I. The Facts
Just days before a much-awaited donor conference, the
influential International Crisis Group (ICG) recommended
to place all funds pledged to Macedonia under the
oversight of a "corruption advisor" appointed by the
European Commission. The donors ignored this and other
recommendations. To appease the critics, the affable
Attorney General of Macedonia charged a former Minister
of Defense with abuse of duty for allegedly having
channeled millions of DM to his relatives during the
recent civil war. Macedonia has belatedly passed an anti-
money laundering law recently - but failed, yet again, to
adopt strict anti-corruption legislation.
In Albania, the Chairman of the Albanian Socialist Party,
Fatos Nano, was accused by Albanian media of
laundering $1 billion through the Albanian government.
Pavel Borodin, the former chief of Kremlin Property,
decided not appeal his money laundering conviction in a
Swiss court. The Slovak daily "Sme" described in
scathing detail the newly acquired wealth and lavish
lifestyles of formerly impoverished HZDS politicians.
Some of them now reside in refurbished castles. Others
have swimming pools replete with wine bars.
Pavlo Lazarenko, a former Ukrainian prime minister, is
detained in San Francisco on money laundering charges.
His defense team accuses the US authorities of "selective
prosecution".
They are quoted by Radio Free Europe as saying:
"The impetus for this prosecution comes from allegations
made by the Kuchma regime, which itself is corrupt and
dedicated to using undemocratic and repressive methods
to stifle political opposition ... (other Ukrainian officials)
including Kuchma himself and his closest associates, have
committed conduct similar to that with which Lazarenko
is charged but have not been prosecuted by the U.S.
government".
The UNDP estimated, in 1997, that, even in rich,
industrialized, countries, 15% of all firms had to pay
bribes. The figure rises to 40% in Asia and 60% in Russia.
Corruption is rife and all pervasive, though many
allegations are nothing but political mud-slinging.
Luckily, in countries like Macedonia, it is confined to its
rapacious elites: its politicians, managers, university
professors, medical doctors, judges, journalists, and top
bureaucrats. The police and customs are hopelessly
compromised. Yet, one rarely comes across graft and
venality in daily life. There are no false detentions (as in
Russia), spurious traffic tickets (as in Latin America), or
widespread stealthy payments for public goods and
services (as in Africa).
It is widely accepted that corruption retards growth by
deterring foreign investment and encouraging brain drain.
It leads to the misallocation of economic resources and
distorts competition. It depletes the affected country's
endowments - both natural and acquired. It demolishes the
tenuous trust between citizen and state. It casts civil and
government institutions in doubt, tarnishes the entire
political class, and, thus, endangers the democratic system
and the rule of law, property rights included.
This is why both governments and business show a
growing commitment to tackling it. According to
Transparency International's "Global Corruption Report
2001", corruption has been successfully contained in
private banking and the diamond trade, for instance.
Hence also the involvement of the World Bank and the
IMF in fighting corruption. Both institutions are
increasingly concerned with poverty reduction through
economic growth and development. The World Bank
estimates that corruption reduces the growth rate of an
affected country by 0.5 to 1 percent annually. Graft
amounts to an increase in the marginal tax rate and has
pernicious effects on inward investment as well.
The World Bank has appointed last year a Director of
Institutional Integrity - a new department that combines
the Anti-Corruption and Fraud Investigations Unit and the
Office of Business Ethics and Integrity. The Bank helps
countries to fight corruption by providing them with
technical assistance, educational programs, and lending.
Anti-corruption projects are an integral part of every
Country Assistance Strategy (CAS). The Bank also
supports international efforts to reduce corruption by
sponsoring conferences and the exchange of information.
It collaborates closely with Transparency International,
for instance.
At the request of member-governments (such as Bosnia-
Herzegovina and Romania) it has prepared detailed
country corruption surveys covering both the public and
the private sectors. Together with the EBRD, it publishes
a corruption survey of 3000 firms in 22 transition
countries (BEEPS - Business Environment and Enterprise
Performance Survey). It has even set up a multilingual
hotline for whistleblowers.
The IMF made corruption an integral part of its country
evaluation process. It suspended arrangements with
endemically corrupt recipients of IMF financing. Since
1997, it has introduced policies regarding misreporting,
abuse of IMF funds, monitoring the use of debt relief for
poverty reduction, data dissemination, legal and judicial
reform, fiscal and monetary transparency, and even
internal governance (e.g., financial disclosure by staff
members).
Yet, no one seems to agree on a universal definition of
corruption. What amounts to venality in one culture
(Sweden) is considered no more than hospitality, or an
expression of gratitude, in another (France, or Italy).
Corruption is discussed freely and forgivingly in one
place - but concealed shamefully in another. Corruption,
like other crimes, is probably seriously under-reported and
under-penalized.
Moreover, bribing officials is often the unstated policy of
multinationals, foreign investors, and expatriates. Many of
them believe that it is inevitable if one is to expedite
matters or secure a beneficial outcome. Rich world
governments turn a blind eye, even where laws against
such practices are extant and strict.
In his address to the Inter-American Development Bank
on March 14, President Bush promised to "reward nations
that root out corruption" within the framework of the
Millennium Challenge Account initiative. The USA has
pioneered global anti-corruption campaigns and is a
signatory to the 1996 IAS Inter-American Convention
against Corruption, the Council of Europe's Criminal Law
Convention on Corruption, and the OECD's 1997 anti-
bribery convention. The USA has had a comprehensive
"Foreign Corrupt Practices Act" since 1977.
The Act applies to all American firms, to all firms -
including foreign ones - traded in an American stock
exchange, and to bribery on American territory by foreign
and American firms alike. It outlaws the payment of
bribes to foreign officials, political parties, party officials,
and political candidates in foreign countries. A similar law
has now been adopted by Britain.
Yet, "The Economist" reports that the American SEC has
brought only three cases against listed companies until
1997. The US Department of Justice brought another 30
cases. Britain has persecuted successfully only one of its
officials for overseas bribery since 1889. In the
Netherlands bribery is tax deductible. Transparency
International now publishes a name and shame Bribery
Payers Index to complement its 91-country strong
Corruption Perceptions Index.
Many rich world corporations and wealthy individuals
make use of off-shore havens or "special purpose entities"
to launder money, make illicit payments, avoid or evade
taxes, and conceal assets or liabilities. According to Swiss
authorities, more than $40 billion are held by Russians in
its banking system alone. The figure may be 5 to 10 times
higher in the tax havens of the United Kingdom.
In a survey it conducted last month of 82 companies in
which it invests, "Friends, Ivory, and Sime" found that
only a quarter had clear anti-corruption management and
accountability systems in place.
Tellingly only 35 countries signed the 1997 OECD
"Convention on Combating Bribery of Foreign Public
Officials in International Business Transactions" -
including four non-OECD members: Chile, Argentina,
Bulgaria, and Brazil. The convention has been in force
since February 1999 and is only one of many OECD anti-
corruption drives, among which are SIGMA (Support for
Improvement in Governance and Management in Central
and Eastern European countries), ACN (Anti-Corruption
Network for Transition Economies in Europe), and FATF
(the Financial Action Task Force on Money Laundering).
Moreover, The moral authority of those who preach
against corruption in poor countries - the officials of the
IMF, the World Bank, the EU, the OECD - is strained by
their ostentatious lifestyle, conspicuous consumption, and
"pragmatic" morality.
II. What to Do? What is Being Done?
Two years ago, I proposed a taxonomy of corruption,
venality, and graft. I suggested this cumulative definition:
a. The withholding of a service, information, or
goods that, by law, and by right, should have been
provided or divulged.
b. The provision of a service, information, or goods
that, by law, and by right, should not have been
provided or divulged.
c. That the withholding or the provision of said
service, information, or goods are in the power of
the withholder or the provider to withhold or to
provide AND That the withholding or the
provision of said service, information, or goods
constitute an integral and substantial part of the
authority or the function of the withholder or the
provider.
d. That the service, information, or goods that are
provided or divulged are provided or divulged
against a benefit or the promise of a benefit from
the recipient and as a result of the receipt of this
specific benefit or the promise to receive such
benefit.
e. That the service, information, or goods that are
withheld are withheld because no benefit was
provided or promised by the recipient.
There is also what the World Bank calls "State Capture"
defined thus:
"The actions of individuals, groups, or firms, both in the
public and private sectors, to influence the formation of
laws, regulations, decrees, and other government policies
to their own advantage as a result of the illicit and non-
transparent provision of private benefits to public
officials".
We can classify corrupt and venal behaviors according to
their outcomes:
a. Income Supplement - Corrupt actions whose sole
outcome is the supplementing of the income of the
provider without affecting the "real world" in any
manner.
b. Acceleration or Facilitation Fees - Corrupt
practices whose sole outcome is to accelerate or
facilitate decision making, the provision of goods
and services or the divulging of information.
c. Decision Altering (State Capture) Fees - Bribes
and promises of bribes which alter decisions or
affect them, or which affect the formation of
policies, laws, regulations, or decrees beneficial to
the bribing entity or person.
d. Information Altering Fees - Backhanders and
bribes that subvert the flow of true and complete
information within a society or an economic unit
(for instance, by selling professional diplomas,
certificates, or permits).
e. Reallocation Fees - Benefits paid (mainly to
politicians and political decision makers) in order
to affect the allocation of economic resources and
material wealth or the rights thereto. Concessions,
licenses, permits, assets privatized, tenders
awarded are all subject to reallocation fees.
To eradicate corruption, one must tackle both giver and
taker.
History shows that all effective programs shared these
common elements:
a. The persecution of corrupt, high-profile, public
figures, multinationals, and institutions (domestic
and foreign). This demonstrates that no one is
above the law and that crime does not pay.
b. The conditioning of international aid, credits, and
investments on a monitored reduction in
corruption levels. The structural roots of
corruption should be tackled rather than merely its
symptoms.
c. The institution of incentives to avoid corruption,
such as a higher pay, the fostering of civic pride,
"good behavior" bonuses, alternative income and
pension plans, and so on.
d. In many new countries (in Asia, Africa, and
Eastern Europe) the very concepts of "private"
versus "public" property are fuzzy and
impermissible behaviors are not clearly
demarcated. Massive investments in education of
the public and of state officials are required.
e. Liberalization and deregulation of the economy.
Abolition of red tape, licensing, protectionism,
capital controls, monopolies, discretionary, non-
public, procurement. Greater access to information
and a public debate intended to foster a
"stakeholder society".
f. Strengthening of institutions: the police, the
customs, the courts, the government, its agencies,
the tax authorities - under time limited foreign
management and supervision.
Awareness to corruption and graft is growing - though it
mostly results in lip service. The Global Coalition for
Africa adopted anti-corruption guidelines in 1999. The
otherwise opaque Asia Pacific Economic Cooperation
(APEC) forum is now championing transparency and
good governance. The UN is promoting its pet convention
against corruption.
The G-8 asked its Lyon Group of senior experts on
transnational crime to recommend ways to fight
corruption related to large money flows and money
laundering. The USA and the Netherlands hosted global
forums on corruption - as will South Korea next year. The
OSCE is rumored to respond with its own initiative, in
collaboration with the US Congressional Helsinki
Commission.
The south-eastern Europe Stability Pact sports its own
Stability Pact Anti-corruption Initiative (SPAI). It held its
first conference in September 2001 in Croatia. More than
1200 delegates participated in the 10th International Anti-
Corruption Conference in Prague last year. The
conference was attended by the Czech prime minister, the
Mexican president, and the head of the Interpol.
The most potent remedy against corruption is sunshine -
free, accessible, and available information disseminated
and probed by an active opposition, uncompromised
press, and assertive civic organizations and NGO's. In the
absence of these, the fight against official avarice and
criminality is doomed to failure. With them, it stands a
chance.
Corruption can never be entirely eliminated - but it can be
restrained and its effects confined. The cooperation of
good people with trustworthy institutions is indispensable.
Corruption can be defeated only from the inside, though
with plenty of outside help. It is a process of self-
redemption and self-transformation. It is the real
transition.
III. Asset Confiscation and Asset Forfeiture
The abuse of asset confiscation and forfeiture statutes by
governments, law enforcement agencies, and political
appointees and cronies throughout the world is well-
documented. In many developing countries and countries
in transition, assets confiscated from real and alleged
criminals and tax evaders are sold in fake auctions to
party hacks, cronies, police officers, tax inspectors, and
relatives of prominent politicians at bargain basement
prices.
That the assets of suspects in grave crimes and corruption
should be frozen or "disrupted" until they are convicted or
exonerated by the courts - having exhausted their appeals
- is understandable and in accordance with the Vienna
Convention. But there is no justification for the seizure
and sale of property otherwise.
In Switzerland, financial institutions are obliged to
automatically freeze suspect transactions for a period of
five days, subject to the review of an investigative judge.
In France, the Financial Intelligence Unit can freeze funds
involved in a reported suspicious transaction by
administrative fiat. In both jurisdictions, the fast track
freezing of assets has proven to be a more than adequate
measure to cope with organized crime and venality.
The presumption of innocence must fully apply and due
process upheld to prevent self-enrichment and corrupt
dealings with confiscated property, including the unethical
and unseemly use of the proceeds from the sale of
forfeited assets to close gaping holes in strained state and
municipal budgets.
In the United States, according to The Civil Asset
Forfeiture Reform Act of 2000 (HR 1658), the assets of
suspects under investigation and of criminals convicted of
a variety of more than 400 minor and major offenses
(from soliciting a prostitute to gambling and from
narcotics charges to corruption and tax evasion) are often
confiscated and forfeited ("in personam, or value-based
confiscation").
Technically and theoretically, assets can be impounded or
forfeited and disposed of even in hitherto minor Federal
civil offenses (mistakes in fulfilling Medicare or tax
return forms)
The UK's Assets Recovery Agency (ARA) that is in
charge of enforcing the Proceeds of Crime Act 2002, had
this chilling statement to make on May 24, 2007:
"We are pursuing the assets of those involved in a wide
range of crime including drug dealing, people
trafficking, fraud, extortion, smuggling, control of
prostitution, counterfeiting, benefit fraud, tax evasion
and environmental crimes such as illegal dumping of
waste and illegal fishing." (!)
Drug dealing and illegal fishing in the same sentence.
The British firm Bentley-Jennison, who provide Forensic
Accounting Services, add:
"In some cases the defendants will even have their assets
seized at the start of an investigation, before any charges
have been considered. In many cases the authorities will
assume that all of the assets held by the defendant are
illegally obtained as he has a "criminal lifestyle". It is
then down to the defendant to prove otherwise. If the
defendant is judged to have a criminal lifestyle then it
will be assumed that physical assets, such as properties
and motor vehicles, have been acquired through the use
of criminal funds and it will be necessary to present
evidence to contradict this.
The defendant's bank accounts will also be scanned for
evidence of spending and any expenditure on
unidentified assets (and in some cases identified assets)
is also likely to be included as alleged criminal benefit.
This often leads to the inclusion of sums from legitimate
sources and double counting both of which need to be
eliminated".
Under the influence of the post-September 11 United
States and the FATF (Financial Action Task Force on
Money Laundering), Canada, Australia, the United
Kingdom, Greece, South Korea, and Russia have similar
asset recovery and money laundering laws in place.
International treaties (for instance, the 1959 European
Convention on Mutual Legal Assistance in Criminal
Matters, the 1990 Convention of the Council of Europe on
Laundering, Search, Seizure and Confiscation of the
Proceeds from Crime (ETS 141), and The U.N.
Convention against Corruption 2003- UNCAC) and
European Union Directives (e.g., 2001/97/EC) allow the
seizure and confiscation of the assets and "unexplained
wealth" of criminals and suspects globally, even if their
alleged or proven crime does not constitute an offense
where they own property or have bank accounts.
This abrogation of the principle of dual criminality
sometimes leads to serious violations of human and civil
rights. Hitler could have used it to ask the United
Kingdom's Assets Recovery Agency (ARA) to confiscate
the property of refugee Jews who committed "crimes" by
infringing on the infamous Nuremberg race laws.
Only offshore tax havens, such as Andorra, Antigua,
Aruba, the British Virgin Islands, Guernsey, Monaco, the
Netherlands Antilles, Samoa, St. Vincent, the US Virgin
Islands, and Vanuatu still resist the pressure to join in the
efforts to trace and seize suspects' assets and bank
accounts in the absence of a conviction or even charges.
Even worse, unlike in other criminal proceedings, the
burden of proof is on the defendant who has to
demonstrate that the source of the funds used to purchase
the confiscated or forfeited assets is legal. When the
defendant fails to furnish such evidence conclusively and
convincingly, or if he has left the United States or had
died, the assets are sold at an auction and the proceeds
usually revert to various law enforcement agencies, to the
government's budget, or to good social causes and
programs. This is the case in many countries, including
United Kingdom, United States, Germany, France, Hong
Kong, Italy, Denmark, Belgium, Austria, Greece, Ireland,
New Zealand, Singapore and Switzerland.
According to a brief written by Jack Smith, Mark Pieth,
and Guillermo Jorge at the Basel Institute on Governance,
International Centre for Asset Recovery:
"Article 54(1)(c) of the UNCAC recommends that states
parties establish non-criminal systems of confiscation,
which have several advantages for recovery actions: the
standard of evidence is lower ("preponderance of the
evidence" rather than "beyond a reasonable doubt");
they are not subject to some of the more restrictive
traditional safeguards of international cooperation such
as the offense for which the defendant is accused has to
be a crime in the receiving state (dual criminality); and
it opens more formal avenues for negotiation and
settlements. This is already the practice in some
jurisdictions such as the US, Ireland, the UK, Italy,
Colombia, Slovenia, and South Africa, as well as some
Australian and Canadian States".
In most countries, including the United Kingdom, the
United States, Austria, Germany, Indonesia, Macedonia,
and Ireland, assets can be impounded, confiscated, frozen,
forfeited, and even sold prior to and without any criminal
conviction.
In Australia, Austria, Ireland, Hong-Kong, New Zealand,
Singapore, United Kingdom, South Africa, United States
and the Netherlands alleged and suspected criminals, their
family members, friends, employees, and partners can be
stripped of their assets even for crimes they have
committed in other countries and even if they have merely
made use of revenues obtained from illicit activities (this
is called "in rem, or property-based confiscation"). This
often gives rise to cases of double jeopardy.
Typically, the defendant is notified of the impending
forfeiture or confiscation of his or her assets and has
recourse to a hearing within the relevant law enforcement
agency and also to the courts. If he or she can prove
"substantial harm" to life and business, the property may
be released to be used, though ownership is rarely
restored.
When the process of asset confiscation or asset forfeiture
is initiated, banking secrecy is automatically lifted and the
government indemnifies the banks for any damage they
may suffer for disclosing confidential information about
their clients' accounts.
In many countries from South Korea to Greece, lawyer-
client privilege is largely waived. The same requirements
of monitoring of clients' activities and reporting to the
authorities apply to credit and financial institutions,
venture capital firms, tax advisers, accountants, and
notaries.
Elsewhere, there are some other worrying developments:
In Bulgaria, the assets of tax evaders have recently begun
to be confiscated and turned over to the National Revenue
Agency and the State Receivables Collection Agency.
Property is confiscated even when the tax assessment is
disputed in the courts. The Agency cannot, however,
confiscate single-dwelling houses, bank accounts up to
250 leva of one member of the family, salary or pension
up to 250 leva a month, social care, and alimony, support
money or allowances.
Venezuela has recently reformed its Organic Tax Code to
allow for:
" (P)re-judgment enforcement measures (to) include
closure of premises for up to ten days and confiscation
of merchandise. These measures will be applied in
addition to the attachment or sequestration of personal
property and the prohibition against alienation or
encumbrance of realty. During closure of premises, the
employer must continue to pay workers, thereby
avoiding an appeal for constitutional protection".
Finally, in many states in the United States, "community
responsibility" statutes require of owners of legal
businesses to "abate crime" by openly fighting it
themselves. If they fail to tackle the criminals in their
neighborhood, the police can seize and sell their property,
including their apartments and cars. The proceeds from
such sales accrue to the local municipality.
In New-York City, the police confiscated a restaurant
because one of its regular patrons was an alleged drug
dealer. In Alabama, police seized the home of a senior
citizen because her yard was used, without her consent,
for drug dealing. In Maryland, the police confiscated a
family's home and converted it into a retreat for its
officers, having mailed one of the occupants a package of
marijuana.