Development Channel

As Latin America reflects on its current wave of anticorruption successes—including the arrest of former Guatemalan president, Odebrecht prosecutions in Peru, and the ongoing Lava Jato cleanup in Brazil—it may be both sobering and heartening to consider the history of past anticorruption successes around the world. First, the sobering lesson. Even when things go well, other countries’ experiences suggest that an overall shift in the degree of corruption can take decades. Perhaps the best known example is the United States, where a series of disconnected local and national accountability efforts during the Progressive Era took place—including regulation of the trusts, elimination of patronage hiring in the civil service, and restrictions on corporate campaign contributions.[i] But although many of the reforms took place in the late nineteenth century, they only coalesced into a significant shift in the overall level of corruption in the U.S. between the 1920s and the New Deal. Summarizing a complex history, Glaeser and Goldin use press coverage of corruption to demonstrate an arc-like pattern: corruption rose steadily from 1815 to 1850, but began falling after 1870, reaching a stable lower-corruption equilibrium by the 1930s, where it remained until the 1970s (when the authors ceased data collection). Similarly, Bo Rothstein’s work on Sweden suggests that the process of significantly lessening the degree of corruption in that country was decades-long.[ii] While the slow pace of these changes may be discouraging for Latin American publics frustrated by the damage and unfairness inflicted by persistent political graft and crony capitalism, it may be somewhat heartening to think that even small victories in the short term can trigger enormous development gains, by changing norms, removing dirty players from the political game, and most importantly, by consolidating public support for the continuation of the reform process. As Brazil’s outgoing prosecutor general Rodrigo Janot noted in Washington this week, there is no putting the genie back in the bottle: no matter where Brazil’s Lava Jato investigation goes, the public has shown that it will no longer tolerate the old cronyism between oligopolies and politicians. Furthermore, the pace at which anticorruption gains accumulate may be faster in the twenty-first century than it could be in the nineteenth and twentieth. Countries as diverse as Georgia and Rwanda have made remarkable gains on most measures of corruption in the space of the past two decades. They have done so by drawing on a large set of international best practices, simultaneously improving transparency, oversight, institutional effectiveness and the likelihood of sanction. Latin American democracies that are already implementing such anticorruption strategies may also be able to benefit from vibrant political competition, which lessens oligarchic politics and increases the practical autonomy of courts and prosecutors, and a vibrant press, which has proven essential to uncovering wrongdoing and mobilizing civil society. Finally, the international anticorruption framework is much stronger than ever before—the record-breaking Odebrecht settlement with Swiss, Brazilian, and U.S. officials being only the latest example—which enhances global support for reformers while increasing the likely international penalties against potential bribe-takers. So although the path to improvement will be a long one, it may be possible for Latin American reformers to move more quickly than was possible in the not-so-distant past. That alone is grounds for optimism, although a healthy dose of realism is also needed in the face of widespread pushback from the guardians of the status quo.   [i] Glaeser, Edward L., and Claudia D. Goldin. Corruption and Reform: Lessons from America's Economic History. Chicago: University of Chicago Press, 2006. Hofstadter, Richard. The Age of Reform: From Bryan to F.D.R. 1966 ed. New York: Alfred A. Knopf, 1955, p.3. [ii] Rothstein, Bo. "Anti-Corruption: The Indirect 'Big Bang' Approach." Review of International Political Economy 18, no. 2 (2011): 228-50

Last year was momentous for the breadth and depth of corruption revealed globally. Among the many remarkable events of 2016, the massive Panama Papers release, the multinational Odebrecht settlement, and Global Witness’ Undercover in New York investigations were all remarkable for pointing out the depth and breadth of international corrupt networks, and the degree to which they pass through a variety of jurisdictions, including—most notably—the United States. If 2016 was the year of bombastic revelations, 2017 seems to have brought growing consensus about how to fight transnational corruption, especially grand corruption and kleptocracy.  Kate Bateman and Charles Davidson recently expressed the emerging consensus about reforms that the United States might undertake, including:  Limit anonymous “shell” companies, which hide the identities of true beneficial owners and permit corrupt actors to “move and hide assets, launder money, and evade law enforcement”; Halt anonymous ownership of real estate in the United States, which has too often turned a blind eye to the kleptocrats in our midst; Tighten the enforcement of the Foreign Agents Registration Act; Use emerging bipartisan congressional support for anticorruption efforts to invest in greater U.S. government capacity to tackle international corruption by the Justice, Treasury, and State Departments; The first two recommendations, particularly, seem to be generating widespread support—including in Congress. One anonymous author was so expectant of change as to pen a book entitled “Offshore Apocalypse,” predicting the end of the offshore banking business. But this seems far too optimistic. The Trump Organization is reported to be doing more business than ever with shell companies, raising questions about the administration’s willingness to clamp down. Congress is not exactly a well-oiled legislating machine, so adding one more project to the dauntingly crammed legislative agenda may be a non-starter. Further, when it does act, Congress seems to be moving backward on anticorruption: one of legislators’ few achievements this year was to roll back the Cardin-Lugar provisions in section 1504 of the Dodd-Frank Act, which had required U.S. oil and gas companies to disclose payments to foreign governments. And of course, certain U.S. states rival Panama in the opaqueness of corporate disclosure requirements, suggesting that their representatives may not sign on to transparency-enhancing legislation. There are practical problems, meanwhile, with limiting shell companies and anonymous ownership, including the simple fact that even legitimately named owners are often hard to link to the political actors and prominent business leaders that may be a source of their wealth. If a beneficial owner is a relative of a major political figure but has a different surname, establishing key links across layers of international jurisdictions and legal entities that are purposely created to obfuscate the proceeds of corruption will still be a daunting task. This is particularly the case because there is so much illicit money sloshing around the world: the law firm at the heart of the Panama Papers, Mossack Fonseca, alone was responsible for creating 214,000 offshore accounts, a huge haystack for investigators to dig through. What is to be done? As an innovative recent paper by Mike Donaldson[1] points out, the ethical rules for lawyers do too little to prohibit U.S. lawyers from helping their clients to break the laws of foreign jurisdictions. In part because lawyers are trained to believe that everyone deserves legal advice and in part because the rules are not focused on what may happen outside the jurisdiction where a lawyer practices, there is not clear guidance—for example in the American Bar Association’s Model Rules of Professional Conduct—that would unambiguously prohibit American lawyers from assisting a client in a breach of foreign law. In addition, these Rules suggest that if a lawyer only reasonably believes (and doesn’t know for certain) that a client is breaking the law, she is entitled to continue acting on their behalf. And ABA Rules don’t explicitly require lawyers to ask enough questions in suspicious circumstances, such as the embarrassing scenes in the Global Witness videos when only one of thirteen New York lawyers immediately refused to help the supposed representative of a dubious foreign government official bring highly suspect money into the U.S. Donaldson offers a number of commonsense solutions for tightening the existing ethical rules of the legal profession to make it harder for lawyers to help suspicious transactions – or to phrase it another way, to help honest lawyers push back against pressure to take on bad business. There is, of course, a reasonable case to be made that we can’t expect U.S. lawyers to know the applicable laws of all global jurisdictions. But in a world in which offshoring and shell companies increasingly look ethically indefensible, perhaps a combination of greater awareness of the costs of international corruption, increasing harmonization of international anticorruption law, and tighter ethical standards for lawyers can contribute to moderating corruption’s terrible human costs. [1] Donaldson, Mike. “Lawyers and the Panama Papers: How Ethical Rules Contribute to the Problem and Might Provide a Solution,” Law and Business Review of the Americas, 22:4 (Fall 2016), 363-382.

Ford announced this week that instead of building its new Focus – the best-selling car in the world – in a new $1.6 billion dollar Mexico-based plant, it will ship cars for North American customers from China. Ford has promised that its decision won’t reduce its workforce. Yet even if that is true, American workers will lose. Today the compact Focus uses steel from Wisconsin, axles from Oregon, seatbelts from Indiana, grills from Michigan, tire pressure sensors from Tennessee, front-side shafts from North Carolina and Ohio, and the list goes on. With the shift, these raw materials, parts and components will be sourced and put together in Asia, eliminating dozens of U.S. based suppliers, and likely costing many of their employees their jobs. While assembly was scheduled to move from Michigan to Mexico, that would have ensured ongoing American employment – as over 40 percent of the value of vehicles “made in Mexico” comes from U.S. factory floors and U.S. offices. For products imported from China – as the new Ford Focus will be starting in 2019 – this number is a negligible 4 percent. Ford made the decision first and foremost for market reasons. China’s 28 million vehicle market is the largest in the world. And while U.S. demand for smaller cars has faltered, in China it is growing at a robust 4 percent annually. Already nearly half of the million Ford Focus models sold each year go to Chinese buyers. Importing vehicles isn’t an option as the United States doesn’t have a free trade agreement with China, so cars coming from abroad face a stifling 25 percent tariff. View full text of article, originally published in Americas Quarterly.