Fighting corruption in emerging markets is surpassingly difficult. It involves displacing those with malign power. It cannot be initiated and led by outsiders. Corruption pervades and distorts society in nations like Russia and China where the U.S. has great interests. It was a primary cause of the popular uprisings in the Middle East and elsewhere. It remains a huge issue in the emerging markets of Africa and Asia and, especially in failed and failing states. It is a pervasive obstacle to legitimate and transparent economic globalization. And it undermines a key goal of current counter-insurgency military strategy — the building of a civil society.

At the core of these problems is bribery of public officials, and officials’ extortion and misappropriation of funds. In the last 20 years, there has been growing recognition that corruption of this sort has a widespread and insidious impact. It distorts markets and competition; breeds anger, cynicism and discontent among citizens; stymies the rule of law; corrodes the integrity of the private sector; and impairs development and poverty reduction. Bribery, extortion, and misappropriation also help perpetuate failed and failing states — and sectors of other states — that are incubators of terrorism, the narcotics trade, money laundering, human trafficking, counterfeiting, piracy and other kind of global crime.

Heinman goes on to list what he says the U.S. can do to help: continue to support international anti-bribery conventions such as the Foreign Corrupt Practices Act, apply contemporary counter-insurgency theories in places like Afghanistan, and promote development in a subtle, auxiliary role that offers support in the form of aid, advise, and limited action.

I take issue with nothing that Heinman writes. He does a great job writing about an important topic Unlike so many mainstream commentators, Heinman sees the importance of the United States in helping to solve problems of corruption in the developing world. Too often, opinion leaders seem to believe that corruption is an unsolvable problem, or that the United States can do very little to change things. What I do believe is that Heinman missed a critical component in the fight against corruption, one that is very much accomplishable by the United States. The U.S. needs to stop actively facilitating corruption by maintaining an opaque, easily-laundered financial system.

Corrupt governance in the developing world is, at it’s heart, a financial problem. Corrupt public officials siphon money away from the state, stash it in bank accounts, and spend it on their own consumption. The U.S. contributes in two ways: by allowing for the creation of anonymous corporations, which are easily used by corrupt officials to hide money and business deals, and by functioning as an offshore tax haven for non-residents. Both represent profitable actions for a small number of Americans and corporations, but are highly counterproductive to U.S. foreign policy.

In many ways, the financial system inside the United States resembles that of secrecy jurisdictions like the Cayman Islands. However, unlike in tax havens such as the Cayman Islands, U.S. banks, accounts, and corporations have an inherent air of credibility — it is a whole lot easier to claim plausibile deniability when dealing with a shady-looking corporation from Delaware or Nevada than when dealing with one from the Cayman Islands or Bermuda. We should eliminate anonymous corporations, and stop allowing our banks to hide illicit non-resident alien deposits with no threat of scrutiny.

Bringing financial transparency to the United States would not eliminate worldwide corruption, nor would it make laundering millions of corrupt, illicit dollars impossible. However, it would raise the cost of corruption. It would force corrupt officials to have to take riskier bets in order to benefit from their crimes. They would have to hire more accountants, jump through more hoops to launder their money, and look over their shoulder more often for the threat of law enforcement. Furthermore, action by the United States on this kind of financial transparency would go a long way toward pushing other powerful nations to do the same, tightening the world’s grip around tax havens, secrecy jurisdictions, and their customers.

As Heinman points out, corruption is an economic and security problem. The United States has a clear national interest in creating a climate where the developing world can establish stable, transparent, and safe economies. As a result, the opaque U.S. financial system clearly undermines our foreign policy goals. However, there is also a moral problem here. By actively facilitating corruption, the United States is complicit in the consequences.

• The extensive use of emergency ordinances
• Low level of accountability for corruption
• Low level of trust of people in the parliament
• A major gap in implementation of laws by the government

If corruption continues to remain high, and the government fails to address it, Romania will struggle to further integrate into the European Economy.

Illicit financial outflows due to corruption, kickbacks, and trade mispricing have been increasing in Romania since 2006. A study by Global Financial Integrity has shown that in the year 2005, when Romania signed the EU adherence treaty, the country’s illicit financial flows declined to a three year low. However, as the graph below shows, illicit financial flows increased significantly at the same time as Romania was integrating into the European Union. Prior to accession, Romania was asked to enact reforms to curb organized crime, corruption, and food safety. Corruption remains one of the biggest drags on Romania’s economy.

Romania has shown that it does address corruption occasionally with the arrest of Former Prime Minister Adrian Natase, who was charged with taking part in organizing a conference to illegally collect money for his 2004 Presidential campaign. He was convicted to two years in prison.

This is a good step forward in creating accountability in the government. However, the amount of money flowing out of Romania indicates that they may be wise to follow Transparency International’s suggestions not only to combat the systemic level of corruption, but also to create a stronger, stable country that all Romanians and the rest of the European Union member-states can be proud of.

Every other week, the Task Force highlights a Featured Allied O

The Council on Geopolitics was formed in 2001 as a civil analysis center. The Council works to raise awareness about corruption and its devastating effects on societies worldwide. Primarily, they conduct competitive, political, and strategic research; as well as geopolitical analyses. They organize conferences, seminars, and lectures on the subject of foreign and security policy. On International Anti-Corruption Day (December 9, 2011) the Council on Geopolitics launched a free bi-weekly electronic newspaper titled SecInfo which focuses on anti-corruption issues.

To learn more about the Council on Geopolitics please visit their website. To register to receive the Council’s news on anti-corruption issues (currently available in Hungarian) please visitwww.secinfo.hu.

Proposals to Amend Foreign Bribery Law Could Significantly Undermine Human Rights, Commerce, U.S. Standing in the World

WASHINGTON, DC – Earlier today more than 30 civil society and business groups, including human rights and anticorruption organizations, sent a letter to every member of the U.S. House of Representatives and U.S. Senate expressing their opposition to any efforts to amend the world’s flagship anticorruption legislation, the U.S. Foreign Corrupt Practices Act (FCPA).

The signatories, who include, among others¹, Amnesty International, Calvert Investments, Citizens for Responsibility and Ethics in Washington, EarthRights International, Global Financial Integrity, Global Witness, Human Rights Watch, International Corporate Accountability Roundtable, Jubilee USA Network, Open Society Policy Center, Oxfam America, Revenue Watch Institute and Transparency International-USA are concerned that Members of Congress in both the House and Senate are considering introducing legislation that would weaken the decades old law.

The organizations stated in their correspondence that any narrowing of the law, which serves as the model for other international anticorruption conventions and foreign anticorruption laws, would have a negative effect on global commerce, human rights, and the standing of the U.S. in the world.

We believe that any amendments to more narrowly define key terms of the FCPA would constrain the ability of the Department of Justice and the Securities and Exchange Commission to effectively enforce the FCPA, limit the potential liability of companies violating the FCPA to a greater degree than is already provided under the maximum sentencing provisions of the Act, and thereby significantly undermine the statute as a tool to curb corruption. 

Our constituencies are strongly opposed to any effort to open up this legislation.  Even the perception that the U.S. commitment to combating bribery is waning would weaken the global fight against corruption.  As leaders in the public interest community dedicated to advancing human rights and curbing corruption, we therefore urge you to halt any attempt to introduce amendments to the FCPA.

“Given that this is an anticorruption law, Members of Congress looking to amend the FCPA should consult with anticorruption and human rights organizations before considering the introduction of legislation,” said Global Financial Integrity Director Raymond Baker, who signed the letter on behalf of GFI. “It is critical that legislators comprehend that there is far more at stake than a local constituent’s short term bottom line.”

“It is important for Congress to understand that changes to the FCPA can send the wrong message and weaken the enforcement of anticorruption laws around the world,” added Claudia J. Dumas, President and CEO of Transparency International – USA, who also signed the letter and noted that the Department of Justice is working on guidance on the FCPA’s enforcement provisions.

“These proposals could deliver a devastating blow to the fight against human rights abuses and corruption across the globe,” said Simon Taylor, founding Director at Global Witness. “Lawmakers should not underestimate the level of support for the FCPA. Efforts to undermine it will be extremely damaging to the reputations of those involved,” he concluded.

1. The full list of organizations includes: the Advocates for Human Rights, Amnesty International, Asia Initiatives, Calvert Investments, Caux Round Table, Center for Corporate Policy, Citizens for Responsibility and Ethics in Washington (CREW), Crude Accountability, EarthRights International, EG Justice, Financial Accountability and Corporate Transparency (FACT) Coalition, Foreign Policy in Focus, Free the Slaves, Freedom House, Friends of the Earth – US, Global Financial Integrity, Global Rights, Global Witness, Human Rights Watch, International Corporate Accountability Roundtable, Jubilee USA Network, Just Foreign Policy, Main Street Alliance, New Rules for Global Finance Coalition, Open Society Policy Center, Oxfam America, Public Citizen, Publish What You Pay United States, Revenue Watch Institute, Tax Justice Network – USA, Transparency International – USA, United to End Genocide, and U.S. PIRG.
2. The full letter to members of the U.S. House of Representatives can be read here.
3. The full letter to members of the U.S. Senate can be read here.

Journalist Contacts:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202-293-0740 ext.222

Stefanie Ostfeld
sostfeld@globalwitness.org
+1 202-621-6674

Looking at 2012, experts from the Brookings Africa Growth Initiative (AGI) and colleagues from think tanks based in the region have come together to produce this year’s issue of Foresight Africa, where they outline the top priorities for the continent for 2012 and beyond. AGI scholars assess what they see as the major challenges for Africa in the coming year and provide policy recommendations on how to manage these challenges and leverage opportunities to catalyze and reignite growth in 2012. Similarly, AGI and its partner think tanks identify country-specific challenges in Nigeria, South Africa, Senegal and Kenya.

It doesn’t seem to be getting any better. In a 2008 article on the “death of honor in sports,” Marc Ellenbogen grieves the loss of athletes like Babe Ruth and Hank Aaron, noting that sports are now riddled with “greed, dishonor, and arrogance.”  But at the end of his article, in what is now a twisted irony, he murmurs he is thankful there are “still athletes like Tiger Woods …who young people can look up to.” Less than two years after these words were written, Woods publicly admitted to having been unfaithful to his wife, telling reporters he had believed his athlete status meant that “normal rules didn’t apply.”

It’s not just athletes. In May of last year, the International Federation of Association Football (in French: Fédération Internationale de Football Association or FIFA), suspended two of its officials: Mohamed bin Hammam of Qatar and Jack Warner of Trinidad and Tobago. The national body accused these men  of attempting to bribe the 25 heads of the Caribbean football associations who were voting in an upcoming FIFA presidential election. Allegedly, Warner offered them cash gifts of $40,000 each in exchange for their votes for Bin Hammam. Warner adamantly denied the allegations against him.

And, of course, it’s all exposed to illegal behavior on the demand side too—through illegal betting. Often this occurs with collaboration between dishonest athletes and gamblers. It’s been a serious problem for the International Cricket Council (ICC), which last year warned the Pakistan Cricket Board to implement a series of measures to solve alleged corruption, including spot-fixing in the team’s recent tour ofEngland, or face serious sanctions.

In an effort to upend scandals like the one that occurred in Pakistan, and a similar one which unraveled in India, the ICC has enlisted the help of Interpol to help them strengthen their anti-corruption mechanism. In a parallel effort, with the help of FIFA, Interpol is establishing a center in Singapore dedicated to promoting integrity in sports by tackling global betting and organized criminals. Interpol chief Ronald K. Noble has noted the focus of the joint efforts will be to “teach young players, agents, and officials ways in which they can be ‘tricked’ into doing something illegal which might look innocent.”

I think this view is rather simplistic and doesn’t address the root causes of the problem. At the very least it’s a political statement aimed at assuaging the fears of officials who might see cooperation with Interpol as an “investigation” rather than “collaboration.” Of the many underlying causes for corruption in sports, the most important is not a misunderstanding of the rules. The most important is accountability. Organizations like FIFA and the ICC simply don’t have the incentive to regulate themselves or to create transparency in their operations. There are only three groups that can truly hold a sports organization accountable—member associations, fans, and corporate sponsors. Each is unlikely, for very different reasons, to cut off the flow of money and support that make it so influential. So the cycle of corruption inevitably continues.

But by working with Interpol, FIFA and the ICC have shown promise in their ability and willingness to address this obstacle. To the extent that a third party gains access and oversight of the corruption problem—which tends to be internal and self-reinforcing—these organizations can hope to gain some perspective and perhaps some solutions. Or at least we can hope.

flickr / didkovskaya

Foreign bribery is a huge problem for the Russian economy. Investors are threatening to flee in droves in the face of ever increasing official depravity and the tightening of domestic laws on bribery abroad. Transparency International estimates that the total annual amount paid in bribes in Russia is worth $300 billion—equivalent to the GDP of Denmark.  Global Financial Integrity estimates that the country lost an average $47 billion in illicit financial flows per year, a number which money transferred abroad stemming from tax evasion, corruption, and trade mispricing.

Corruption has become an endemic characteristic of Russia’s public sector. As internal State Department memos made public by WikiLeaks revealed, the top levels of Russia’s government are engaged in a much deeper and more pervasive type of corruption than most of the world has realized.  One cable notes that extortion is so widespread that it has “become the business of the Interior Ministry and the federal intelligence service.”  The government has transformed into an organization more closely resembling “the mafia” and the line separating government from business is so blurred it is nearly non-existent.

Bribery is also pervasive part of the private sector’s culture. According to Transparency International’s Bribe Payers Index, Russian businesses were the most likely to pay bribes abroad compared to companies in 28 other leading economies, below both China and Mexico. Elena Panfilova, the Director of Transparency International’s Russian Chapter, believes this is the result of “stabilized corruption,” which means “that even if new laws are adopted, it does not have the desired effect on those involved in corruption because they are not enforced.”

In the face of all these head winds, earlier this year, Russian President Demitri Medvedev signed a bill that would outlaw foreign bribery and gives prosecutors the authority to seek massive fines for graft—up to 100 times the amount of the bribe. The OECD has welcomed this bill as a “significant step,” although I would categorize the entire response’s tone as cautiously optimistic.

Medvedev, for his part, has done his best to assert his intentions to tackle corruption in the court systems, stating that Russia should do its best to “make the courts become as much as possible independent from the authorities and at the same time to absolutely depend on society.”  Although, he’s also said he has “no illusions that this will happen in one or two years.” Just a year earlier Medvedev admitted he knew “of no significant successes in this direction,” despite the prior two years of effort.

Panfilova wouldn’t be surprised. She’s noted “This law looks great on paper, but the question is whether it will be implemented…the real work will be all in the future.”

Despite all the pessimism floating around, Russia has improved, significantly, in one important survey. According to an economic crime survey by PricewaterhouseCoopers, 40% of respondents “who faced economic crimes in the past year suffered from bribery or corruption,” this is down from 48% two years ago. Could it be? Is the bribery problem diminishing in Russia? Or is it just a mirage?

Not likely. As Irina Novikova, the director of the forensics department at PricewaterhouseCoopers Russia, has observed, “one of the reasons for the decline may be a reduced willingness of survey respondents to talk about corruption.” This would actually indicate the problem is getting worse, not better, since solving the problem requires openness, dialogue, and willingness to reform. But let’s at least hope the numbers are real. And if they turn out to be, let’s figure out what Russia is doing right. Even if it’s by accident.

Image License:  Some rights reserved by didkovskaya

Global Financial Integrity

WASHINGTON, DC – Corruption, kickbacks and bribery are on the rise in Ethiopia, according to a forthcoming report from Global Financial Integrity, a Washington-based research and advocacy organization.  According to the study, illicit financial flows out of the African nation nearly doubled to US$3.26 Billion in 2009 over the previous year, with corruption, kickbacks and bribery accounting for the vast majority of that increase.

GFI Economist Sarah Freitas, who co-authored the upcoming report with GFI Lead Economist Dev Kar, revealed the data in a blog post today on the website of the Task Force on Financial Integrity & Economic Development (financialtaskforce.org).

Ms. Freitas wrote:

An upcoming report by Global Financial Integrity finds that Ethiopia, which has a per-capita GDP of just US$365, lost US$11.7 billion to illicit financial outflows between 2000 and 2009.  More worrying is that the study shows Ethiopia’s losses due to illicit capital flows are on the rise.  In 2009, illicit money leaving the economy totaled US$3.26 billion, which is double the amount in each of the two previous years.

The report, titled Illicit Financial Flows from Developing Countries over the Decade Ending 2009, shows that the vast majority of the rise in illicit financial flows is a result of increased corruption, kickbacks, and bribery while the remainder stems from trade mispricing.

Ethiopia is one of the poorest countries on earth.  Plagued by famine, war, and political oppression, 38.9% of Ethiopians live in poverty, and life expectancy in 2009 was just 58 years.   In 2008, Ethiopia received US$829 million in official development assistance, but this was swamped by the massive illicit outflows.  The scope of Ethiopia’s capital flight is so severe that our conservative US$3.26 billion estimate greatly exceeds the US$2 billion value of Ethiopia’s total exports in 2009.

The people of Ethiopia are being bled dry.  No matter how hard they try to fight their way out of absolute destitution and poverty, they will be swimming upstream against the current of illicit capital leakage.  The global shadow financial system happily absorbs money that corrupt public officials, tax evaders, and abusive multi-national corporations siphon away from the Ethiopian people.

The full article can be read here.

Ethiopia is not the only country to be highlighted in the organization’s upcoming study.  Indeed, in a similar blog post published last week, Ms. Freitas revealed that the report, titled Illicit Financial Flows from Developing Countries over the Decade Ending 2009, found that Syria had lost US$23.6 billion in illegal capital flight from 2000-2009.  The report is the annual update to GFI’s previous studies measuring the illicit financial flows out of 160 different developing nations.  This will be the first of GFI’s studies to include data for the year 2009.

To schedule an interview with Ms. Freitas or Dr. Kar, or to receive an embargoed copy of the report, contact Clark Gascoigne at cgascoigne@gfintegrity.org or +1 202 293 0740 ext.222.

###

Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 ext. 222.

________________

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org. 

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A Market in Harar, Ethiopia. flickr / A. Davey

An upcoming report by Global Financial Integrity finds that Ethiopia, which has a per-capita GDP of just US$365,lost US$11.7 billion to illicit financial outflows between 2000 and 2009.  More worrying is that the study shows Ethiopia’s losses due to illicit capital flows are on the rise.  In 2009, illicit money leaving the economy totaled US$3.26 billion, which is double the amount in each of the two previous years.

The report, titled Illicit Financial Flows from Developing Countries over the Decade Ending 2009, shows that the vast majority of the rise in illicit financial flows is a result of increased corruption, kickbacks, and bribery while the remainder stems from trade mispricing.

Ethiopia is one of the poorest countries on earth.  Plagued by famine, war, and political oppression, 38.9% of Ethiopians live in poverty, and life expectancy in 2009 was just 58 years.   In 2008, Ethiopia received US$829 million in official development assistance, but this was swamped by the massive illicit outflows.  The scope of Ethiopia’s capital flight is so severe that our conservative US$3.26 billion estimate greatly exceeds the US$2 billion value of Ethiopia’s total exports in 2009.

The people of Ethiopia are being bled dry.  No matter how hard they try to fight their way out of absolute destitution and poverty, they will be swimming upstream against the current of illicit capital leakage.  The global shadow financial system happily absorbs money that corrupt public officials, tax evaders, and abusive multi-national corporations siphon away from the Ethiopian people.

What can be done?  The first step the international community should take is to hamper the ability of corrupt and tax-evading Ethiopians to launder their money in the global financial system.  This could be accomplished by establishing a global system of automatic exchange of tax information. In this way, Ethiopian authorities could much more easily track the bank accounts their tax evaders have established around the world. Furthermore, the G20 governments could push for an end to shell companies by calling for beneficial owners of all companies, trusts and foundations to be known to government authorities.  This would make it far more difficult for the corrupt and the criminal to hide their ill-gotten gains behind a wall of corporate secrecy.

These two measures would immediately curtail the flow of billions of dollars leaving the country each year.  And, by preventing the flow of so much money, countless lives will benefit.

Editorial Note: Later this month, Global Financial Integrity will release its new report, Illicit Financial Flows from Developing Countries over the Decade Ending 2009, measuring illicit financial flows out of 160 different developing countries.  Revealing more data from the upcoming report, Ms. Freitas wrote last week that Syria lost US$23.6 billion in illicit financial outflows from 2000-2009. Sign up here to receive notices when new GFI reports are released.

Image License: This photo has Some Rights Reserved by A. Davey

Global Financial Integrity

WASHINGTON, DC – A forthcoming report from Global Financial Integrity (GFI) finds Syria lost US$23.6 billion to corruption, crime and tax evasion from 2000-2009, writes GFI Economist Sarah Freitas in a new blog post on the website of the Task Force on Financial Integrity and Economic Development (financialtaskforce.org).

The article, titled “After Years of Leakages, Syrian Capital Flight Likely Intensifying,” releases data from GFI’s upcoming report, “Illicit Financial Flows from Developing Countries over the Decade Ending 2009,” which will be released later this month.  Ms. Freitas, who co-authored the report with GFI Lead Economist Dev Kar, states that illicit financial outflows from the Middle Eastern nation have likely increased in the wake of the recent uprising.

The article says:

Illicit outflows are not new to Syria. An upcoming report by Global Financial Integrity estimates that from 2000-2009, Syria lost $23.6 billion from corruption, trade mispricing, bribery, and other illicit activity. In a country with a per capita GDP of just US$2,891 in 2010, these outflows represent a loss of US$1,048 for every Syrian citizen. GFI’s study also finds evidence that bribery, kickbacks, and corruption increased dramatically from 2005-2009. It’s no wonder that Syrians are discontent.

An international shadow financial system is enabling wealthy Syrians, including corrupt public officials, terrorist financiers, and tax evaders, to move their money into safe havens offshore. In many countries, including the United States, individuals can form shell (anonymous) corporations to shield their money from the eyes of authorities. It was one of these shell corporations that allowed the government of Iran to own a skyscraper on Fifth Avenue in Manhattan for over 30 years before it was seized in 2009. Iran was able to evade sanctions for years using many layers of anonymous corporations, and it is likely that the regime in Syria uses similar vehicles to circumvent international sanctions.

Countries like the United States can make it more difficult for corrupt public officials like al-Asad to smuggle stolen assets out of their countries by eliminating anonymous corporations and strengthening anti-money laundering laws.

The full article can be found here.

To schedule an interview with Ms. Freitas or Dr. Kar, or to receive an embargoed copy of the report, contact Clark Gascoigne at cgascoigne@gfintegrity.org or +1 202 293 0740 ext.222.

###

Contact:

Clark Gascoigne
cgascoigne@gfintegrity.org
+1 202 293 0740 ext.222

____

Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

For additional information please visit www.gfintegrity.org.

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