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Corruption Brief Series: How Anonymous Shell Companies Finance Insurgents, Criminals, and Dictators
The latest paper in the Corruption Brief series from the Civil Society, Markets, and Democracy program at the Council on Foreign Relations was published this month. In the brief, Dr. Jodi Vittori, senior policy advisor at Global Witness, addresses the myriad problems posed by anonymous shell companies – corporate entities with few or no employees and no substantive business, which offer a convenient way to privately move money through the international financial system. Read More
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Senator Ben Cardin discusses corruption's effect on economic and social inequalities, investment, development, and democratic institutions.
Latin America’s Accountability Revolution
A wave of corruption scandals has roiled Latin America in recent years, from Chile’s campaign finance affairs, through Mexico’s Casa Blanca revelations. Most recently, the information divulged in the December Odebrecht settlement has sent a shudder of fear across regional politics after the Brazilian construction firm admitted to paying nearly $800 million in bribes in twelve countries. The tide of corruption revelations has contributed to massive protests, slumping incumbent polls, and political uncertainty throughout the region.
Obviously, the scandals of recent years differ greatly from each other. The Odebrecht scandal was driven by a Brazilian context very distinct from the Guatemalan environment that led to President Pérez Molina’s downfall, or from the Mexican and Chilean cases. Empirical evidence about corruption trends in the region is also quite mixed, with polls showing contradictory findings about the direction of public experiences with corruption victimization and public perceptions of corruption more broadly.
For all these differences, there is a common silver lining to the region-wide wave of scandal. As a perceptive study released this week by the Inter-American Dialogue argues, the region has seen declining public tolerance of corruption and a rising normative edifice that makes it easier to tackle abuses.
On the public side, authors Kevin Casas-Zamora and Miguel Carter catalogue a variety of factors that are changing the accountability equation. Citizens are angry: three-quarters of the population in Latin America view their society as unjust, and fewer than two in five express satisfaction with their democracies. An economic downturn has driven down incumbents’ average approval ratings across the region. Meanwhile, citizens are not only more motivated to mobilize, they are better able to do so: the revelations come against a backdrop of improving information transparency, changing access to public information through the widespread adoption of social media, and growth of a politically active middle class.
Simultaneously, a “new normative edifice” of international agreements and standards, alongside improved national laws and policies, has given teeth to previously weak anticorruption bodies (see figure below). Laws have been introduced or rewritten in ways that constrain money laundering, reduce campaign finance violations, increase fiscal transparency, and facilitate prosecution. The investigative capacities of police and prosecutors have increased. New bodies, such as governmental auditing agencies and civil society anticorruption organizations, have been created in many countries over the past two decades.
Anticorruption measures adopted by Latin American countries, 1990-2015
Source: Kevin Casas-Zamora and Miguel Carter, “Beyond the Scandals: The Changing Context of Corruption in Latin America,” Inter-American Dialogue, February 2017.
The authors are quick to remind us that there is a big gap between laws on the books and “their effective implementation and enforcement.” But the cautiously optimistic conclusion I draw from their analysis is that the pincer movement of greater public mobilization for effective accountability, on the one hand, and institutional changes, on the other, is having tangible effects in fighting longstanding patterns of impunity for corruption across countries as diverse as Brazil, Chile, Guatemala, Honduras, Mexico, and Panama.
This two-pronged process may continue to cause political instability for the foreseeable future. And the list of reforms that are still needed is enormous, from structural changes, such as addressing the economic and political disparities that diminish the equality of citizens before the law, to more “technical fixes” such as improving judicial performance and enhancing political finance oversight. But overall, the trend is a largely positive one, with declining public and institutional tolerance fueling corruption revelations. These in turn often generate the political pressure for legal and institutional reforms that have the potential to create less corrupt and more accountable political systems. Whether one agrees with this hopeful conclusion or not, the report is well worth a read, marshalling substantial cross-national evidence on the evolution of corruption and accountability processes across the region.
Mexico Plummets in Annual Corruption Rankings
Transparency International yesterday released its annual Corruption Perceptions Index (CPI) that ranks 176 countries on a scale from zero (highly corrupt) to one-hundred (very clean), based on the opinions of citizens and experts.
As in years’ past, Nordic countries fared best. Denmark topped the list (tied with New Zealand), followed by Finland, Sweden, and Switzerland. Ranked worst were Yemen, Syria, North Korea, South Sudan, and Somalia.
Regionally, Europe stagnated compared to last year, sub-Saharan Africa progressed unevenly, and Middle Eastern and North African countries saw sharp declines. Most Asia Pacific nations continued to post failing grades (scoring forty points or less).
Latin America’s fight against corruption, witnessed in the region’s ongoing headlines and rising number of domestic cases, generally hurt perceptions.
Mexico took the biggest hit. Continued revelations of flagrant wrongdoing by numerous governors and other public officials—followed by few investigations or prosecutions—led the nation to plummet twenty-eight places to 123, alongside Honduras and Sierra Leone.
After two years of declines, Brazil’s score stabilized, even as the Lava Jato investigations expanded and deepened. This year’s further arrests, prosecutions, and convictions seemed to give some confidence that law enforcement might change things. Argentina’s score improved to its highest in five years, reflecting widespread sentiments that Macri’s government will be cleaner than that of his predecessor, Cristina Fernández de Kirchner. Scores for Honduras and Guatemala, both suffering from their own corruption scandals, remained roughly even, though their rankings fell relative to others.
Though many criticize the index for measuring perceptions rather than realities, the survey remains one of the best indicators of global and regional corruption trends. And as my colleague Matthew Taylor points out, it draws the attention of policymakers, law enforcement and the public—those that will need to come up with actions and solutions if their countries are to change.
Fighting Bangladesh’s Sweatshops
In late December, tens of thousands of Bangladeshi garment workers went on strike, shutting down over fifty factories making fast-fashion clothes for international brands including Gap, H&M, and Zara. What started as a walkout in support of 121 workers fired for asking for higher pay quickly grew into larger protests demanding a tripling of the minimum wage.
Bangladeshi authorities responded by firing rubber bullets into the crowds and detaining and interrogating dozens of protestors and union leaders—sending many more into hiding. Factory owners sued scores of workers for inciting labor unrest, and fired over 1,600 more. Throughout, reputation-sensitive fashion brands largely remained silent.
The current minimum wage in Bangladesh is just 5,300 taka—about $68 per month—not enough to cover basic food, medicine, and housing. The last increase was in 2013, when the government nearly doubled wages in the wake of the Rana Plaza tragedy, the building collapse killing over 1,000 people.
While justified in their grievances, it is unlikely the workers will get their raise. The government and companies’ disregard reflects Bangladesh’s labor supply. In a country where nearly one in five people lives on less than $1.90 per day, $68 a month sewing pants, shirts, and dresses finds many takers.
But the government’s harshness also reflects the competition Bangladesh faces from other nations for the loyalty, and orders, of international apparel brands. Many already have diversified their supply chains, making garments in Cambodia, Myanmar, and Vietnam. Some have even moved to Ethiopia, which currently pays the lowest wages in the world. With apparel now comprising 80 percent of Bangladesh’s total exports, losing even part of the $30 billion industry could devastate the national economy.
Precedent shows that the major labels only support living wages when under widespread and sustained pressure from consumers. This happens rarely—getting customers to know and care about sweatshop conditions, as happened to Nike in the 1990s, is an anomaly. Still, for Bangladeshi workers, their best hope is drawing more international attention from the Westerners who buy the clothes they sew.
This Week in Markets and Democracy: Asian Trade Openness, Palm Oil Abuses, Global Magnitsky
Trade Rules Favor Asia, Not the United States
Asia’s rise in the global trading system continues. Recent World Economic Forum data shows that the ten Association of Southeast Asian Nations (ASEAN) members now outrank the European Union (EU) and United States on trade openness, reflecting deeper integration into the global economy aided by investment and trade deals. But ASEAN and other countries may have a tougher time accessing markets if protectionism in the United States and EU prevails. The rankings back up at least some of the recent political rhetoric—the United States ranks 120 out of 136 countries in terms of foreign market access, facing average tariffs of almost 5 percent—the seventh highest in the world.
Children Still Forced to Work on Palm Oil Plantations
Even companies with the best intentions sometimes struggle to free their supply chains from abuse. The latest scandal comes in palm oil, an ingredient used in everything from pizza to toothpaste. Despite standards set through the Roundtable on Sustainable Palm Oil, an association of hundreds of businesses and non-profits committed to cleaning up the industry, Amnesty International has uncovered ongoing exploitation and abuse. At Wilmar, the world’s largest palm oil producer, unrealistically high production quotas force workers to put in eleven-hour days and recruit their spouses and children to help—all for pay as low as $2.50 a day. This belies the “sustainable” claims of Nestlé, Colgate, Unilever, and many of Wilmar’s other top-tier customers. To really improve conditions for workers, brands will need to invest more in auditing and training to help their suppliers uphold labor standards.
A New Way to Take on Human Rights Abusers
President Obama now has before him bipartisan legislation authorizing the United States to sanction human rights abuses and corruption taking place abroad. The Global Magnitsky Human Rights Accountability Act, named after Russian whistleblower Sergei Magnitsky, expands a 2012 law sanctioning Russian officials involved in the torture and death of the thirty-seven-year old lawyer who exposed a massive tax fraud scheme, and died in police custody in a Moscow prison. The global version Congress just passed (tucked into an annual defense bill), allows the U.S. government to impose financial and visa sanctions on any foreigners who violate human rights and freedoms, carry out extrajudicial killings and torture, or commit “acts of significant” corruption. The legislation provides a powerful tool for the executive branch to hold human rights abusers accountable.
Five Questions on Innovative Finance With Georgia Levenson Keohane
This post features a conversation with Georgia Levenson Keohane, executive director of the Pershing Square Foundation, adjunct professor of social enterprise at Columbia Business School, and author of Capital and the Common Good: How Innovative Finance is Tackling the World’s Most Urgent Problems. She talks about what innovative finance means and how it works, addressing its successes and limitations in putting private and public capital to work for the common good.
1) Can you explain what innovative finance is (and what it is not) and how you came to work on it?
Innovative finance is about creative ways to finance and pay for unmet needs and public goods—about integrating government, financial, and philanthropic resources to invest in solutions to global challenges and promote inclusive, shared prosperity. It is not the same as “financial innovation”—feats of engingeering designed to improve market efficiency, but not always a valuable end in themselves (as we saw in the 2008 financal crisis). Instead innovative finance, by design, is intended to solve problems, overcome market and political failures, and meet the needs of the poor and underserved. The innovation often comes in a new application, pressing time-tested tools like lending, insurance, and credit enhancements into the service of global health, financial inclusion, disaster relief, and battling climate change.
Which is to say, virtual currencies, speed trading, subprime mortgages, or even payday lending might be considered financial innovation. Micro agriculture insurance for poor farmers, low income loans or equity for higher education, pay-as-you-go financing for solar electricity in Kenya, or discounted Metro Cards in New York City are innovative finance.
In the fall of 2012, I had just finished a book on social entrepreneurship and public-private partnerships, when Hurricane Sandy hit—and I started to consider innovation in a different light. Sandy’s surging waves caused more than $5 billion in damage to New York City’s mass transit systems and the Metropolitan Transit Authority (MTA) emerged from the wreckage uninsurable. This was a huge challenge: no insurance, no subway, and the city shuts down. In a municipal finance first, the MTA went to the catastrophe (cat) bond market for coverage against future Sandys. (With cat bonds, insurers transfer risk to capital market investors who bet against catastrophe: that a hurricane will not hit in a particular place, time, or intensity. If that proves true, investors are repaid principal plus a high rate of interest).
I thought this was an entrepreneurial use of finance, and went on to explore others: vaccine bonds, green bonds, social impact bonds, new kinds of financing facilities and emerging insurance entities large and small. The work took on greater urgency last year when the United Nations adopted the global Sustainable Development Goals—and with them a multi-trillion funding gap to meet the goals. Many see innovative finance as a way to harness more and particularly private capital to fill this gap. But, in fact, innovative finance is also about smarter capital: finance as an instrument that encourages behavior change, motivating governments to respond faster to disasters like drought or pandemic, or to invest in cost-effective preventions like vaccines or maternal health.
2) What are some successful examples of innovative finance?
Many involve technology.
For example, Kenya’s M-Pesa, a mobile payments platform that allows people to send and receive money from their phones, has been an extraordinary success. Ten years ago, for all practical purposes, mobile phones did not exist in Kenya, and most of the country was unbanked. Today 80 percent of Kenyans own a mobile phone, and 70 percent have mobile money accounts. By some estimates nearly 40 percent of Kenya’s GDP flows through the M-Pesa platform. Yet as interesting as what people pay for (just about everything—remittances, taxes, school fees, etc.) is how they pay for it. The mobile money platform has created new kinds of consumer finance, as it allows people to save, insure, and to pay for things over time.
Consider the case of solar. Eighty perecent of the country may now use mobile money, but they still live far from the electric grid, reliant for light on things like kerosene—an expensive and noxious source of energy that poisons, burns, and contributes to global warming. For Kenyan families who pay over $200 a year for kerosene, a one-time investment in a $199 solar panel would make sense, but they lack the upfront cash to make this purchase. That is where companies such as M-Kopa or Angaza come in; they use the M-Pesa platform to allow households to pay for solar panels in small installments. By some estimates, pay-as-you-go finance has accelerated the rate of solar adoption fourfold.
A company called Alice Financial is using the same approach to public transportation in New York City, where a one-way subway or bus ride costs $2.75. This is no small expense for a daily commuter, who makes 500 of those trips a year. For many New Yorkers, the substantial discount of a thirty-day metrocard is out of reach, since it costs $116 upfront each month. (New Yorkers overpay $500,000 a day because they can’t afford the discount). Alice offers instead a pay-as-you go weekly installment plan, made possible via its socially-motivated, innovative finance arbitrage.
3) What are the limits of innovative finance?
Unfortunately, technological innovation alone is not going to solve all of our financial inclusion needs and aspirations. Technology might make more financial services and products available or affordable, but that does not necessarily mean people use them. Just as innovative financial service organizations across the globe have recognized that they need to offer more than just credit to move people out of poverty, so too do they realize that simply having a broader set of product offerings—savings, pensions, insurance—may not be enough. Adoption often requires an important relationship, a human interaction.
For example, IFMR Trust in India now employs local wealth managers who are trusted members of the community to work with poor, rural families by collecting their basic financial information on a tablet, and then walking them through the product or service recommendations generated by the company’s algorithms. The combination of technology and a trusted agent translates into greater use of beneficial financial service products. Neighborhood Trust Financial Partners (NTFP) in Upper Manhattan illustrates the same principle. In recent years, NTFP has developed a range of new products for their their low-income customers: a socially-responsible credit card to pay down debt, an app to encourage savings, and payroll innovations for lending or retirement needs. Yet their success depends on the work of local financial advisors who educate, translate, and earn the trust of their clients.
4) What are some areas that market-based solutions cannot, or perhaps should not, address?
Innovative finance is not a panacea. It is particularly well suited to challenges that can be measured, and benefits or savings that can be achieved—and monetized—in a relatively short time frame. Cap and trade, for example, allows us to put a price on carbon, which is not as simple for problems such as government corruption or racial injustice.
In many cases, there will never be a viable market solution. Serving the very poorest, working in particularly challenging geographies or conditions—or areas where a constellation of problems is particularly complex (and solutions hard to isolate)—might never be profitable, and will always require substantial philanthropic or government support or subsidy. However, even on issues that don’t lend themselves to these kinds of tools or instruments, the innovative finance lens helps us think differently about the costs of delay and inaction, and the benefits of prevention. Vaccines are cheaper than treating full-blown disease (and cheaper still than pandemic); early childhood education and job training costs a whole lot less than mass incarceration. Innovative finance reminds us that an ounce of prevention is worth a pound of cure.
5) How can government policy help innovative finance succeed?
There are a number of ways policy can encourage greater use of innovative finance. For example, last fall the U.S. Department of Labor repealed restrictive rules that had previously prevented U.S. pension funds from considering social, environmental, and good governance factors when making in investment decisions. This “ERISA” (Employee Retirement Income Security Act) reform has the potential to catalyze greater investment in innovative financial products by pension funds that must follow the guidelines. While there is more work to do on norms and guidance related to fiduciary responsibility, this is an important first step. Under the Obama administration, the Treasury Department, USAID, the White House Office of Social Innovation, and even Congress promoted various forms of innovative finance activity. The hope is that the next U.S. administration has the same openness to this approach.
Perhaps more important, many of the most successful innovative finance examples are those that involve cost-effective investments in prevention, made possible through new kinds of public-private partnerships. The International Finance Facility for Immunization (IFFIm), for example, has raised over $5 billion since 2006 in “vaccine bonds” to fund large-scale immunizations. Bondholders are repaid out of future government aid pledges, front loading that future aid for investment in vaccines today.
Closer to home, social impact bonds (SIBs) are a new breed of pay-for-success contracts between local governments, social service providers, and private investors that finance preventive social services like early childhood education, maternal health support to families to keep children out of foster care, or programs to keep former prisoners from re-offending. Investors, who loan working capital to service providers, are only repaid by the government if interventions work—with payments coming out of the social savings. Today there are more than sixty SIBs in action across the globe, and much of the innovation occurs at the local level. This willingness to partner across sectors is critical for innovative finance in the years ahead.
