Unmasked

Corruption in the West

Laurence Cockcroft, Anne-Christine Wegener

• Publisher: I.B. Tauris
• Year: 2016
• ISBN:
  9781786720795
• Edition: 1
• Topic: Social Sciences
• Subtopic: Criminology
• Index: Social Sciences

How corrupt is the West? Europe and North America's formal self-perception is one of high standards in public life. And yet, corruption is receiving ever greater attention in the European, American and Canadian press, with high-profile cases affecting both the corporate and political worlds. This book identifies the driving forces behind such cases, particularly the role of political finance, lobbying, the banking system and organised crime. It analyses the sectors which are particularly prone to corruption, including sport, defence and pharmaceuticals. In the course of their investigation, the authors consider why anti-corruption legislation has not been more effective and why there is an increasing discrepancy between regulation and commercial and cultural practice. Are Europe and the US genuinely serious about fighting corruption and if so what measures will be taken to roll it back?

1

Corruption and its Perils

In Europe and North America, corruption exists and determines outcomes on a scale that is scarcely recognised but embraces fields as diverse as politics, sport and climate change.

It has permeated society in the West in ways that cannot be ignored, and corruption is increasingly recognised by the public. As part of a global survey of citizens’ attitudes to corruption, carried out by Transparency International, interviewees recently expressed an extraordinarily high level of distrust in key institutions in both Europe and America. When asked: ‘Do you regard political parties as corrupt or very corrupt?’, nine out of ten Italians, three-quarters of Americans, and almost the same percentage of Czechs replied ‘yes’.¹ Parliaments did not fare much better: two-thirds of Canadians and more than half of British citizens found their parliaments or legislatures to be ‘corrupt’ or very corrupt.²

For the most part, these responses do not reflect a personal experience of bribery. Rather, they reflect a general view that government itself is corrupt and represents the interests of small elites who control decision making and the allocation of resources. This perception has led to the rise of protest parties of the left and right in Europe, and increasingly aggressive criticism of the politics centred on Washington, DC in the USA.

In this context, corruption is regarded as much more than a question of bribery or slightly more subtle financial pay-offs. For the most part, contemporary corruption in the West is not the corruption of brown envelopes but the corruption of influence, in which politics and institutions (including sports associations) are captured by people or interest groups for illicit gain and their own organisation’s benefit. Looked at another way, it is the buying of influence and the selling of power.

Corruption is one of the principal drivers of the inequality at both the global and the national level, and is increasingly recognised as a major problem for both the world economy and national politics. It is no accident that in the US midterm elections of 2014 (federal level), one per cent (32,000) of the wealthiest one per cent of donors – the one per cent of the one per cent – gave 30 per cent of disclosed political contributions, and that those with firm connections to Wall Street were the largest contributors.³ The consequence of this pattern of financial support is a vicious circle in which corruption by influence reinforces the position of the top one per cent.

Because corruption in Europe and North America is not centred around bribery but is rather a struggle for the capture of resources, it may appear that it has a less dire effect on the public than direct bribery. This conclusion would not be justified. A patient forced to pay a bribe to receive health care at a hospital in the developing world, which should be free of charge, will be likely to complain at least in private. A patient being prescribed a more expensive drug without his knowing, but for which he has to pay, is unlikely to find out and complain. Both patients will be cheated by a system of corruption: but where a network linking health managers to pharmaceutical companies gains influence, it can skim off profits or illicit gains without having to resort to a hierarchy of bribes.

This more subtle form of corruption, as we will see in the following chapters, is alive in different countries in different ways but affects all walks of life, from politics to justice, from banking and finance to the corporate world (notably in pharmaceuticals, construction and defence), in the world of sport and even in the case of action designed to combat climate change.

None of these sectors, as we will show in the following chapters, is immune from influence bought by money, and from elected politicians and well-placed bureaucrats selling power, although some are significantly more prone to such backroom deals than others.

On the political front, voters are dismayed that big funders can determine the scale of political campaigns, or that parties can enrich their leaders from party funds. Campaign finance in the US is a cogent example of the danger of money not only in influencing particular decisions, but in determining who gets to make the decisions in the first place, by targeting individual congressmen at both the state and the federal level. A very large increase in direct and indirect financial contributions to the campaigns of candidates for political office has been created by the Citizens United case. Decided by the Supreme Court in 2010, the ruling on the case removed nearly all obstacles on corporate and individual contributions to independent vehicles such as Political Action Committees (PACs), and eased limits on individual contributions made directly to candidates. Although in the 2016 US presidential campaign, neither Donald Trump (R) nor Bernie Sanders (D) used this ‘liberalisation’ in their campaigns, other candidates including Hillary Clinton did so on a big scale. The same was true for many candidates for Congress and at the state level. The outcome of this huge increase in the inflow of political contributions is one in which policy can be bought for a price and elected members fear that unless they toe the funders’ line they will have few resources to fight their next campaign. The corruption consists of the role that ‘big money’ can play in suppressing the interests of a wider public whose views can be marginalised by both major parties.⁴

In the business world, strategies that undermine regulation, minimise competition and foster the exchange of executives between governments and companies constitute a further case of the corruption of influence. Defence companies – prestigious upholders of the national interest – have sustained close ties, particularly through ‘revolving doors’, with Ministries of Defence, ensuring that competition for large-scale contracts is minimal. Construction companies have long played and captured markets in alliance with organised crime and with the support of elected politicians.

In the banking sector, small- and large-scale private investors may find that major failures in corporate governance have written off a once-valued share. Nowhere has this become more apparent in the past decade than in the banking and finance sector, which has been engaged in both reckless lending in the mortgage market and criminal activity in ways that have led to charges in the courts from market-rigging to fraud. At the same time, banks have been successful in ensuring that the regulatory authorities do not develop the teeth to control them effectively. In the US after the financial crisis, the groundswell of support for regulation that would limit the ability of banks to engage in trading with their own capital (and so put depositors at risk) or to restrain executive bonuses has been systematically eroded by the lobbying power of Wall Street. In the UK, the appetite for regulating the City of London – the financial centre – had reached a high point by 2013, but effective lobbying has ensured that the Financial Conduct Authority, formed as one response to the crisis, would have no more leverage than its predecessor organisation, the Financial Services Authority.

Over at least the past 20 years, banks and companies have also taken every opportunity to reap the fiscal benefits offered by the authorities who control ‘offshore centres’ even when these are geographically inland and better described as ‘secrecy jurisdictions’.⁵ The authorities allowing this corporate and banking behaviour range from the state of Wyoming to the governments of Liechtenstein, Switzerland and Panama, and include 15 jurisdictions under the British Crown. The release of the ‘Panama Papers’ by the International Consortium of Investigative Journalists in April 2016 provided another shocking example of how these jurisdictions are used by national leaders and their networks to hide their assets, with the intention of disguising their origin in corruption. Estimates of the total funds held in this network vary widely and range from $7 trillion⁶ to $20 trillion,⁷ all of which is placed there to evade scrutiny and taxes. Either figure is very substantial in relation to the total assets of the US commercial banking system assessed at $16 trillion.⁸ This offshore system has consequences for equality: as much as 8 per cent⁹ of household wealth (quite apart from corporate income) may be held offshore in secrecy jurisdictions, thus enabling evasion on a huge scale. While many of these transactions are strictly speaking legal, they are viewed by a majority of the public as corrupt.

The judicial sector is undoubtedly key for fighting corruption but is, at the same time, susceptible to it. While judges’ independence and integrity are generally high, there are countries that are an exception to this, where influence and wealth can buy judicial immunity. The US justice system straddles both the courage and thoroughness of its distinguished prosecutors such as Robert Morgenthau and Eliot Spitzer and the inadequacies of justice at the level of many states where judges must run for office and seek campaign finance. Doubts about the quality of justice inevitably impede the fight against corruption.

Differences between Europe and North America

How different from each other are the factors driving processes of influence-buying and power-selling in Europe and North America? We argue that, in both cases, the main drivers of corruption are political finance and lobbying; opaque processes involving individuals, associations, corporations and banks; a weakened justice and police system; and failures of oversight, compliance and regulation (which extends to the governance of sport).

In Europe, political finance is for the most part more constrained because it is subject to more intensive regulation, although it is certainly a factor in electoral outcomes. In the financial sector, the situation is more complex because within Europe the position of the City of London is different to that of most continental banking sectors, which is different again to that of the US. In the US, sport remains an area much less affected by corruption than sport in Europe.

The corruption as described in this book has strong international linkages that come from external sources. These ‘imported’ factors include money from corrupt sources laundered from the rest of the world, including funds that are the fruit of organised crime and that are then held in ‘shell companies’ (with an untraceable owner) and subsequently invested in respectable assets such as high-end including investments in the ‘junior’ (and so less-well-regulated) financial markets in London and New York. Its impact is matched by the strength of organised crime networks that originate in Latin America and Asia but control human smuggling in the West, and cybercrime, which may originate in any part of the world, working jointly or separately from domestic cyber criminals.

Looking ahead

The message of the analysis and arguments presented here is not that the situation in its various manifestations cannot be reversed, but that specific and targeted effort will be required. This is discussed in our final chapter. The actions that are critical to this are re-establishing confidence that corruption is not undermining democracy. They extend to ensuring that banking and finance are seen to be rid of the fraud and corruption that characterised the financial crisis; they should include action by multinational companies to adopt more effective compliance systems that reject the use of corruption to increase market share. Separately, international action needs to be taken both on organised crime (including cybercrime), and in relation to the governance of sporting institutions, to address the triple threats of match-fixing, doping and failed governance. ‘Secrecy jurisdictions’ are themselves a theme that runs through this book and whose further regulation must be a part of action by both the EU and the US who together provide the umbrella that has protected them to date. In all of these areas, the objective will have to be to reduce the buying of influence and the selling of power. Most of these measures can only be successful in the context of international action, but are even more crucial at a time when corruption is increasingly recognised as a threat to global security. However, there is no substitute for a core group of Western countries addressing the challenging situation laid out in the following chapters.

2

The Rising Price of Power

The funding of political parties is at the heart of corruption in many countries, and Europe and North America are no exception to this pattern. Large-scale funders of political parties expect a return on their money if the party they are backing achieves power. The return may be either financial – because their party’s victory generates contracts for them or their friends – or the buying of ‘influence’ through the adoption of policies that favour their narrow interest (such as a tax or a tariff or the protection of a business). Some donors have broader interests at heart but in all countries there are few major donors whose policy interests do not relate to them or their peer group – such as the industry they work in. Thus party funders are buying influence and elected politicians are selling power. As a consequence, the interests of the broader electorate, including those whose votes returned the politicians, may be overridden by large-scale party donors. In a range of countries this process is abetted by a ‘lobbying’ industry – pushing elected politicians for specific outcomes – which is sometimes closely linked to donors (as in the US) or may be largely separate from it (as in the UK and the European Parliament) but is nonetheless very effective. In the ‘accession’ countries of the EU, funds provided by ‘oligarchs’ and privatised enterprises that remain very close to the state play an increasing role in determining political outcomes. This chapter shows how powerful political finance has become in both Europe and the US and that its role is corrupting in the sense that public outcomes are too often determined by private interests.

USA: An end to limits

The effectiveness of legal barriers against corruption in the US has been a recurring challenge and the fight against it has never been more than partially effective, although various strands of corruption have often led to legislative reform. Concerns about corruption in political finance are part of this pattern and have triggered legislation designed to control it since the Tillman Act of 1907 when President Teddy Roosevelt sought to address the overbearing influence of corporations in politics.¹ Since the Watergate scandal of 1974 there has been heightened concern about campaign funding leading to new legislation in the form of the Federal Election Campaign Act amendments of 1974 and the Bipartisan Campaign Reform Act (BCRA) of 2002.

It was a film about Hillary Clinton that opened the way to the greatest challenge to this legislation governing political funding for 40 years. Financed in 2008 by a small not-for-profit entity, Citizens United, and funded largely by the energy magnates Charles and David Koch, it was intended to sabotage the prospects facing Hillary Clinton in her race with Barack Obama in the Democratic Party primary in that year, and was intended to be released on the cable channel DirecTV. However, the Federal Electoral Commission intervened to claim that it violated the BCRA, which banned political advertisements within 30 days of a presidential primary (and was intended to place a federal cap on ‘indirect contributions’ to federal campaigns by national party committees). The legal basis for BCRA was strongly challenged by Citizen United’s lawyer, Ted Olson, who in hearings in 2008 and 2009 argued that its restriction cannot be justified in law because it placed limits on ...

Table of contents

• Cover
• Author Bio
• Endorsement
• Title Page
• Copyright Page
• Dedication
• Contents
• List of Tables and Figures
• Preface
• Acknowledgements
• 1 Corruption and its Perils
• 2 The Rising Price of Power
• 3 The Power of the Lobby
• 4 The Big Business of Corruption
• 5 The Bankers’ Story: An End to Trust
• 6 On- and Offshore Secrets
• 7 Justice for Sale?
• 8 Organised Crime: A Perennial Spectre
• 9 Foul Play: Corruption in Sport
• 10 Murky Waters: Environmental Corruption
• 11 A Challenge to the West
• Notes
• Bibliography