Fighting corruption for profit

by Jason Sharman

If there was a time when corruption was not in the news, it is long gone. Demonstrations in Romania, the huge, still-unfolding scandal that claimed the Brazilian president, and, closer to home, a record fine of Rolls Royce for overseas bribery are only the latest examples.

Is there more corruption than before, or does corruption just get more coverage than it used to? Though it’s impossible to say for sure, it seems that the drum-beat of scandals is actually a positive development: people are less willing to tolerate corruption among political elites, and more willing to believe that something can be done about it. The abuse of public office for private gain is no longer seen as an unchangeable fact of life.

Yet there is also the sobering fact that the vast majority of corrupt officials get away with their crimes, especially the big fish. This pattern of impunity persists despite the introduction of successive waves of tough national and international laws to fight financial crime. These laws have aimed to follow the trail of dirty money, especially in cases of leaders from the developing world who loot their own countries, and stash the proceeds in places like London, New York and Switzerland. The plausible-sounding plan was that their bribery and embezzlement could be detected, investigated and countered through analysing bank records. The guilty would then be stripped of their ill-gotten gains by powerful confiscation provisions, with the money being used to compensate victims. It hasn’t worked out this way. Why?

The fight against corruption has often been framed as a struggle against the profit motive. Officials should turn down bribes, for the positive reason that it will further the public good, and the negative reason that they might be jailed for accepting them. The same reasoning is said to apply to the banks and other financial institutions that are the crucial enablers of large-scale corruption. The system to keep dirty money out of the financial system aims to dissuade banks from accepting criminal funds, and the associated lucrative fee income, by threatening them with fines if they are complicit in or willfully blind to financial crime.

The trouble is, thanks to their political influence and economic importance, banks are almost never punished for their failures to combat corruption. Given this, it’s rational for banks not to ask awkward questions about where their clients’ money comes from, take the fees, and risk the very small chance of fines as a cost of doing business. The result is billions and billions of pounds of corruption proceeds coursing through the global banking system.

Considering this failure, a much more promising approach is to turn the profit motive from an enemy into an ally in the fight against corruption. How would this work?

First, we should create rewards for whistle-blowers exposing banks, law firms and other key enablers guilty of laundering the proceeds of corruption. This approach succeeded in the case of Bradley Birkenfeld, an American former employee of the Swiss bank UBS. Thanksto evidence provided by Birkenfeld, in February 2009 UBS agreed to pay the US government a fine of $780 million for aiding and abetting tax evasion and other crimes. In return, Birkenfeld received a $104 million reward (though he also had to serve three years in prison).

Another approach would encourage private law firms hired to recover corruption proceeds to work on a ‘no win, no fee’ or contingency basis. This would enable law firms to keep something between a quarter and a half of any stolen assets they recovered if they won the case, but if they lost, they would get nothing. This would avoid the unhappy fate of the post-revolutionary Arab Spring governments. They paid out millions in legal fees to law firms looking for wealth looted by the Mubarak, Gaddafi and Ben Ali families, and yet came away poorer than when they started. Working on a contingency basis would transfer the risk from governments of cash-strapped developing countries to law firms, which could in turn take out insurance against this risk.

A final route is to engage corporate bounty-hunters. Imagine a country that had just had a revolution to oust a kleptocratic strong-man and his light-fingered clique, now in comfortable exile. The new government is sure that the ancien regime stole billions that is stashed across the world. Yet learning from the disappointments of the Arab Spring and other instances, the new government also realises that getting back even a small fraction of this money could take years or even decades in court and cost tens of millions in legal fees the country can ill afford. For example, legal action to return money from the former dictator of Haiti has been going on for 30 years and counting.

Instead, the new government can sell the claim to recover the assets at a discount to a for-profit third party, gaining crucial money immediately to help stabilise their looted country. This third party then uses every legal trick in the book to attack and confiscate the former dictator’s ill-gotten gains. If this effort nevertheless fails (and many do), then the poor country has still got a useful sum of money, and it is only the corporate bounty-hunter that has lost out.

For-profit responses to corruption are often seen as distasteful and perhaps even unjust by many of the campaigners whose dogged and devoted work has been so successful in getting this problem on to the agenda in the first place. Yet given that almost everyone admits that far more corrupt officials get away with their crimes than are ever brought to book, it is time to try something new. To be effective, fighting corruption must be an area where there is room to do well by doing good.

For more on this topic see Jason Sharman’s new book, The Despot’s Guide to Wealth Management: On the International Campaign against Grand Corruption (Cornell University Press), published 7 March 2017.

About the author

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Jason Sharman is the Sir Patrick Sheehy Professor of International Relations in the Department of Politics and International Studies at Cambridge. His research interests range from the study of international corruption, money laundering and tax havens to the global politics of the early modern world.

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