Tag Archives: United States

Are Corporate Anticorruption Compliance Programs Effective?

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Requiring business corporations to institute an anticorruption compliance program should be a part of any national strategy to fight corruption.  The argument is simple.  Corporate employees or their agents are always on the paying side of a bribery offense and often a facilitator of conflict of interest and other forms of corruption.  Making it against company policy for employees or agents to participate in any corrupt act with stringent sanctions up to and including termination for a violation will help shut down the supply side of the corruption equation.

Even where a company’s compliance program is a sham, established simply to comply with the law, it can still be help in combating corruption.  A sham program would be a violation of law, and were the company investigated, the existence of a sham program would be easy for investigators to spot, easing their task of determining wrongdoing.  So there seems to be no reason why lawmakers shouldn’t insist that firms subject to their law, whether state-owned or privately-held, establish a program.  And between the many guides published by international organizations (examples here and here), NGOs (here and here), academics, the burgeoning compliance industry, and the issuance of an international standard for such programs, there is no dearth of information on how to create and operate an effective one.

I have argued the case for a compliance requirement in several posts (examples here and here), as have many other GAB contributors (examples here and here).  My most recent plea for mandating private sector compliance programs came in this one noting such a requirement in Vietnam’s new anticorruption law.  But one thing I have not done is address two obvious questions about compliance programs that Matthew posed in a comment to the Vietnam post: How are compliance requirement laws enforced? How effective are they in practice?

It turns out these obvious, innocent sounding questions (the kind law professors always seem to ask) aren’t all that easy to answer.  What I have found so far follows.  Readers with more information earnestly requested to supplement it. Continue reading →

Ownership Transparency Works: Geographic Targeting Orders in the US Real Estate Market

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The anticorruption community, along with those concerned about tax evasion, fraud, and other forms of illicit activity, has made anonymous company reform a high priority on the reform agenda. It’s not hard to see why: Kleptocrats and their cronies, as well as other organized criminal groups, need to find ways to hide and launder their assets, and to do so in ways that are difficult for law enforcement authorities to trace. Moreover, those whose legitimate sources of income would be insufficient to obtain luxury assets would like to conceal their ownership of such assets, as the ownership itself could arouse suspicion, and might make the assets more vulnerable to forfeiture.

So-called “know-your-customer” (KYC) laws in the financial sector have made it much more difficult—though, alas, far from impossible—for account owners to conceal their identities from the banks and government overseers, at least in the US and most other OECD countries. But it is still far too easy for criminals to purchase substantial assets in wealthy countries like the United States while keeping their identities hidden. All the bad actor needs to do is, first, form a company in a jurisdiction that does not require the true owner of the company to be disclosed and verified to the government authorities, and, second, have this anonymous shell company purchase assets in a transaction that is not covered by KYC laws. Step one is, alas, still far too easy. Though we often associate the formation of these sorts of anonymous shell companies with “offshore” jurisdictions like the British Virgin Islands, in fact one can easily form an anonymous shell company in the United States. Step two, having the anonymous company purchase substantial assets without having to disclose the company’s owner, is a bit trickier, because you’d need to avoid the banking system. But you can get around this problem by having your anonymous company purchase assets with cash (or cash equivalents, like money orders or wire transfers), so long as no party to the transaction is under obligations, similar to those imposed on banks, to verify the company’s true owner.

One of the sectors where we’ve long had good reason to suspect this sort of abuse is common is real estate, especially high-end real estate. Though money laundering experts had long been aware of the problem, the issue got a boost from some great investigative journalism by the New York Times back in 2015. The NYT reporters managed to trace (with great effort, ingenuity, and patience) the true owners of luxury condos in one Manhattan building (the Time Warner Center), and found that a number of units were owned by shady characters who had attempted to conceal their identities by having shell companies make the purchases.

The US still hasn’t managed to pass legislation requiring verification of a company’s true owners as a condition of incorporation, which would be the most comprehensive solution to the anonymous company problem. Nor has the US taken the logical step of extending KYC laws to real estate agents across the board. But starting back in 2016, the US Treasury Department’s Financial Crimes Enforcement Network (known as FinCEN) took an important step toward cracking down on anonymous purchases of luxury real estate by issuing so-called Geographic Targeting Orders (GTOs). And thanks to some excellent research by the economists C. Sean Hundtofte and Ville Rantala (still unpublished but available in working paper form), we have strong evidence that many purchasers in the luxury real estate market have a strong interest in concealing their true identities, and that requiring verification of a company’s ultimate beneficial owners has a stunningly large negative effect on the frequency and aggregate magnitude of anonymous cash purchases. Continue reading →

Who Will Get to Prosecute Mozambique’s Former Finance Minister for Corruption?

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Manuel Chang must surely feel special these days. He is the first former Minister of Finance in history (or at least that history recorded on the internet) whose is being sought for corruption by two countries. As explained here, Chang was arrested in South Africa December 30 after the United States had filed a preliminary request for extradition. Two weeks later, Mozambique filed its own extradition request.  Both countries want to bring him to trial for offenses arising from his alleged corrupt approval of government guarantees for bonds issued by private firms while minster.  Soon after their issue, the bonds went into default, costing the impoverished nation (GNI per capita $1200) as much as $2 billion and throwing the economy into recession.

Which country will get to prosecute Chang will turn on how South African authorities construe recondite provisions in South Africa’s extradition treaties with the United States and Mozambique.  As obscure as the provisions in the two treaties are, how South African authorities choose to interpret them will remain anything but.  For their interpretation will have significant consequences for the global fight against corruption. Continue reading →

Putting Elected Officials in Charge of Elections Is a Recipe for Corruption: Evidence from U.S. States

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One of the stories that figured prominently in last November’s U.S. elections was that of Brian Kemp, then Georgia’s Secretary of State and now the state’s new Governor. As Secretary of State, Kemp was responsible for administering the state’s elections—but in 2018 he was administering the very election in which he was running for governor, which creates an inherent conflict of interest. Indeed, there was plenty of evidence that Kemp used his position as Secretary to increase his odds of winning the election: He attempted to close polling locations in neighborhoods likely to vote for his opponent, promulgated abnormally stringent voter registration rules that put thousands of voters’ eligibility into question, and launched what most observers considered to be a groundless investigation into his opponent’s campaign in the week before the election. Ultimately, after ignoring calls for him to recuse himself, Kemp announced that he would resign as Secretary of State two days after the election, while the votes were still being counted. Kemp was eventually declared the winner, though his opponent, Stacey Abrams, never fully conceded, vowing to sue Kemp for “gross mismanagement of the election.”

It’s hard to see how an election administrator’s use of his power to benefit his own political campaign is anything other than corrupt. Indeed, Kemp’s controversial election illustrates how the U.S. electoral process is particularly vulnerable to this sort of corruption. (And, it’s worth noting, while Kemp drew most of the attention, there were two other candidates in the 2018 elections that found themselves in the same position, with one choosing to recuse himself from the recount process back in August 2018 during a close primary.) In most U.S. states, the Secretary of State (who is responsible for administering the state’s elections) is an elected official, and in over half of the states, Secretaries of State can run for public office while serving as Secretaries. This is out of step with most of the developed world, where election administration is independent and apolitical. Reformers have called for changes to this system before, so far without much success. But the atmosphere may now be ripe for anticorruption advocates to propose referenda to create new, independent, and non-partisan systems for election administration. A well-designed system could eliminate the clear conflicts of interest raised by people like Brian Kemp, while also tackling the more insidious and less obvious forms of corruption that arise when party members use their power over election administration to ensure that their party stays in power.

What might such a system look like? Canada may provide a useful model, given its similarities to the U.S., particularly with respect to its federalist structure. In Canada, each province is responsible for administering its provincial elections, while the Canadian national government administers national elections. The Canadian election administration systems share a few key components that keep the electoral commissions independent and non-partisan, and that all U.S. states should adopt: Continue reading →

Will 2019 Be the Year the US Finally Passes Anonymous Company Reform? Not If the ABA Gets Its Way

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It’s a new year, a new US Congress, and a new opportunity for the United States to take action to close some of the most glaring loopholes in its anticorruption and anti-money laundering (AML) framework. So far, Washington has been consumed with the government shutdown fight, along with early chatter about who might seek the Democratic nomination to challenge Trump for the presidency in 2020, such that there hasn’t yet been much coverage of what new legislation we might see emerging from this new Congress over the next two years. And to the extent there has been such discussion, it has tended to focus on initiatives—such as the Democrat-sponsored “anticorruption” bills that focus on lobbying, voting rights, and conflict-of-interest law reform—that, whatever their usefulness in shaping the debate and setting an agenda for the future, have virtually no chance of passing in the current Congress, given Republican control of the Senate and the White House. Indeed, many commenters assume that on a wide range of issues, political gridlock and polarization means that the new Congress is unlikely to accomplish much in the way of new legislation.

That may be true as a general matter, but there are a few areas—including some of particular interest to the anticorruption community—where the opportunity for genuine legislative reform may be quite high. Perhaps the most promising such opportunity is so-called anonymous company reform. Anonymous companies are corporations and other legal entities whose true “beneficial owners” are unknown and often hard to trace. (The registered owner is often another anonymous legal entity registered in another jurisdiction.) It’s no secret that anonymous companies are used to funnel bribes to public officials, to hide stolen assets, and to facilitate a whole range of other crimes, including tax evasion, fraud, drug trafficking, and human trafficking. And although in the popular imagination shady anonymous shell companies are associated (with some justification) with “offshore” jurisdictions, in fact the United States has one of the most lax regulatory regimes in this area, making it ridiculously easy for kleptocrats and others to use anonymous companies registered in the US to shield their assets and their activities from scrutiny.

Of course it’s possible for law enforcement agencies, armed with subpoena power and with the assistance—one hopes—with cooperative foreign partners and sympathetic courts can eventually figure out who really owns a company involved in illicit activity, doing so is arduous, time-consuming, and sometimes simply impossible. It would be much better if there were a central register of beneficial ownership information, with verification of the information the responsibility of those registering the companies and stiff penalties for filing inaccurate information. Indeed, one of the striking things about the debate over anonymous company reform is how little disagreement there seems to be among experts about the benefits of a centralized company ownership register. There’s still significant controversy over whether these ownership registers should be public (see, for example, the extended exchange on this blog here, here, here, here, and here). But even those who object to public registers of the sort the UK has created acknowledge, indeed emphasize, the importance of creating a confidential register that’s accessible to law enforcement agencies and financial institutions conducting due diligence. But the US doesn’t even have that.

There’s a chance this might finally change. Continue reading →

Part-time Legislatures Should Use Disclosure, Not Recusal, To Regulate Conflicts of Interest

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For most state legislators in the United States, public service is a part-time gig; forty U.S. states have part-time or hybrid legislatures. These part-time state lawmakers have regular jobs, and while some are conventional—law or business—some are less so. (There’s the pizza delivery guy in Arkansas, the boxing and mixed martial arts judge in Nevada, the hula dancer in Hawaii, and the alligator hunter in Louisiana.) Part-time legislatures are popular because they’re cheap—New Hampshire pays its legislators just $100 per year—and also because of distrust of professional politicians and a romantic notion that the legislature should instead be a forum for citizens of varied professional backgrounds to bring their unique perspective to the lawmaking process.

But part-time legislatures also entail significant corruption risks for three reasons. First, when legislators have private sector jobs, it may be easier for them to conceal bribe payments as legitimate outside income. Second, part-time legislators’ low public salaries may make them more inclined to accept bribes or otherwise abuse their office than better-paid full-time legislators. These two factors have been discussed previously on this blog. Here, I want to consider a third factor: the potential conflicts of interest between an official’s public and private work.

A part-time legislator’s dual responsibilities will often, perhaps inevitably, conflict. Teachers will vote on education issues, doctors on health care bills, and business owners on tax plans. Lawyers, lobbyists, and insurance agents may vote on legislation that directly affects their clients. Part-time legislators may even introduce bills advancing their private professional interests. Take the Missouri legislator who introduced and secured passage of a bill prohibiting cities from banning plastic bags at grocery stores—and who also happened to be the director of the Missouri Grocers Association. Similarly egregious, lawyers serving as part-time legislators have sponsored bills raising the salaries or pensions of judges before whom they had cases. One might worry too that part-time legislators, especially those who are lawyers or lobbyists, will implicitly or explicitly use their public positions as a way to drum up business, precisely because potential clients might think that hiring a part-time legislator will increase the odds of favorable legislative treatment. And even if a part-time legislator is not influenced in the slightest by her private professional interests, conflicts like those just described still risk creating the appearance of corruption. What can be done about this?

Continue reading →

Is the U.S. Political System Characterized by “Legalized Corruption”? Some Tentative Concerns About a Common Rhetorical Strategy

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Today is Election Day in the United States. It’s an important election (they all are, really), and I hope those of our readers who are eligible to vote in the United States will do so. But this post isn’t going to be about these U.S. elections specifically. Rather, I want to consider a question about the U.S. electoral system more generally: Is it accurate to describe the U.S. system as a one of “legalized corruption”? That is, do the campaign finance and lobbying rules in the United States amount to a system in which wealthy individuals and interest groups “purchase” favorable policy through what are effectively “bribes”—in the form of campaign contributions or support?

The use of the rhetoric of corruption and “legalized bribery” to describe the U.S. political system has been around for a while, and it seems to have become even more pronounced over the last few election cycles—perhaps galvanized by the U.S. Supreme Court’s controversial decision in the Citizens United case. (For examples, see here, here, here, and here.) I certainly understand, and indeed share, the underlying concerns about how the influence of concentrated economic wealth can distort the political process and tilt policy outcomes in a direction that favors the affluent. Yet I’ve felt increasingly ambivalent about the use of the language of “systemic corruption” or “legalized bribery” to describe the very real money-in-politics problem in the United States. There are three main reasons for my ambivalence. Continue reading →