Tag Archives: United States

Highway Robbery: Preventing Corruption in U.S. Infrastructure Investment

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Last November, President Biden signed into law the Infrastructure Investment and Jobs Act (IIJA), a $1.2 trillion package that earmarks $110 billion for repairing and rebuilding roads and bridges. This is the single largest investment in U.S. roads and bridges since the construction of the interstate highway system in the mid twentieth century. And though it is a federal project, much of the money will be distributed to state governments, which will determine how best to use the money to address their infrastructure needs. As state governments receive the IIJA money, we can expect the states to launch a public tender frenzy.

In all the extensive discussion and debate over the IIJA, there has been relatively little focus on the corruption risks inherent in this sort of spending program—even in an affluent, reasonably well-governed country like the United States. After all, corruption in large construction projects, and infrastructure projects like roadbuilding in particular, is all too common. Unfortunately, the IIJA’s design exacerbates rather than reduces these corruption risks. While it is too late to address those flaws in the statute, there are some measures that the federal government can and should adopt now to mitigate the inherent corruption risks. Continue reading →

Do Individual U.S. Senators Manipulate the Timing of FCPA Enforcement Actions? (Spoiler: No.)

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Is enforcement of the U.S. Foreign Corrupt Practices Act (FCPA) improperly politicized? The notion that it is has gained traction in some circles, particularly in countries with multinational firms that have been sanctioned by U.S. authorities for FCPA violations, such as France and Brazil. The usual claim by those who assert that FCPA enforcement is politicized is that the US Department of Justice (DOJ) deploys the FCPA as a kind of protectionist weapon against foreign multinationals that compete with US firms. But a recent working paper by two business school professors (one American and one Chinese) claims to have found evidence for a different sort or FCPA politicization. According to this paper, individual U.S. Senators exert behind-the-scenes influence over the DOJ to manipulate the timing of FCPA enforcement actions against foreign corporations. More specifically, the paper argues that when a Senator is up for reelection, he or she will influence the DOJ to announce an enforcement action against a foreign company before, rather than after, the election. Doing so, the authors suggest, helps the Senator’s reelection chances by imposing a cost on a foreign company that competes with domestic firms in the Senator’s state.

I confess that when I first saw this paper a few weeks ago, I didn’t take it too seriously, because the central argument seemed so obviously detached from reality. (I also didn’t have time to dig into the details of the empirical methods, which are somewhat involved.) But the paper seems to generated a bit of buzz—including a Tweet from one of the best and most respected economists who works on corruption-related issues, which specifically asked me and a few others for our reactions to some of the “provocative” evidence presented in the paper. So I took a closer look. Continue reading →

Guest Post: France Continues to Modernize its Procedures for Fighting Global Corruption—and Has Some Interesting New Ideas

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Frederick Davis, a member of the New York and Paris Bars and a Lecturer in Law at Columbia Law School, contributes today’s guest post:

As recently as a few years ago, posts in this space by me and others bemoaned the striking inability of French authorities to prosecute French companies involved in global corruption. In the first fifteen years after France criminalized overseas bribery (thereby meeting its obligations under the OECD Convention on Combatting Bribery for Foreign Officials that France had signed in 1997), not a single French company had been convicted of this crime. This was attributed to the difficulty of pinning corporate criminal responsibility on corporations, as well as to limits in French criminal procedures that rendered its prosecutors unable to move as quickly, efficiently, and effectively as their U.S. counterparts. French deficiencies included the lack of both “sticks” (the credible threat of significant sanctions) and “carrots” (the ability to offer a deferred prosecution agreement (DPA) in exchange for self-disclosure and cooperation). The result: a number of iconic French companies reached negotiated outcomes with the U.S. Department of Justice (DOJ), and paid well over US$2 billion in fines and other payments to the U.S. government.

Resisting populist demands for retaliation, France instead changed its criminal procedures and enforcement institutions to address the challenge. The most notable changes include the creation of a National Financial Prosecutor’s Office with nationwide responsibility for many economic crimes, the creation of the French Anti-Corruption Agency to enforce compliance regimes, and the passage of the so-called Loi Sapin II, which increased penalties for financial crimes and introduced a French-style DPA called a Judicial Convention in the Public Interest. In addition to these reforms, France’s highest court has clarified the laws on corporate criminal responsibility, and in an unprecedented decision ruled that a parent or successor corporation remains criminally responsible for acts of an acquired entity even the acts took place prior to the acquisition.

The results of these reforms have been nothing short of remarkable: Continue reading →

New Podcast Episode, Featuring Casey Michel

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A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, I interview the American journalist Casey Michel about his new book, American Kleptocracy: How the U.S. Created the Greatest Money Laundering Scheme in History. In our conversation, Casey and I touch on a variety of topics raised by his provocative book, including the dynamics that led to the U.S. and U.S. entities playing such a substantial role in facilitating illicit financial flows (including the nature of American federalism, the broad exceptions to the coverage of U.S. anti-money laundering laws, and the role of U.S.-based “enablers” of illicit finance), the challenges of regulating lawyers and law firms, the role and responsibilities of universities in light of concerns about “reputation laundering” by kleptocrats and others, the impact of the Trump and Biden Administrations in this area, and the challenges of generating and maintaining bipartisan/nonpartisan support for fighting kleptocracy. You can also find both this episode and an archive of prior 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.

Lessons from the U.S. College Admissions Scandal: Why Universities Need to Embrace Anticorruption Measures

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In 2019, a college admissions corruption scandal made headlines in the United States and around the world. Richard Singer, who masterminded the scheme, promised wealthy parents that he could get their children coveted places at Stanford, Yale, USC, and other selective colleges through what he called the “side door.” Rather than donate $45 or $50 million to gain an edge in admissions, parents would pay Singer and his foundation to bribe college coaches to recruit the students as college athletes—even though many of the students had never competed in the sport for which they were allegedly being recruited. U.S. federal prosecutors, in the so-called “Varsity Blues” investigation, uncovered this scheme and indicted more than fifty people (parents, coaches, and others). Many of the defendants pled guilty. This past October, in the first Varsity Blues case to go to trial, a jury found hedge fund magnate John Wilson and former casino executive Gamal Abdelaziz guilty of conspiracy, wire fraud, and mail fraud. More trials are likely coming, and more convictions are likely.

Beyond the sensational headlines—which often focused on the wealthy parents, several of whom are celebrities—what broader lessons can we draw from the scandal? When it first broke, many commentators attacked the broader culture of entitlement and privilege in which wealthy parents secure unfair—but in most cases entirely legal—advantages for their children through legacy preferences and favoritism toward big donors. Other commentators drew attention to the hypercompetitive, win-at-all-cost culture fostered by the U.S. college admissions system. Critics pointed to a culture that leads not only to criminal bribery of the sort revealed in the Varsity Blues investigation, but also to less visible forms of dishonesty like college admissions “consultants” who draft essays for pay and students who cheat on college admissions tests, sometimes with the support or complicity of adults.

Those critiques of the U.S. college admissions culture are apt, but there’s another important lesson that emerges from the scandal, one that has received less attention: The scandal highlighted the extent to which universities have failed to address seemingly obvious corruption risks, and failed to implement effective controls for identifying applicants who were bribing their way onto campus. Compared to other large institutions, universities are behind when it comes to establishing effective anticorruption controls.

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Guest Post: Five Observations on the New US Strategy on Countering Corruption

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For today’s guest post, GAB is pleased to welcome back Robert Barrington, professor of practice at the University of Sussex’s Centre for the Study of Corruption.

Earlier this week, in the run-up to the Summit for Democracy, the US government launched its first-ever national anticorruption strategy, a move that was widely praised by advocacy groups such as Transparency International and the FACT Coalition. Indeed, the promulgation of this US “countering corruption” strategy document may turn out to be one of the most significant outcomes of the Summit, even though it preceded the Summit itself.

Only time will tell how much of an impact this new strategy document will make, but here are five initial observations: Continue reading →

ENABLERS in the Legal Profession: Balancing Client Confidentiality Against Preventing Money Laundering

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The anticorruption world is abuzz with discussion of the Pandora Papers, a major leak of financial documents that exposed how wealthy elites, including various political leaders and shady businesspeople, conceal their assets. But alongside revelations about the illicit expenditures of the rich and powerful, reporting based on the Pandora Papers also highlighted the role that lawyers and law firms have played in facilitating these arrangements—many of which are technically legal, but at least some of which suggest possible money laundering or other illicit activities.

This is hardly the first time that concerns have been raised about attorneys’ involvement in money laundering. Indeed, such concerns have existed for years, and have been repeatedly emphasized by groups like the Financial Action Task Force, and a 2010 study found that lawyers played a facilitating role in 25% of surveyed money laundering cases in an American appeals court. But perhaps because of the Pandora Papers revelations, U.S. legislators finally appear to be taking the problem seriously. Within days of the Pandora Papers leak, Members of Congress introduced a bill called the ENABLERS Act, which would expand the scope of the Bank Secrecy Act (BSA) so that many of the BSA’s requirements, including the duty to file suspicious activity reports (SARs) with the Treasury Department and to implement anti-money laundering (AML) controls, would apply to a broader set of actors—including attorneys and law firms.

The American Bar Association (ABA), which has consistently resisted pretty much every effort to impose even modest AML requirements on the legal profession, has strenuously opposed this aspect of the ENABLERS Act. The ABA’s principal objection is that many BSA requirements—especially the requirement that covered entities file SARs with the government—conflict with the lawyer’s ethical duty of client confidentiality—the attorney’s obligation not to reveal information gained in the course of representing a client to outside parties, including the government, save in a very narrow set of circumstances. (The duty of confidentiality is related to, but distinct from, the attorney-client privilege, which prevents a lawyer from testifying against her client in court regarding private communications that the attorney had with the client in the course of the legal representation, or providing such communications in response to a discovery request. Some critics have also raised attorney-client privilege concerns about SAR filings.) The ABA and other commentators have argued that extending the BSA’s mandatory reporting requirement to attorneys, as the ENABLERS Act would do, compromises attorneys’ ability to guarantee confidentiality, and thereby discourages the full, frank communications between attorney and client that are essential for effective legal representation.

The ABA has a valid concern, but only to a point. A broad and unqualified extension of BSA reporting requirements to attorneys could indeed impinge on traditional and important principles of lawyer-client confidentiality. But this is not a reason to leave things as they are. Rather, the ENABLERS Act and its implementing regulations can and should draw more nuanced distinctions, imposing SAR and other AML requirements on lawyers when those lawyers are acting principally as financial advisors, but enabling lawyers to preserve client confidentiality—including with respect to suspicious transactions—when lawyers are providing more traditional legal representation, for instance in the context of litigation.

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Little Trust on the Prairie

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Offshore finance has always been glamorous. The world’s tax dodgers and kleptocrats seem to favor the same jurisdictions as James Bond, places with soring vistas, crystalline waters, and plenty of five-star resorts. Yet as the recent release of the Pandora Papers makes clear, the geography of offshore finance has shifted in recent years. For those seeking to obscure the origins of their wealth, South Dakota now eclipses Grand Cayman. Customer assets in South Dakota trusts have more than quadrupled over the past decade to $360 billion. And while there are of course legitimate reasons to set up a trust, trusts offer an ideal mechanism—even better than shell companies—for concealing ownership and preserving anonymity.

South Dakota is an especially attractive jurisdiction for setting up such trusts because it offers not only low costs and flexibility, but also a combination of privacy and control that those seeking to hide their wealth find attractive. Notably, South Dakota automatically seals trust records, preventing outsiders from identifying settlors and beneficiaries, and does not require publicly filing trust documents. (Although South Dakota’s privacy laws do not shield settlors and beneficiaries from federal law enforcement, they do conceal the trust from journalists and the private parties, making it less likely that those involved in the trust come to the attention of government authorities.) South Dakota also allows the creation of “dynasty trusts,” which exist in perpetuity, as well as “directed trusts,” which give families and their advisors maximum control in managing the trust’s affairs. Unusually, South Dakota also allows trusts whose settlor and beneficiary are the same person.

These rules make South Dakota trusts particularly appealing to business and political elites whose assets may be the target of civil as well as criminal litigation. Indeed, the Pandora Papers identified, among those who used South Dakota trusts to conceal their assets, a Colombian textile baron who had sought to launder international drug proceeds, a Brazilian orange juice mogul who allegedly underpaid local farmers, and the former president of a Dominican sugar producer who was accused of exploiting workers. With banks and even real estate agents wary of taking large sums from officials in corrupt regions, a U.S. domiciled trust offers a veneer of legitimacy.

Allowing states like South Dakota to join the archipelago of secrecy jurisdictions where bankers and trustees ask few questions undermines the United States’ fight against global corruption. Indeed, attacking those who abet foreign corruption while welcoming dirty money as an investment strategy is not just hypocritical but self-defeating. The rise of anonymous domestic trusts in the United States demands and an aggressive response from federal regulators. That response can and should include the following measures:

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Why the U.S. Corporate Transparency Act Should Cover Trusts

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In late 2020, anticorruption and transparency advocates scored a major victory: the passage of the U.S. Corporate Transparency Act (CTA), which requires U.S. corporations, limited liability companies, and “other similar entities” to disclose the identities of their true beneficial owners to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). FinCEN is currently in the process of drafting regulations to implement the CTA. One of the key questions FinCEN is considering concerns the scope of the CTA’s coverage—in particular whether trusts should be considered “similar entities” to which the CTA’s disclosure obligations apply.

The answer ought to be a resounding yes. As the recent revelations from the International Consortium of Investigative Journalists (ICIJ) stories on the so-called Pandora Papers has made all too clear, trusts are prime vehicles for kleptocrats, organized crime groups, and others who want to hide their illicit assets. To be sure, trusts have legitimate uses, such as estate planning, charitable giving, and certain (lawful) strategic business purposes. But the potential for abuse means that it is essential to increase transparency and oversight of trusts.

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Guest Post: Shifting Anticorruption Messaging from “Crime and Punishment” to “Guardrails for Good Government”

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Today’s guest post is from Joe Grady, a co-founder of the Topos Partnership, a firm that specializes in public opinion research:

Public backing is critical to the success of anticorruption reform efforts. Yet communications intended to mobilize the public against corruption often backfire, making audiences less engaged and less confident the problem can be solved. To better understand this problem, the Open Society Foundations recently sponsored an international research effort led by the Topos Partnership to better understand how residents of three countries—the United States, North Macedonia, and Brazil—think about corruption in the public sphere, and how best to engage them in efforts to combat the problem. In each country, ethnographers spoke at length with roughly 150 people, followed by internet surveys testing different kinds of messages.

Not surprisingly, findings across the countries are distinct in various interesting ways. Macedonians, for example, often have a sense that their country lags behind other European countries, and they may also look back nostalgically at the Yugoslav era when things seemed to run more predictably. Brazilians see themselves as being culturally averse to rigid rules and procedures, including those that keep government “honest.” The U.S. public has a strong sense that government is supposed to be by and for the people. But despite these important differences, there are also important similarities across the three countries. Continue reading →