Improper Payments and American Financial Mismanagement

Sound government fiscal management requires, among other things, ensuring that government payments are made accurately—to the right payee, in the correct amount, and with sufficient documentation. Failure to implement effective systems to prevent improper payments leaves the government checkbook at risk of fraud, corruption, and other forms of abuse. Alas, the magnitude of improper payments in the United States is astounding: in 2016, the US reported $144 billion in improper payments—nearly the double the budget for the Department of Education. Improper payments for Medicaid alone are more than ten times the total size of the Community Development Block Grants that the Trump Administration intends to cut – allegedly to save money, even though eliminating this program would have disastrous consequences for programs such as Meals on Wheels.

While improper payments in other contexts are part of corruption schemes, such as the “ghost soldiers” in Afghanistan that Sarah his discussed in this post, improper payments under domestic U.S. programs like Medicaid are more likely to be the result of fraud or simple mismanagement than public corruption. That said, we have no idea how much corruption contributes to the massive improper payments problem. In either case, the most effective policy responses are largely similar, regardless of the underlying cause of the problem.  However, the U.S. response to the improper payments problem has so far been inadequate.

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Do People Care More About Corruption Than They Used To? Evidence from the US and Germany

Sometimes it feels like corruption has become the topic of the year: We’ve heard repeatedly that it is (the perception of) corrupt elites that has fueled the rise of populists, nationalists, and new socialist parties and politicians. The most prominently of these, though not the only one, is Donald Trump, who promised in his campaign to take back power from the corrupt elites (see here and here).

But has the topic of corruption actually become increasingly prominent in popular and media discourse over the last two years? To investigate this question, I did a simple search on the Factiva database within the eight most widely-circulated American newspapers (USA Today, the New York Times, the Wall Street Journal, the Los Angeles Times, the New York Post, the Chicago Tribune, the Washington Post, and Newsday) for the term “corruption.” I did a similar search for Germany, using the term “Korruption” and the eight most widely-circulated German newspapers (BILD, BILD am Sonntag, Süddeutsche Zeitung, Frankfurter Allgemeine Zeitung, Die Zeit, Westdeutsche Allgemeine Zeitung, Rheinische Post, Welt am Sonntag and Rheinische Post). Surprisingly (at least to me), over the last two years there was no growth in U.S. newspaper reporting on corruption. As the following graph shows, reporting on corruption in the U.S. has been rather stable over this period, with between 500 and 750 articles a month. A slightly different picture emerges for Germany, where newspaper reports on corruption, which were substantially less frequent than in the U.S. to begin with, have actually declined over the past two years. (A side note, though perhaps an interesting one: The most reported corruption topic in both countries, with about 2.5 times more stories than the next-most-mentioned topic, was FIFA.): Continue reading

Why the Repeal of the U.S. Publish-What-You-Pay Rule Is a Major Setback for Combating Corruption in the Extractive Sector

Bonnie J. Palifka, Assistant Professor of Economics at Mexico’s Tecnológico de Monterrey (ITESM) contributes today’s guest post:

Last Friday, following the U.S. House of Representatives, the Senate voted to repeal a Securities and Exchange Commission (SEC) regulation that required oil, gas, and minerals companies to make public (on interactive websites) their payments to foreign governments, including taxes, royalties, and “other” payments. The rule was mandated by Section 1504 of the 2010 Dodd-Frank Act, but had only been finalized last year. President Trump’s expected signature of the congressional resolution repealing the rule will represent a major blow to anticorruption efforts, and a demonstration of just how little corruption matters to his administration and to Congressional Republicans.

The extractive industry had lobbied against this rule, arguing that having to report such payments is costly to firms and puts them at an international disadvantage. Some commentators have supported their efforts, arguing, for example, that the Section 1504 rules are unnecessary because the Foreign Corrupt Practices Act (FCPA) already prohibits firms under SEC jurisdiction—including extractive industry firms—from paying bribes abroad. This argument misses the mark: The extractive sector poses especially acute and distinctive corruption risks, which the FCPA alone is unlikely to remedy if not accompanied by greater transparency. Continue reading

How Should the U.S. Anticorruption Community Respond to Trump? Engagement vs. Confrontation

So Donald Trump is now the President of the United States, and has been for almost two weeks. Yes, this is really happening. And yes, this is really frightening. As has been pointed out countless times, Donald Trump poses a unique and unprecedented threat to American political institutions. It’s not mainly the hard-right policies that President Trump and the Republican Congress will push. People can strongly disagree with much of that policy agenda (as I do), but those policy positions are, alas, within the American political mainstream. And it’s not just Trump’s obvious narcissism, racism, and ignorance, bad as those are. On top of all that, Trump seems to view the presidency mainly as an opportunity for personal enrichment, and many of his top-level advisors and appointees seem to have a similar attitude. Notwithstanding his (obviously disingenuous) “drain the swamp” rhetoric, Trump—and many congressional Republicans—seem to have little regard for basic ethical norms and principles. And there are reasonable fears, based on what we’ve seen so far, that much of the Trump Administration’s policy agenda, though couched in familiar conservative market-oriented rhetoric, will in fact be oriented toward enriching the friends and families of senior administration officials, including but not limited to Trump’s own organization.

A democratically elected head of government who ran on a populist platform, but whose agenda seems to be oriented primarily toward using political power to enrich himself and his cronies? This might be a new experience for Americans, but as Professor Palifka pointed out in her post last week, this is a familiar story in many other countries (including Mexico, Ms. Palifka’s lead example). Think Silvio Berlusconi in Italy, Nestor and Cristina Kirchner in Argentina, Thaksin Shinawatra in Thailand, Jacob Zuma in South Africa, and countless others. Now that the U.S. seems to be facing a similar situation, the U.S. anticorruption community—which I’ll define loosely as the diverse set of activists, advocacy groups, commentators, researchers, scholars, and others who focus on anticorruption in their professional work—needs to be actively involved in responding.

Unfortunately, the U.S. anticorruption community is not especially well-prepared to deal with this situation. Put aside for the moment that the most prominent international anticorruption advocacy group—Transparency International (TI)—recently voted to strip its U.S. chapter (TI-USA) of its accreditation, triggering an ongoing internal fight that has, I gather, left the chapter in limbo. (That’s a whole other story.) Much more important than any internal organizational drama is the fact that most U.S. anticorruption advocacy groups have typically focused on questions of U.S. anticorruption policy—such as FCPA enforcement, asset recovery, corporate transparency, and the like—not on systemic corruption in the U.S. government itself. True, some groups have in the past positioned themselves as fighting systemic corruption in the U.S. government, but those groups generally use a broad (in my view, overly broad) definition of “corruption” that emphasizes primarily campaign finance and lobbying reform—noble causes, to be sure, but not really the main worry right now. The U.S. anticorruption community faces a challenge that’s more akin to the challenge anticorruption communities have faced (or are still facing) in places like Mexico, Italy, Argentina, Thailand, and South Africa, though perhaps with even higher stakes.

My sense is that many leading figures in the U.S. anticorruption community are already thinking hard, and having many constructive conversations, about how to respond to the unique challenges posed by the Trump Administration. In the remainder of this post, I want to focus on a basic strategic question that I’ve seen come up many times in these conversations: Engage or confront? Continue reading

How Corrupt Are Your Courts? Too Corrupt To Be Fair?

In complex transnational litigation, ensuring the rights of all parties is especially challenging. Consider the following situation: A plaintiff brings a lawsuit against a US multinational in US court, alleging wrongful conduct in some foreign country; the defendant corporation moves to dismiss the case on the ground that the courts of the country where the alleged conduct took place are a more appropriate forum for adjudicating the suit, and the plaintiff should therefore be required to pursue the suit there; but the plaintiff opposes the motion to dismiss on the grounds that the foreign country’s courts are so corrupt that it would be impossible to get a fair trial. What should the US court do when confronted with that sort of situation?

The technical legal term for a motion to dismiss a case because the plaintiff ought to file the suit in a different (and more convenient) judicial forum is the forum non conveniens motion. To successfully win on such a motion in a US federal court, the defendant must convince the court that an alternative forum would provide “basic fairness.” When the alternative forum is the judiciary of a foreign country, plaintiffs sometimes try to oppose these motions by pointing to judicial corruption in the foreign forum. But as one court highlighted, “the argument that the alternative forum is too corrupt to be adequate does not enjoy a particularly good track record.” Indeed, as I noted in my previous post on the Chevron-Ecuador litigation, the district judge in that case rejected the plaintiff’s claim that Ecuadorian judicial corruption made it impossible to get a fair trial in Ecuador, remarking that “the courts of the United States are properly reluctant to assume that the courts of a sister democracy are unable to dispense justice.” Even when confronted with clear and undisputed evidence of corruption in a foreign court, US courts have generally been unwilling to accept this as a sufficient reason to keep the case in US court. (In one case a US court reaffirmed a forum non conveniens decision even after the plaintiff successfully bribed a Mexican judge to have the case sent back to the US court.) Consistent with this deferential approach, there are very few cases where a US court has found a foreign forum inadequate due to credible allegations of widespread judicial corruption. (There are admittedly a handful of such cases, including Bhatnagar v. Surrendra Overseas, Ltd., in which the court found that the extensive delay, unreliability, and general corruption of the Indian judiciary made it an inadequate forum for the plaintiff.)

By contrast, other jurisdictions take allegations of foreign judicial corruption more seriously as a reason not to dismiss a lawsuit and insist that it remain in the forum of the plaintiff’s choice. Notably, although the forum non conveniens analysis is very similar in US and Canadian courts, Canadian courts have been more willing to find foreign forums inadequate because of pervasive corruption. For example, in Norex Petroleum Limited v. Chubb Insurance Company of Canada, a US court dismissed the case on forum non conveniens grounds, while the Canadian court took jurisdiction, denying the defendant’s forum non conveniens motion in light of the Canadian court’s finding that—even though every other factor weighed heavily in favor of Russia as the better forum—extensive judicial corruption in Russia would prevent the plaintiff from accessing a fair and impartial court. It’s certainly not the case that Canadian courts have been consistently receptive to these sorts of arguments—for example, a recent Canadian ruling found Guatemala an appropriate forum despite significant corruption concerns—but the contrast between Canada and the US demonstrates that the US courts’ “see no evil” approach is far from inevitable.

Although it may be helpful for the purposes of international comity for courts to presume that foreign judiciaries are fair, and there are legitimate reasons to dismiss a case in favor a foreign forum (such as easier access to evidence and witnesses), the reluctance of US courts to accept credible allegations of judicial corruption as a reason to deny a forum non conveniens motion likely goes too far. Respect for foreign courts is a good thing in principle, but in practice it can undermine the ability of plaintiffs to get a fair hearing. US courts should hesitate before dismissing cases to foreign forums when there are plausible claims of corruption for two reasons:  Continue reading

The Purity Potlatch and Conflict of Interest Revisited

A potlatch is a competition once found among tribes in the American Northwest.  Contestants took turns destroying things of value to them to demonstrate their wealth and status in the community, and overtime the combat escalated until eventually the only way to win was to reduce oneself to material ruin.  In a 1964 essay Stanford Law School Dean Bayless Manning, a member of the President’s Advisory Panel on Ethics and Conflicts of Interest in Government, compared the then current race in Washington, D.C., to condemn conflicts of interest to a potlatch – with similar unfortunate consequences.  Given the conflict of interest mania now gripping Washington, D.C., the time seems right to resurrect Dean Manning’s largely forgotten classic on the perils of ethics overstretch.  “The Purity Potlatch: An Essay on Conflicts of Interest, American Government, and Moral Escalation” appeared in volume 24 of the Federal Bar Journal. Available nowhere online, excerpts follow. The emphasis are as in the original:

“Something dramatic has happened of late to the subject of conflicts of interest.  This formerly obscure topic has become front page news and Big Politics. . . .

“The significant feature of these nation-rocking exposes is that, so far as is known from the record, none of the men involved actually did anything demonstrably injurious to the public treasury or the public interest.  None figured in an alleged Teapot Dome or anything resembling it.  The charge was only that the combination of their economics circumstances and their offices did not look just right.  The worst allegation that could be made against them was that they held an economic interest or received gifts that might, upon a certain set of assumptions about the conduct of their office and about human nature generally, tempt them in the future to act contrarily to the public interest in certain limited situations. Continue reading

Guest Post: Corporate or Individual Liability? Converging Approaches to Fighting Corruption

GAB is delighted to welcome back Gönenç Gürkaynak (Managing Partner at ELIG Attorneys-at-Law in Istanbul and 2015 Co-Chair of the B20 Anti-Corruption Task Force), who, along with his colleagues Ç. Olgu Kama (ELIG partner and B20 Anti-Corruption Task Force Deputy Co-Chair) and Burcu Ergün (ELIG associate), contributes the following guest post:

Combating international corruption has come a long way in the last decade. More and more jurisdictions are adapting and updating their legal systems in an effort to eradicate impunity for corruption crimes. Yet an important question persists: Who should be held primarily liable for corruption crimes, the individual or the company? The US and European countries have traditionally provided diverging answers to this question, but there now seems to be some evidence of an emerging convergence, though a consensus is yet to be reached.

In the United States—the pioneering legal system in terms of fighting international corruption—although individuals can be charged with violations of the Foreign Corrupt Practices Act (FCPA), it is the companies that are primarily held liable for FCPA violations. The US embraces a broad notion of corporate criminal liability, based on the principle of respondeat superior (the employer is responsible for the acts or omissions of its employees) and the US Department of Justice (DOJ) and Securities and Exchange Commission (SEC) have employed this theory as the basis for FCPA settlements with scores of corporations, raking in hundreds of millions of dollars in fines. However, there have been relatively few FCPA cases brought against individuals. This may be due in part to the fact that it is often difficult to attribute a corrupt act to any one specific individual, though it may also be due to the DOJ’s and the SEC’s traditional focus on going after the “deep pockets” of the corporations that come under their scrutiny.

In contrast to the US, the focus of criminal law in continental European systems has typically been on the culpability of individuals; thus, the introduction of the concept of “corporate criminal liability” is a relatively new development. Traditionally, the continental European systems have taken the view that criminal punishment can only be imposed on grounds of personal culpability, and that organizations cannot be held liable under criminal law (societas delinquere non potest). To that end, some European jurisdictions have preferred imposing administrative liability on corporations for actions that are considered to be administrative (rather than criminal) offenses.

In terms of deterring corrupt acts, a broad notion of corporate criminal liability goes a long way. The willingness of US authorities to impose significant fines on corporations provides powerful incentives for corporations to self-police. Furthermore, the threat of criminal FCPA sanctions—and the associated “moral sanctioning” of criminal liability—may have a more powerful effect on corporations than would similar fines imposed as administrative sanctions. On the other hand, the threat of corporate criminal liability is likely not sufficient, on its own, to foster a compliance culture within an organization. In a legal environment in which individuals face a credible threat of prosecution for their personal roles in organizational corruption, corporations could maintain a stronger culture of compliance as the employees themselves would be legally responsible for their misconduct and therefore less likely to engage in (or turn a blind eye to) corrupt practices.

Even though significant differences remain among jurisdictions, it is an encouraging development that there now seems to be gradually converging views regarding corporate criminal liability among these different legal systems. Continue reading