Responding to the ABA’s Objections to the ENABLERS Act

In a rare moment of bipartisanship, the U.S. Congress is on the cusp of adopting a significant piece of anticorruption legislation: the ENABLERS Act.  The ENABLERS Act is targeted at closing loopholes in the American financial services system that have allowed corrupt foreign actors to use “gatekeeper” entities like law firms, trusts, payment processors, and accounting firms to launder billions of dollars through offshore accounts. The proposed legislation, which has been attached to the FY2023 National Defense Authorization Act (NDAA), would expand the definition of “financial institution” in the current Bank Secrecy Act (BSA) to cover more gatekeeper entities like those mentioned above, and would require these financial services-adjacent entities to institute anti-money laundering (AML) systems, comply with Know Your Client (KYC) regulations, and file suspicious activity reports (SARs) with the Treasury Department. 

The ENABLERS Act, discussed previously on this blog, has received widespread support in both the House and Senate, but some influential interest groups remain opposed. Notably, the American Bar Association (ABA) has objected to the inclusion of law firms among the entities that the ENABLERS Act would subject to the BSA’s AML rules. The ABA’s chief objections are that the ENABLERS Act—especially the requirement that law firms would be required to file SARs—would undercut attorney-client confidentiality and the right to effective counsel and would inappropriately interfere with state judicial regulation of the legal profession.

While the ABA is correct in emphasizing the fundamental principle that everyone is entitled to legal representation, and that lawyers have duties of confidentiality, loyalty, and zealous advocacy to their clients, the ABA’s objections to the ENABLERS Act are overstated. Upon closer inspection, the ENABLERS Act does not ask lawyers to do more than the ethical regime that governs the legal profession already requires or permits.

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Twentieth International Anticorruption Conference December 6-10 in Washington, D.C.

One mark of the progress in putting the fight against corruption on the global agenda is the size and scope of this year’s International Anticorruption Conference. The first one drew less that 200 people, mostly law enforcement personnel from the United States and 12 other nations (here). Organizers expect this year’s — December 6 through 12 in Washington — to attract more than 2,000 representatives of government, civil society, and the private sector from 135+ nations with many more attending virtually.

Jointly organized by Transparency International and the the U.S. government, speakers include: Delia Ferreiro, Chair of the Transparency International Board of Directors; David Malpass, President of the World Bank; Adesina Akinwumi, President of the African Development Bank; Ghada Waly, Executive Director of the United Nations Office on Drugs and Crime; Samantha Power, Administrator for the United States Agency for International Development; the heads of the Open Government Partnership, the Financial Action Task Force, CIVICS, and the chief executives of several multinational corporations.

The theme of this year’s conference is “Uprooting Corruption, Defending Democratic Values.” Plenary sessions will address the “grand issues:” global security, defending the defenders, kleptocracy and illicit finance.  There will be over 60 workshops, and multiple special thematic events and social gatherings.

More on who is coming, workshop and thematic events, and how to register is here.

Guest Post: Is UNCAC Article 35 a “Dead Letter” in the United States?

Today’s Guest Post is by Craig R. Arndt, an international lawyer living in Bangkok. In the course of a long career, he advised multinational clients on a range of corruption-related matters and has represented those injured by corruption in actions to recover damages.

The drafters of the United Nations Convention Against Corruption recognized that corruption was a transnational disease. And that accordingly, no country could fight it on its own. Hence, in its very first article the Convention makes it clear that states ratifying it are obliged to “promote, facilitate, and support international cooperation and technical assistance in the prevention of and fight against corruption.”  

Article 35 of the Convention sets forth one of the ways states are required to work together to curb cooperation. It provides that each party must “ensure that entities or persons who have suffered damage as a result of an act of corruption have the right to initiate legal proceedings against those responsible . . . to obtain compensation.”

Rick has documented the sorry state of civil recoveries by bribery victims in transnational cases (here, here, here, here, here, here, here and here). That state is now even sorrier thanks to two recent decisions by American federal courts of appeal. In the words of one commentator, the two “gut” article 35.

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Explaining (the Lack of) Corruption in the US Federal Judiciary

The United States judiciary has a history with corruption. Corruption pervaded every aspect of pre-revolution America, from the customs enforcers up to the colonial judges. Corruption in the United States only worsened a century after the Revolution, with politicians during the late 19th century taking “spectacularly handsome bribes from corporations and demand[ing] kickbacks as the helping hand they extended often came with an open palm.” Early twentieth century America, in many ways, had systemic corruption similar to that seen in modern developing countries. Even as recently as the early 2000s, state judges have come under fire for not only individual corruption, but pervasive, systemic corruption rings. Outright bribery is only one problem: state judges have also been known to engage in misappropriation of public resources, nepotism in appointing counsel, and “skimming off the top.”

Yet in spite of the environment around them, the federal judiciary—more or less since day one—has been mostly corruption-free. As Professor Mathew Stephenson observed, even during the quite corrupt nineteenth century, “at least at the federal level, the institutions of justice—courts and prosecutors—seemed relatively clean and basically functional.” If anything, the federal judiciary, and federal prosecutors, have served as a check on corruption at the state and local level, “particularly in the latter half of the twentieth century.” This pattern continues into the present day: Although the federal judiciary comprises 5% of all judges in the United States, they only account for 0.2% of known cases of judicial bribery.

This raises a question: How did the federal judiciary remain relatively free from corruption, especially during the first century of the country’s existence, when corruption pervaded so many aspects of American society, including state and local courts? There are two broad categories of explanation: historical and structural. These are not mutually exclusive alternatives; rather, the historical and structural explanations complement one another.

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Guest Post: C4I’s New Index Illuminates the Need for Reform of State-Level Campaign Finance Rules in the U.S.

Today’s guest post comes from Shruti Shah, President and CEO of the Coalition for Integrity (C41), together with Laurie Sherman, C4I’s Policy Advisor, and Stephanie Camhi, a C4I external consultant.

Anticorruption and good governance advocates, in the United States and elsewhere, have long been concerned with the potentially corrupting influence of campaign donations and other political spending on public policy. (Indeed, although the U.S. Supreme Court has deemed political spending to be a form of “speech” protected by the First Amendment of the U.S. Constitution, the Court has also recognized the prevention of corruption, or its appearance, as one of the few interests sufficiently compelling to justify campaign finance laws that limit such spending.) Much of the discussion of the campaign finance issue in the United States focuses on federal elections, yet concerns about the corrupting effect of campaign donations are just as important in state-level elections. State elected officials—legislators, governors, and other elected executive branch officials—play a vital role in creating and implementing public policy, and these officials decide how to spend trillions of dollars on roads, health, education, welfare, and other programs. And money continues to flow into state races in record-breaking amounts. Yet the potential for corruption—both illegal corruption and the “softer” corruption associated with undue access and influence for large donors—does not receive as much attention at the state level as at the federal level.

State-level political candidates must follow campaign finance laws written and enforced by the state, and states vary greatly in terms of the content and quality of their campaign finance systems. To highlight the variance across states in campaign finance laws, and to provide more information to voters and reformers, the Coalition for Integrity (C4I) created the first State Campaign Finance Index analyzing the campaign finance laws and regulations in all fifty states and District of Columbia. The Index assigns states scores based on several factors that, in C4I’s judgment, constitute best practices. The most important factors are as follows: Continue reading

The U.S. Supreme Court Has an Appearance Problem: What FEC v. Cruz Got Wrong

According to the U.S. Supreme Court, campaign contributions are a form of political “speech” and are therefore protected by the First Amendment of the U.S. Constitution. As a result, the government may restrict such contributions only if doing so serves a compelling state interest. Currently, the only interests that the Court has recognized as sufficiently compelling to justify restrictions on political spending are preventing corruption or the appearance of corruption.

Though sometimes presented as a single interest, the prevention of actual corruption and the prevention of the appearance of corruption are not the same. The reason the government has an interest in preventing actual corruption is obvious. The Court has explained the related but distinct interest in preventing the appearance of corruption by appealing to the importance of maintaining public confidence in the electoral process. If a certain campaign finance activity creates the appearance of corruption, then ordinary citizens may start to view their political participation as futile, and may lose faith in the integrity of elections. Because Congress has an interest in preventing this erosion of public trust, the government can regulate campaign finance activities that the public perceives as corrupt, even when those activities are not associated with actual corruption.

At least that’s what the Court has said. In practice, however, the Court has often failed to apply the appearance of corruption standard in a way that serves these objectives. This is nowhere clearer than in the Court’s recent decision in Federal Election Commission (FEC) v. Cruz. The case concerned a federal law that prohibited a candidate from using post-election campaign donations to repay more than $250,000 of personal loans that the candidate made to his or her campaign prior to the election. The government justified this law partly on the grounds that it prevented the appearance of corruption. After all, when a candidate uses donations to repay personal loans, the donor’s contributions go straight into the candidate’s pockets; the public could easily view such payments as fostering corruption. In support of this argument, the government pointed to a public opinion poll in which 81% of respondents thought it was “likely” or “very likely” that donors who make post-election contributions expect a “political favor” in return. Additionally, the government cited an academic study that found—on the basis of over three decades of empirical evidence—that politicians with campaign debts are “significantly more likely” than debt-free politicians to switch their votes after receiving contributions from special interests.

This evidence, on its face, would seem to support the government’s claim that the limit on using post-election donations to repay a candidate’s large personal loans furthers its compelling interest in preventing the appearance of corruption. However, the Court’s majority opinion dismissed the government’s appearance-based argument in a brief passage with relatively little sustained analysis, apparently treating the flaws in the government’s arguments as self-evident. The Court’s dismissive attitude to the government’s evidence in this case indicates a worrisome approach to the appearance-of-corruption issue more generally.

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Corruption’s Queer History: Stonewall’s Seedy Underside

A little after midnight on June 28, 1969, New York City police officers raided the Stonewall Inn, a seedy bar in Greenwich Village known for catering to a mostly LGBTQ crowd. Such raids were not uncommon—in fact, the Stonewall Inn had already been raided just four days prior to that now historic evening. But for some reason, that particular raid on that particular night had touched off violent clashes between police and Stonewall’s patrons, becoming a watershed moment for the LGBTQ civil rights movement in the United States. Indeed, the Stonewall Inn is now a national monument, and the anniversary of Stonewall is commemorated every year with Pride parades around the world.

In the days following the riots, however, the Stonewall Inn was in utter disarray: graffiti sprawled on its boarded-up windows read: “GAY PROHIBITION CORRUPT$ COP$ / FEED$ MAFIA.” That brief and blunt statement captures an important truth about Stonewall, one that is important for understanding both the historical context of the Stonewall uprising, as well as the intersection between anti-LGBTQ discrimination and corruption that persists today: The riots weren’t only about police discrimination—organized crime and corruption also played a fundamental role.

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U.S. States Have Failed to Address Charter School Corruption. It’s Time for Federal Intervention.

In the United States, charter schools are publicly-funded, tuition-free institutions that operate largely independent from the traditional public school system. Charter schools are established through a contract, or charter, between the school and an “authorizer,” which is the school district, state education agency, or other entity that a state has sanctioned to approve these charters. Once approved, charter schools do not have to follow the same regulations as traditional public schools but instead are required to operate under the terms and academic standards set by their authorizing contract.

Proponents tout charter schools’ autonomy and flexibility: free from burdensome education laws and local regulations, these schools can be innovative in their curricula and management, and can compete with one another and with traditional public schools in the education “market.” Parents will then have the opportunity to “vote with their feet,” and they—along with the public funding designated for their children—will flow into better schools, leaving the poorly performing charter schools to shut down.

Or so the argument goes. In reality, thanks to rampant corruption that has come to plague the charter school industry, this public funding often flows not into the best schools but rather into the pockets of dubious school officials and their affiliates. There have been numerous charter school corruption scandals: self-dealing real estate leases, exorbitant salaries for school executives, and kickbacks from inflated purchases of school equipment and supplies, to name a few.

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The Financial Weapon: Expanding Magnitsky Sanctions to Attack Corruption

Economic sanctions targeted at individual wrongdoers can be a potent weapon in the fight against global corruption. The United States’ 2016 Global Magnitsky Human Rights Accountability Act (GMA) authorizes the President to impose targeted sanctions on corrupt foreign officials and their associates. And the GMA has had successes in deterring corruption: As earlier posts on this blog have highlighted, the GMA has prompted countries to strengthen their anticorruption laws and has prompted businesses to cut ties with corrupt individuals. Yet despite these successes, Magnitsky sanctions remain a relatively underused anticorruption tool. The U.S. Treasury Department’s Office of Foreign Asset Control (OFAC) has only sanctioned around 200 people as part of its Magnitsky programs, and most of these individuals have been sanctioned for human rights abuses rather than corruption per se.

GMA sanctions can and should be scaled up by an order of magnitude, with a greater focus on targeting corrupt actors. The U.S. should be imposing GMA sanctions on several thousand people, not just a couple hundred. As the Biden Administration has recognized, global corruption increasingly threatens national and international security. In light of this, the Administration should use the GMA to impose sanctions on not only the most egregious of kleptocrats but those who engage in more modest—but still significant—forms of corruption. Continue reading

“Municipal Takeovers”: Failing to Address Corruption While Threatening Democratic Self-Government 

The town of Mason is a small, majority-Black community in the State of Tennessee. For two decades, Mason’s municipal government has been afflicted with serious corruption and financial mismanagement, leading to the resignation a few years ago of almost all of Mason’s elected leadership following allegations of fraud and embezzlement. In the wake of these persistent problems, this past February the Tennessee State Comptroller, Jason Mumpower, sent a dramatic request to every property owner in Mason: vote to dissolve your town (in which case Mason would be absorbed into majority-White Tipton County, thus ending Mason’s 153 years of independent governance), or else the state government will exercise its legal authority to step in and take financial control of Mason’s town government—which would likely lead to drastic layoffs and cuts to municipal benefits. (Mumpower’s ultimatum may well have been influenced not only by Mason’s history of municipal corruption, but also by the fact that Ford Motors is set to open up a massive manufacturing plant nearby, which will bring in significant tax revenue that Mumpower claimed Mason’s town government can’t handle responsibly.)

The situation in Mason may seem extraordinary, but it is far from unique. Roughly twenty U.S. states have laws that permit the state government to take over municipal governments, although the specifics of the laws differ. (Municipal takeovers are often preceded, as in Mason, by presenting the municipality with the option to dissolve and be absorbed into the surrounding county.) Though municipal takeovers come in various forms, they generally entail the appointment of an “intervenor,” such as a state official, emergency manager, or financial control board. In some states, the intervenor’s powers are limited to financial oversight and technical assistance, but in other states (including Tennessee), the intervenor can take steps as radical as entirely dissolving a locality.

Municipal takeovers are, unsurprisingly, controversial. While pursuing a takeover is an extreme step, one can understand why some people might find it warranted, especially when corruption is so deeply embedded in a municipality that it seems inconceivable that the local government can clean itself up. But this view is misguided, at least in the U.S. context. (Municipal dissolution has been deployed and endorsed by some anticorruption advocates in other countries, such as Italy. While some of my arguments may apply in other contexts, this post focuses on the United States.) First, the costs of municipal takeovers are substantial and are often underestimated. Second, the purported benefits of municipal takeovers—at least with respect to addressing the underlying corruption and misgovernance problems in a given community—rarely materialize.

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