The Blog

FCPA Blog: December 2012

Global Corruption: Money, Power and Ethics in the Modern World (University of Pennsylvania Press) - Review, Richard Cassin 

The temptation when writing about corruption is to focus on statistics and policy details instead of people -- both the victims and the heroes. But Laurence Cockcroft leaves math and wonkiness behind (no small feat for an economist) and delivers a great narrative.

Cockcroft's new book is Global Corruption: Money, Power, and Ethics in the Modern World. It was published this year by the University of Pennsylvania Press.

Anti-corruption enforcement was largely off the table during the Cold War, he says, but has since emerged as the key weapon against global organized crime. His description of crime gangs aligned with governments (and unions) takes examples from Western and developing countries. And his tale of graft busters, from Bobby Kennedy to John Githongo, shows how individuals, against the odds, can turn the tide.

In a blurb for the book, Sir Chris Patten, former European Commissioner and Governor of Hong Kong, said 'Corruption is a tax on development. . . . Wherever it grows, it hollows out governing institutions and undermines prosperity and stability. Laurence Cockcroft has written a brilliant analysis of its scale and malign results. His book deserves a place on the library shelf of everyone committed to sustainable development in free and plural societies.'

Cockcroft is a founding member of Transparency International and was formerly chairman of its U.K. chapter. He's also the author of Africa's Way: A Journey from the Past.

He first saw corruption while working at a training center for small-plot farmers in Nigeria in the early 1960s. After studies at Cambridge University, he returned to Africa as an agricultural economist for the governments of Zambia and Tanzania and later Ghana. He then spent ten years working for a British agribusiness company.

Twenty years after the founding of Transparency International, Cockcroft is still part of it. Convincing successive British governments that bribery 'is really a threat to a level playing field in international markets' has been one of the biggest challenges, he says.

His new book should help. It shows graft as both incredibly corrosive and far from inevitable.

Cockcroft rightly casts corruption as a 'gateway' crime -- a powerful idea that's gaining acceptance and helping fuel the global anti-corruption movement.

'The case for combating corruption relentlessly,' Cockcroft says, ' is that it is a force which drives poverty, inequality, dysfunctional democracy and global insecurity. Its most consistent victims are the poor who constitute a majority of the population in low-income countries; its most dramatic victims are the subjects of human trafficking. Its everyday victims are the citizens of many countries where political funding is generated by corrupt means and where their voice is lost in the rush by elected politicians to pay off their backers. Corruption feeds failed states, the trade in nuclear weapons and their components, and the perpetuation of hunger even where harvests are plentiful. Unless checked, its major legacy will be an unjust and unstable world, tipping the outcome of uncertainties about the future in an ever more dangerous direction.'

Global Corruption: Money, Power, and Ethics in the Modern World is available from Amazon here and from the publisher here.

 

 

 Montreal Review : December 2012

Global Corruption : Money, Power and Ethics in the Modern World (University of Pennsylvania Press)

 

                Recent scandals in Canada, laid bare by Quebec’s  Charbonneau Commission and the press, have shown how a tight network of city bosses, construction kings and political fund raisers can determine the award of major contracts and the financial power of political parties. The fact that three mayors of  cities in Quebec  have been obliged to resign on corruption related allegations charges since October is testimony to the depth of the problem. However, ‘embedded networks’ of this kind are common across the globe and frequently determine the allocation of resources in ways which destroy public trust and often create huge inefficiencies in public works. In my book, ‘Global Corruption’, I explore the ways in which these networks operate in a range of countries, in many cases creating a downward spiral   which  makes corruption endemic and an every day issue for at least half the world’s population.  Even across the twenty seven countries of the EU a recent poll showed that two thirds of the population consider corruption to be a ‘serious problem’ in their own countries, with ‘political corruption’ at the top of the bill. In the US the recent Presidential campaign was accompanied by unprecedented disquiet over the role of the $2.5 billion invested by both parties, some of it from tainted sources.

                The raising of  political finance from corrupt sources, including organised crime and ‘off the books’ corporate accounts, has a long pedigree. In the case of Italy, the Sicilian based mafia was a player in national politics for most of the last century, with a particularly well defined role since the 1950s, leading to no less than four  prosecutions of Prime Minister Giulio Andreotti on mafia related charges. In South Korea, two ex-Prime Ministers were prosecuted (and imprisoned) on corruption charges in 1996 and one (Roh Moo-hyun), faced with bribery charges, committed suicide in 2009. In India the cost of elections has reached the enormous figure of US$10 million to win a seat in the federal Parliament -  a sum which can only be raised through corruptly gained contracts, creating a situation where the ‘investors’ have to achieve a return on  their investment by securing a further round of corruptly awarded contracts. In South Africa, the Euros 5 billion arms deal of 1998 was structured to include large scale payments to the governing ANC, then in power for four years. In Brazil  thirty seven Congressmen were charged in the ‘mensalao’ case in September  2012 with  receiving bribes  from the executive  to pass more than twenty five laws in a Congress in which there was no overall majority. (Twenty five of them were found guilty in the Supreme Court in October). 

                Much of this funding comes from a combination of organised crime and the skimming of large scale contracts, especially in defence and infrastructure. In some cases both local and international companies may pay bribes which are destined to be indirect  political contributions. In 2008, the new CEO of Siemens, Peter Loscher, said that total identifiable bribes paid by the company in twenty countries, in the recent past had totalled as much as US 1.5 billion. In  several  cases involving BAESystems investigated by the US Department of Justice and the UK Serious Fraud Office in 2010, leading to $440 million in fines, payments were partly channelled to political parties. In Russia, the election of 2003 saw an investment of $100 million  by Mikhail Khodorkovsky (and his Yukos company)  in support of the election of a hundred deputies, rivalling a similar but not so challenging investment by Gazprom (leading to the  jailing Khodorkovsky in Siberia).

               

 

                Political finance of this kind sets the scene for the various forms of corruption which impact on people’s lives. Not all  small scale or ‘petty’ corruption is the  product of a need for survival by those on drastically low pay, a significant part of that is orchestrated by those in more senior posts who expect a cut from the policeman on  the streets or the  medical orderly in the hospital.  Political posts are sold off in many cases for a capital sum : Transparency International (Russia) reported this to  be as high as $8-10 million for a Deputy Minister’s post in 2005. These payments at both the small and large scale level are facilitated by the fact that forty per cent of GDP, or more in ex Soviet and low income countries, may be unrecorded and part of a ‘shadow economy’. This constitutes a huge reservoir from which payments may be made and cannot be detected. In the case of companies, payments may be made  from both unrecorded and recorded output to ‘secrecy jurisdictions’  - such as the UK’s Caribbean ‘Overseas Territories’ – which in some cases flow back to their country of origin as political donations as well as ‘foreign direct investment’. The best estimate of these flows is about $1 trillion per year, a sum of immense value to the Wall Street and City of London banks who have  subsidiaries in these jurisdictions.

                This tangled web of inter relationships at grass roots, corporate and political level is very difficult to unravel. The most positive initiative lies with the G20 whose working group on corruption has focused on several of the key issues in the last two years. It is the influence of this group which caused China, India, Indonesia and  Russia to pass legislation outlawing overseas bribery in 2011. For the next six months the group is co-chaired by Russia and Canada – an excellent opportunity for Canada to  show that it is putting its own house in order, as it seeks to move the G20 on to address on an international basis some of the issues discussed in this book.

 

Secrecy, tax and corruption : onshore/offshore
(Appears in Transparency International(UK)’s Blog Post ; September 30 ^th)

 

The debate about ‘offshore havens’ and ‘secrecy jurisdictions’ is reaching an unprecedented level as the claims of  tax authorities, Ministries of Finance and NGOs converge on the need to have much tougher regulation of more than fifty  such havens  world wide.  Since nine  of these are nominally under the sovereignty of the Crown or the UK government, they constitute a major responsibility for Britain (though one which is largely avoided). The Bank of International Settlements reported in 2009 that total funds in all the UK connected jurisdictions accounted for 55 per cent of the global total – at that time estimated by the BIS at $ 6.5 trillion (though other estimates are much higher). Recent analyses, notably from Global Financial Integrity, have shown how these deposits mix the fruits of bribery, organised crime and ‘mispricing’ by companies trading internationally.   However the arguments about the role of these ‘havens’ and regulation have become more nuanced in the recent past.

There  are two key  arguments  to disentangle : first, do these havens operate regimes of secrecy which benefit depositors (both individuals and companies) who cannot be identified ? second, are their tax regimes such that they attract individuals and corporates who would otherwise pay tax in a range of countries in which they operate  including their major domicile ?   (Barclays Bank informed a House of Commons Committee in 2009 that it had 315 subsidiaries in various tax havens).

The first question is partly answered by the Financial Secrecy Index which Christian Aid generates : the nine UK OFCs all score badly in this. On the other hand The Puppet  Masters , a report published by the World bank in 2011 found that overall  the due diligence provided by those agents (Trust and Company Service Providers) forming companies in the  OECD countries was inferior to that which they carried out in tax havens,   and was more likely to obscure the beneficial owner. The US was particularly at fault in this regard. In the same vein  the  recent Tax Justice Network report by James Henry  (The Price of Offshore) showed  that complex corporate structures, designed to hide the real beneficial owners, are vehicles with many tentacles and are as likely to have one  based in London or New York as in the Caribbean. In this case the focus of change has to be on dismantling the legality of such structures.

The second question is answered by sheer numbers : the BVI hosts 800,000  ‘international business companies’ (a specific corporate form) and the Caymans hosts  18,000 ‘business companies’  many of them Foreign Sales Corporations – a major corporate tax dodging vehicle for US companies. A survey carried out by Deloitte’s for the Foot report, commissioned by the UK government  in 2009,  found that these tax regimes were often characterised by ‘the absence or near absence of certain forms of taxation’.

As Britain’s Chancellor of the Exchequer, George Osborne, searches for new sources of revenue, and as calls for forms of wealth tax emerge in both  France and the UK, the need for clarity in relation to the offshore/onshore scene is essential. It seems likely that the long awaited attack on corruptly gained funds, deposited ‘offshore’, will be sustained by an attack on the more effective taxation  of major international companies. But progress will not be uniform : in 2008 Barrack Obama vowed to see the tax regime which benefited US companies in the Caymans dismantled. In his 2012 campaign there has barely been a reference to such an obvious loophole. The G20 needs to sustain its attack on these issues. 

Can London's Ill Gotten Assets Be Repatriated?
September, 2012

Last week's stories on Newsnight and in the Guardian about the assets of the Mubarak family and Egyptians in London have yet again raised questions about the competence of the UK authorities in relation to the confiscation of assets gained corruptly in various parts of the world. The court and policing system here has always been behind both domestic and international opinion in relation to this issue. For many years the Treasury and the Bank of England authorities were only too happy to see ill-gotten gains from around the developing and eventually ex Soviet world deposited in the City or in the Channel Islands or Caribbean jurisdictions technically under UK governance. The case of the ex President of Nigeria, Sani Abacha – who by the time of his death had siphoned about $4 billion into Swiss and UK banks - exposed the inadequacy of turning a blind eye to these criminally gained funds (some of which in Abacha's case were literally lifted as cash from the Central Bank of Nigeria).The rapid exposure by the Swiss Banking Authority of the fact that about $2 billion of Abacha's assets had been deposited in Switzerland stood in stark contrast to a much weaker report from the FSA which did at least confirm that twenty two UK banks had been involved in recycling Abacha's funds.

As international pressure grew for the fruits of corruption to be repatriated, and a new UN Anti Corruption Convention came into force (in 2000) made legal provision for this, the UK began to adjust its position, at least in principle. An 'Asset Recovery Agency'(ARA) established in 2003 was intended to hold the proceeds of crime which had been detected, even in the absence of a criminal prosecution. Arrangements were made for a significant part of any funds recovered from overseas corruption to be repatriated to their country of origin. However in the course of its four year life the ARA only recovered £4 million and in 2011 was merged into the Serious Organised Crime Agency (SOCA) which in turn is now part of the National Policing Improvement Agency. Such minimal success, combined with a continuous institutional change, is a hopeless basis on which to envisage a serious campaign to identify, collect and repatriate assets which have been corruptly gained.

During the last four years in France, a quite different story has emerged. The courts have upheld the right of two NGOs to bring a case to the courts which if successful would lead to the confiscation of the assets in France of two African Presidents (Dennis Sassou Nguesso of Congo-Brazzaville and Teodorin Obiang of Equatorial Guinea) . This is a step far ahead of UK practice to date, but it has a particular relevance to Russian émigré oligarchs with extensive London assets. Both Putin and many NGOs in Russia would, from different perspectives, love to see these largely corruptly gained assets confiscated and repatriated. The UK Government sees this only as a threat to the pool of funds held in London.

Commenting on Britain's position outside the Eurozone a German government official asked : Is Britain's economic strategy simply to be a super Guernsey ? As long as we are deeply ambivalent about the retention of corruptly gained assets here this will be a fair question.



Corruption : An African or a Global Cancer ?  
Blog for  The Royal Africa Society  Sept 1st 2012 

Is African corruption unique, or is it just like corruption in the many other parts of the world where it is endemic ? Citizens of African countries tend to argue that their corruption problem could not be worse and they must have an unchallengeable lead in the whole business. International corporate types tend to see corruption in Africa as no different to that which they face or participate in across a range of countries. In NGO circles corruption in Africa tends to be regarded as a product of western influence and the siren voices of capitalism. Where does the truth lie ?

In my book, 'Global Capitalism : Money,Power and Ethics in the Modern World', I explore the nature of corruption across the world, the forces which drive it forward, and the roadblocks to combating it. Many of the issues are common to a range of countries. I particularly focus on five key drivers. The first is the size of the 'unrecorded economy' - in many countries from Russia to Nigeria unrecorded transactions amount to at least 40 per cent of GDP, constituting a vast reservoir from which corrupt payments can be made without trace. The second is the system of 'political finance' by which huge sums of money, often gained corruptly, are invested in the political process with the expectation of a corruptly gained reward once power is secured or re-secured – easily discernible in most political systems from the US to India. The third is the role of organised crime in securing political support and cover for trading operations ranging from drugs to counterfeit pharmaceuticals – a recognised practice from Italy to Thailand. The fourth is the role of national and international companies in the 'mis-pricing' of products which enable a large chunk of profits to be moved to havens where tax is low or non-existent – a common phenomenon from Russia to Peru. The fifth is the system by which illegally and corruptly gained products – such as oil, timber and rare minerals – transit from the illegal sector to the legal sector – such as timber from Cambodia or counterfeit drugs in south east Asia. 

It is easy to see that these five drivers are also at work across Africa. No African country has an economy, except South Africa, in which more than 60 per cent is recorded in standard GDP figures ; dominant political parties are typically funded by a small clique with corporate interests ; organised crime is a major factor in many countries especially in the drugs and counterfeit pharmaceuticals business ; 'mis pricing' of mineral and timber exports is common ; and the transit of illegally acquired products - such as timber, oil and coltan – from the informal to the formal sector is widespread. By these criteria corruption in Africa is very much part of an international pattern.

How does this work out at the country level ? Robert Mugabe has been maintained in power by an elite group with strong ties to the military, which once extended its tentacles to the DRC and does so now to the domestic diamond mining industry, much of whose output is unrecorded ; Paul Biya, in power in Cameroun for 30 years, is partly sustained by a never ending flow of the export of illegally felled logs from Cameroun's vast forest reserves ; key politicians in Guinea-Conakry and Guinea-Bissau have become active partners with Colombian drug cartels in the trans-shipment of cocaine to Europe ; in Nigeria 'oil bunkering' from the Delta enriches both local and national players in the government and the army – a classic case of illegally acquired products entering the world's legal trade through the Rotterdam market ; in Tanzania the price at which its booming minerals such as gold, platinum and uranium enter the world market is controversial and secret. 

Whilst these types of corruption are common across much of the world, it is difficult to argue that Africa is a victim of global and corrupt processes which it cannot control. The question of the size of the unrecorded sector is one which governments can tackle over a three to four year period as, for example, Ruanda has shown. Any increase in the local tax take – a growing theme amongst donors –depends on a steady increase in the relative size of the formal sector. The control of political finance is a big problem throughout the world, but the more outrageous raids in Africa on Treasuries, Central Banks and the defence budget can be dramatically reduced. The expansion of the tentacles of organised crime always depend on the compliance of at least some elected and non-elected officials, but there is nothing inevitable about the process. The transit of products from the illegal to the legal sector, although a mechanism requiring international collaboration, is ultimately triggered by local rather than international initiative. The question of mispricing is one for which the responsibility falls much more heavily on the corporate world outside Africa and where countries are undoubtedly frequent victims of this process, losing huge quantities of revenue in the process. Here initiatives such as the Extractive Industries Transparency Initiative (EITI) which commit both companies and governments to reporting the revenue they respectively earn and receive from the exploitation of mineral resources are key. (Of the 14 countries which are 'fully compliant' with EITI, seven are in sub Saharan Africa). 

Africa's corruption has many global aspects, especially the fact that it arises from deep structural factors which it will take great energy and courage to change. Heroes such as Nuhu Ribadu and John Githongo have shown the way forward, but have also shown the depth of resistance to rolling it back, since both were forced into exile. As elsewhere in the world, governments will have to address the underlying issues as well as the symptomatic cases which are occasionally brought to court.