen Zeitung didn’t change owners, the FPÖ came in third in the parliamentary elections and ended up entering into a coalition government with the center-right ÖVP, and Strabag continues to win the majority of public construction contracts in Austria.

The political backlash in response to the publication of the video was swift and severe. An estimated 5,000 people came out to protest on the streets. A day after the publication, Mr. Strache resigned from his Vice-Chancellorship, as well as his other political and party positions, and issued a public apology, and a couple of days after that, all remaining FPÖ ministers in the government were fired or resigned in protest. While Austrian authorities are still debating whether they can charge Mr. Strache for any criminal activities, the public’s response shows that, regardless of the legal ramifications, ordinary citizens view this behavior as corrupt.

But perhaps one of the most disturbing things about this affair is that if the parties had gone through with their plan, and the secret video had never been leaked, neither the authorities nor the public would likely have ever had any reason to suspect a complex corruption scheme behind it. To see this, suppose for the moment that the scheme went ahead as planned. Would anyone have caught on? The answer is likely no: Continue reading

Why (and How) the US Should Use “Sanctions Money” to Help Victims of Corruption 

Individually-targeted sanctions pursuant to the 2016 Global Magnitsky Act (GMA) have been used to hold individuals responsible for acts of grand corruption and human rights abuse in places like Russia and the DRC (explained here and here). Yet more can and should be done to compensate the victims of those same crimes. Advocates should push the US to use the compensatory mechanisms of other US sanctions regimes to strengthen the power of the GMA to compensate victims.

GMA sanctions, like other individually-targeted sanctions, are administered by a division of the US Treasury Department called the Office of Foreign Assets Control (OFAC). When an individual is placed on the US sanctions list—known as the “specially designated nationals” (SDN) list)—that individual’s US assets are frozen in an interest-bearing account until either the individual is removed from the SDN list or the assets are seized. In the interim, any US-dollar denominated transaction with those accounts is blocked. Moreover, any person subject to US jurisdiction who does business with any individual on the SDN list can be hit with a steep civil fines for every transaction with the blocked assets, which can cumulatively run into the millions, sometimes billions, of dollars.

Those two pots of money—the frozen assets of the individuals on the SDN list, and the fines imposed on those who violate the sanctions imposed on those SDNs—could and should be used to compensate the individuals victimized by the corruption or other wrongful conduct of those SDNs. Here’s how these approaches might work in the US context, given precedent of other sanctions regimes:

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Can “Force Majeure” Be A Justification for Corruption? Russia Believes So.

In late January of this year, the Russian Justice Ministry proposed draft legislation that would legalize corruption. More specifically, the proposal, which implements one of the recommendations of Putin’s 2018-2020 Anti-Corruption Plan, would decriminalize corruption “when non-compliance with prohibitions, restrictions, and requirements established in order to combat corruption… [is] due to force majeure”—that is, when circumstances beyond the official’s control make corruption unavoidable. Or, as the Russian government puts it, “[i]n certain circumstances, the observance of restrictions and prohibitions, requirements to prevent or resolve conflicts of interest, and the fulfillment of duties established in order to combat corruption are not possible for objective reasons.” The proposed legislation would create a commission to “assess the objectivity of circumstances” to determine if compliance was possible.

What are these alleged “objective reasons” that might establish a force majeure defense to corruption charges? In contract law, force majeure—sometimes known as an “act of God”—covers unforeseen circumstances, like natural disasters or wars, that are totally outside the control of the parties to the contract, and that make it impossible for one of those parties to perform his or her end of the agreement. But what could force majeure possibly mean in the context of corruption? What circumstances, equivalent to a war or natural disaster, could compel a government official to take a bribe, or embezzle public funds? It is difficult to imagine such a scenario. The Justice Ministry did release a preliminary statement with some initial clarification into the type of circumstances that might trigger this force majeure exemption from criminal liability. That statement noted, for example, that it may not be possible for officials to take the usual measures to prevent or resolve conflicts of interest when the officials are posted in small, remote areas. The idea seems to be that is such settings the community is so small and close-knit that it wouldn’t be feasible for an official to recuse from all decisions in which she might have personal relationships with some of the parties affected. The preliminary statement also noted that sometimes former family members (say, ex-spouses) do not agree to provide information on income and expenses of common children (information that officials are usually obligated to disclose), and that sometimes non-performance of certain duties related to anticorruption might be due to a prolonged and serious illness. The Justice Ministry promised that it would provide more specific information on what constitutes force majeure after the proposed rule’s comment period closed on February 8, 2019. The government has not yet done so, however, despite the fact that more than a month has passed.

At least some of the force majeure examples in the Justice Ministry’s preliminary statement sound reasonable, though it’s not clear whether the special exemption is really needed to deal, say, with an official who isn’t performing certain duties because of a debilitating illness. (Presumably, that official would be on indefinite leave anyway?) But the legislation is written much more broadly than these narrow examples would suggest. Would the new legislation allow individual bribe-payers and bribe-takers to assert a force majeure defense on the grounds that they didn’t create the “culture” or “system” of corruption in which they find themselves embedded? If that counts as force majeure, it would open a giant loophole allowing in Russia’s anticorruption laws, allowing anyone accused of corrupt action to argue that they felt pressured by (social) forces beyond their control. The proposed legislation could be read that way, and if it is, it would undermine efforts to combat corruption. Indeed, one cannot help but wonder if that is the exemption’s purpose. Moreover, by taking the position that certain offenses shouldn’t count as corruption at all, the proposal sends a signal that corruption is not a priority for the Russian government, thus providing room for further loosening of corruption legislation.

Now, the Russian government might be sincerely concerned about not over-punishing people who technically violated the law but do not seem sufficiently blameworthy to deserve harsh sanctions. But if that is the worry, there are other ways to address it, ones that don’t risk creating an enormous loophole in anticorruption laws and that don’t send the signal that the government might not take corruption that seriously. Here are three alternatives to decriminalizing corruption that Russia’s Justice Ministry could consider:

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The CICIG Crisis in Guatemala: How the Trump Administration Is Undermining US Anticorruption Leadership

Back when Donald Trump was first elected, a lot of people—me included—worried about the implications of his presidency for US leadership in the global fight against corruption. Some of the dire predictions have not (yet) come to pass; for example, so far US enforcement of the Foreign Corrupt Practices Act (FCPA) does not seem to have abated despite Trump’s well-documented and ill-informed hostility to that statute. But even if US enforcement of the FCPA has proceeded without much discernible effect (so far), there are other, less easily measurable respects in which the Trump Administration’s foreign policy, and its own cavalier disregard for ethics, may be undermining US leadership on anticorruption issues, and consequently undermining anticorruption efforts and bolstering those who would seek to undermine such efforts.

As just noted, much of this effect is diffuse and hard to observe directly, but there are a few examples where the Trump Administration and its allies are undermining the global fight against corruption is more evident. Perhaps the most striking and disheartening is the situation unfolding in Guatemala, ably documented in a compelling piece by Colum Lynch on Foreign Policy’s FP Blog earlier this month. Long story short: The Trump Administration and its allies in Congress appear to be supporting, or at least tacitly accepting, the efforts of Guatemalan President Jimmy Morales to shut down Guatemala’s UN-sponsored anti-impunity commission, known by its Spanish acronym CICIG, which has proved instrumental in fighting high-level corruption in Guatemala, and forced the resignation of President Morales’s predecessor, Otto Perez Molina. President Morales campaigned on an anticorruption platform, but he now wants to shut CICIG down, apparently because it’s investigating his own family members and associates. And the US, which had supported CICIG in the past and pressured President Molina to renew its mandate when he was inclined to terminate it to protect himself, seems to be backing Morales rather than CICIG.

I won’t go into all the details here, as the story is ably laid out in Mr. Lynch’s excellent piece. I’ll just highlight some themes that emerge from the reporting that Mr. Lynch and others have done, which illustrate connections—some direct, some indirect—between the Trump Administration’s approach to government and the dissipation of US leadership on anticorruption issues, as illustrated by the CICIG debacle. Continue reading

Lessons from Moldova’s “Theft of the Century”

One year ago today, on April 20th, 2017, a Moldovan businessman named Veaceslav Platon was sentenced to 18 years in prison. His crime? Helping to steal a billion dollars. Between 2012 and 2014, businessmen and politicians siphoned off money from Moldova’s three largest banks in a crime now known as the “Theft of the Century.” While corruption is endemic in many parts of Eastern Europe, the theft in Moldova was spectacular in its size and in the severity of its consequences.

This theft was an economic, social, and political catastrophe for Moldova. The amount of money that disappeared was similar to the amount implicated in the 1MDB scandal in Malaysia–but Malaysia’s GPD is 2.3 times the size of Moldova’s. The Moldovan government’s secret bailout of the banks cost $870 million, one-eighth of Moldova’s GDP. As a result of the theft, three of Moldova’s main banks went bankrupt and were liquidated; more banks are still under the supervision of the National Bank of Moldova, and there is persistent instability in the financial sector. And then there’s the human cost. For example, the misuse of money in the State Health Insurance Company’s accounts led to a medicine shortage in 2014-2015. During street demonstrations that ensued after the theft became public, two dozen people were injured. The political fallout from the theft has also been substantial: Confidence in the government was shattered, as every government branch and every major political party seemed implicated. Furthermore, because the party seen as most heavily involved in the theft was a pro-EU party, Moldovan support for joining the EU plummeted. Pro-Russian sympathizers capitalized on the public reaction, and the pro-Kremlin Igor Dodon was elected president in 2016. Dodon has talked about joining the Russia-controlled Eurasian Economic Union, halted participation in NATO exercises, and opposes the opening of a NATO office in Chisinau, Moldova’s capitol.

The investigation into the theft has dragged. More than 40 people have been implicated, and more prosecutions are supposedly in the pipeline, but only a few people have been convicted so far. With Moldova’s 2018 elections looming, now is a good time to look back at the fallout and lessons from the Theft of the Century.

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Adjusting Corruption Perception Index Scores for National Wealth

My post two weeks ago discussed Transparency International’s newly-released 2017 Corruption Perceptions Index (CPI), focusing in particular on an old hobby-horse of mine: the hazards of trying to draw substantive conclusions from year-to-year changes in any individual country’s CPI score. Today I want to continue to discuss the 2017 CPI, with attention to a different issue: the relationship between a country’s wealth and its CPI score. It’s no secret that these variables are highly correlated. Indeed, per capita GDP remains the single strongest predictor of a country’s perceived corruption level, leading some critics to suggest that the CPI doesn’t really measure perceived corruption so much as it measures wealth—penalizing poor countries by portraying them as more corrupt, when in fact their corruption may be due more to their poverty than to deficiencies in their cultures, policies, and institutions.

This criticism isn’t entirely fair. Per capita income is a strong predictor of CPI scores, but they’re far from perfectly correlated. Furthermore, even if it’s true that worse (perceived) corruption is in large measure a product of worse economic conditions, that doesn’t mean there’s a problem with the CPI as such, any more than a measure of infant mortality is flawed because it is highly correlated with per capita income. (And of course because corruption may worsen economic outcomes, the correlation between wealth and CPI scores may be a partial reflection of corruption’s impact, though I doubt there are many who think that this relationship is so strong that the causal arrow runs predominantly from corruption to national wealth rather than from national wealth to perceived corruption.)

Yet the critics do have a point: When we look at the CPI results table, we see a lot of very rich countries clustered at the top, and a lot of very poor countries clustered at the bottom. That’s fine for some purposes, but we might also be interested in seeing which countries have notably higher or lower levels of perceived corruption than we would expect, given their per capita incomes. As a crude first cut at looking into this, I merged the 2017 CPI data table with data from the World Bank on 2016 purchasing-power-adjusted per capita GDP. After dropping the countries that appeared in one dataset but not the other, I had a 167 countries. I then ran a simple regression using CPI as the outcome variable and the natural log of per capita GDP as the sole explanatory variable. (I used the natural log partly to reduce the influence of extreme income outliers, and partly on the logic that the impact of GDP on perceived corruption likely declines at very high levels of income. But I admit it’s something of an arbitrary choice and I encourage others who are interested to play around with the data using alternative functional forms and specifications.)

This single variable, ln per capita GDP, explained about half of the total variance in the data (for stats nerds, the R2 value was about 0.51), meaning that while ln per capita GDP is a very powerful explanatory variable, there’s a lot of variation in the CPI that it doesn’t explain. The more interesting question, to my mind, concerns the countries that notably outperform or underperform the CPI score that one would predict given national wealth. To look into this, I simply ranked the 167 countries in my data by the size of the residuals from the simple regression described above. Here are some of the things that I found: Continue reading