Why the United States Strategy on Countering Corruption is Doomed to Fail and What We Should Do Instead

With great fanfare, the Biden administration has just declared a war on corruption. This is described in a document called “United States Strategy on Countering Corruption.” Like the war on drugs, much money will be spent on this effort, and many prosecutors, agents, and accountants will devote their blood, sweat, and tears to try to make it work. But in the end, it will fail too. As we will see, there is no amount of money we can spend that will let us prosecute our way out of corruption. There is, however, a way that corruption can be severely reduced. I will address my proposed solution at the end of this article. But now we will begin with a discussion of the administration’s “Strategy on Countering Corruption.”

The Strategy is outlined in a 38-page document. The first part is aspirational. The second part is an appendix that details nuts and bolts efforts that could be made to counter corruption. The document begins by describing the scope of the problem and the devastating effects that corruption has on individuals and national economies. It then goes on to explain how the various initiatives will attack this problem. It is very candid in its assessment of the challenges facing the government in countering corruption. The appendix contains serious ideas that are likely to be implemented, but not implemented well unless Congress appropriates a great deal of money to hire more prosecutors, agents, and financial experts. At most, however, effective implementation will not reduce corruption, but it will mean that more bad actors are prosecuted and imprisoned.

The Strategy sets forth five initiatives is calls “Strategic Pillars.” Each initiative is aimed at addressing a different aspect of domestic and international corruption, They are:

• PILLAR ONE: Modernizing, Coordinating, Efforts to Better Fight Corruption
• PILLAR TWO: Curbing Illicit Finance
• PILLAR THREE: Holding Corrupt
• PILLAR FOUR: Preserving and Strengthening Architecture
• PILLAR FIVE: Improving Diplomatic Assistance Resources to Advance Policy

A key component of this strategy will be an effort to “address deficiencies in the U.S. anti-money laundering regime (Strategic Objective 2.1), including by effectively collecting beneficial ownership information onthose who control anonymous shell companies, and by increasing transparency in real estatetransactions.” As detailed in a report by the Washington DC think tank, Global Financial Integrity, the U.S. has become a preferred destination for those looking to use real estate to stash illicit funds — making it a “Kleptocrat’s dream.” Such reports led Congress to enact, The Anti-Money Laundering Act of 2020, which requires certain entities to report the identity of beneficial owners.

That Act provides that, within two years of its enactment, "reporting companies," defined as corporations, limited liability companies or similar entities, including foreign entities registered to do business in the United States, will have to disclose their beneficial owners. Beneficial owners are those who directly or indirectly "exercise substantial control" over the entity or who own or control more than 25 percent of the ownership interest of such entities.

Sounds great. A covered company discloses its beneficial owners and the government learns the identity of a criminal engaged in money laundering. Right? Nope. If the company was created for or used to facilitate money laundering, the “beneficial owners” will all be nominees. Even if the regs require identification documents for the beneficial owners and the source of the money invested in the company, there is no way to ensure that any of the information is truthful from the face of the reports. Of course, if the government believes that the information is false, the government could begin an investigation and will likely identify the true beneficial owners. But faced with tens of thousands of reports, agents will not know which reports disclose information that is false. Moreover, even where it can be established that a company is owned by a nominee, that alone does not demonstrate that the source of the money is illegal conduct. FBI or DEA agents will not investigate a company unless they have reason to believe the source of its funding is, as required by statute, specified unlawful activity.

Consider the statement of , Section Chief, Criminal Investigative Division, Federal Bureau of Investigation, before the Senate Banking, Housing, and Urban Affairs Committee on November 29, 2018. In his statement, D’Antuono details the amount of information collected from banks under the Bank Secrecy Act (BSA):

[T]he FBI conducts data analysis of BSA filings to support existing cases and lay the groundwork for new ones. For its existing cases, the FBI has created a BSA Alert System that searches subjects’ names, dates of birth, Social Security numbers, telephone numbers, e-mail addresses, and other identifying information across BSA filings; the results of this are automatically e-mailed to case agents. These searches hit on an average of 4,000 BSA filings and produce an average of 2,000 alerts every month. In August 2018, for example, the FBI disseminated 2,356 alerts based on 7,747 BSA records. From January 2017 to June 2018, BSA reporting was directly linked to the main subjects of approximately 25 percent of pending FBI investigations (up from 8.9 percent in 2012).

Thus, in a given year, the FBI will search 48,000 BSA filings and will disseminate 24,000 alerts to its agents and analysts.. Steven M. D’Antuono’s statement that BSA reporting was linked to the main subjects of a quarter of pending FBI investigations does not disclose what role that information played in the investigations. Notice also that he does not disclose the actual number of pending investigations (probably because such information is classified). Knowing this number is important because it would demonstrate whether such information could actually have an impact on combatting corruption. If the BSA filings were linked to 25% of 1000 investigations, its impact could be great. If the filings were linked to 25% of 100 investigations, not so much. Remember, only a fraction of investigations result in prosecutions. Thus, the actual impact of all this data is questionable.

Now consider the beneficial owner reports. As we have seen, in most cases involving money laundering, the person identified as the beneficial owner will actually be a nominee. If they claim to be the actual owner, how do you know from the face of the disclosure that they are not? While bank account information can lead to the identity of the actual beneficial owner, particularly if the bank is in the United States, agents and prosecutors will not make the effort to investigate this information unless they already have reason to believe that the investor/purchaser is engaged in criminal activity. The reason is that the agents have no authority to issue a subpoena to a bank; that has to be done by a grand jury. But a federal prosecutor will only bring a matter before a grand jury where there already exists evidence of wrongdoing and some targets of the investigation have been identified. Consequently, these new Anti-Money Laundering Act disclosures will not appreciably increase the number of cases prosecuted by the United States.

Bank records can also be obtained through the execution of a search warrant on the bank. But to get a search warrant, the agents have to apply to a court for one, and before a judge will issue a search warrant, the agents will have to demonstrate through a sworn affidavit or testimony that probable cause exists to believe evidence of a crime will be found in specifically identified accounts. But the agents can’t do that because they don’t know if the account holder is a nominee until they get the records, and they can’t establish probable cause that evidence of a crime will be found in the named accounts without first seeing the records, and they probably cannot establish that money from these accounts was laundered without already possessing evidence that the money was the proceeds of specified unlawful activity.

With foreign entities or individuals, obtaining bank records is even more difficult. Previously, the DOJ or Treasury could only issue subpoenas to a foreign bank maintaining a "correspondent account" in the U.S. for "records related to such correspondent account[s]," As a result of the Anti-Money Laundering Act of 2020, the government is authorized to request records relating to correspondent accounts "or any account at the foreign bank" that is the subject of a BSA/anti-money laundering investigation, a civil forfeiture action, or any federal criminal investigation. But not all foreign banks satisfy these qualification, so it will still be necessary to obtain bank account records through the use of a Mutual Legal Assistance Treaty, a time consuming process.

There is another limitation on the government’s ability to use beneficial owner disclosures to confront corruption. A white collar criminal investigation can take two or three or sometimes four years to complete. It may involve investigators from various state and federal agencies working together. As described by the Department of Justice, a single investigation may draw upon the resources of the:

Fraud Section, FBI, the U.S. Department of Health and Human Services Office of the Inspector General (HHS-OIG), the Centers for Medicare & Medicaid Services (CMS), Drug Enforcement Administration (DEA), Defense Criminal Investigative Service (DCIS), Federal Deposit Insurance Corporation Office of the Inspector General (FDIC-OIG), Internal Revenue Service (IRS), and other agencies, along with the prosecutorial resources of U.S. Attorneys’ Offices and state and local law enforcement partners.

That’s a lot of resources brought to bear, which is why the government has been so successful in prosecuting health care fraud. But this also demonstrates that these cases are extremely labor intensive. No matter how much money is appropriated by Congress, there is simply no practical way to use all this information to uncover criminal activity. The government already has enough known criminal activity to keep agents and prosecutors fully engaged. This is true of all kinds of white collar cases. Thus, while this information may be important in putting together and prevailing in a criminal case, to the extent that our government is successful in fighting corruption, it won’t be because of this new strategy, it will be as a result old fashioned crime-fighting: catching criminals and putting them in prison.

Before returning to our discussion of the Strategy, let us look at regulations being proposed by the Financial Crimes Enforcement Network (FinCEN) of the Department of the Treasury to uncover beneficial owners in real estate transactions. In a terrific article by Peter D. Hardy, Richard J. Andreano, Jr., Michael Robotti & Nikki A. Hatza from the law firm, Ballard Spahr, they say that the proposed regulations would impose:

[N]ationwide recordkeeping and reporting requirements on specified participants in transactions involving non-financed real estate purchases, with no minimum dollar threshold. Fundamentally, FinCEN highlights two alternate, proposed rules. One proposed option, promulgated under 31 U.S.C § 5318(a)(2), would involve implementing specific and relatively limited reporting requirements, similar to those currently required of title insurance companies in the non-financed real estate market. This rule would require covered persons to collect and report certain prescribed information, such as, presumably, beneficial ownership. Alternatively, FinCEN is considering imposing more fulsome Anti-Money Laundering (“AML”) monitoring and reporting requirements, including filing Suspicious Activity Reports (“SARs”) and establishing AML/CFT programs under 31 U.S.C. § 5318(g)(1) and 31 U.S.C. §§ 5318(h)(1)-(2). This latter option would require covered persons to adopt adequate AML/CFT policies, designate an AML/CFT compliance officer, establish AML/CFT training programs, implement independent compliance testing, and perform customer due diligence.

This proposal, well intentioned as it may be, will subject the same burden of collection and disclosure on your neighbor real estate agent that banks are subject to. And the information obtained is subject to the same limitations we have already discussed in regard to beneficial ownership information collected under Anti-Money Laundering Act. It will also be impossible to manage. As FinCEN itself recognizes, aside from commercial real estate deals, in 2020 there were almost 6.5 million residential real estate transactions in the U.S.

The best example of the government’s inability to translate greater knowledge into more prosecutions was demonstrated ironically in one of the government’s most successful law enforcement efforts of the last decade. In 2012, Bradley Birkenfelda Swiss banker, filed a case under the IRS whistleblower law. As a result, UBS bank (at the time the largest bank in the world) had to pay a fine of $780 million. It also had to close all known U.S. accounts and, for the first time in history, the bank turned over the names of 4450 U.S. taxpayers for prosecution in the United States. But there were far too many offenders to prosecute. Instead, the Department of Justice and the Department of the Treasury created a program granting amnesty to any taxpayer who agreed to pay back the taxes they had evaded. “As of 2018, more than 56,000 delinquent taxpayers had come forward, and the IRS had collected $11.1 billion in back taxes, while numerous banks were successfully prosecuted or entered into settlement agreements with the U.S. government.” Of close to 60,000 U.S citizen tax evaders who were identified as a result of Birkenfeld’s initial disclosure the Justice Department, how many were indicted? 120!

But that doesn’t mean that the government’s efforts were a failure. Indeed, they were a resounding success. 60,000 people learned the consequences of not obeying the law and, most importantly, for the first time Swiss bankers understood that they were no longer bulletproof when they allowed their banks to be used as a haven for criminals to secretly stash their money. Today, the Swiss Federal Tax Administration (FTA) is sharing information of people holding accounts in their banks with their respective countries. The arrangement which involves the FTA automatically sharing information such as the owner’s name, address, country of residence, account balance and other details enables authorities of respective countries to check if their taxpayers have declared their foreign financial accounts. This was a cultural change that occurred even though there were comparatively few actual prosecutions.

(Now, someone will look at this example and say, “Well doesn’t this show that access to more information can have a huge impact even if it doesn’t lead to many prosecutions.” No again. UBS possessed the identities of the actual owners of the accounts. The information turned over to U.S. authorities identified the taxpayer and the amount of money hidden in the account. All the government had to do to prosecute these individuals, was to get their income tax returns and see if the money was disclosed on the return. Wealthy U.S. taxpayers, who flocked to their lawyers and accountants for advice, learned that the government could easily prosecute them for tax evasion. Drug traffickers, money launderers, arms dealers, kleptocrats, will have no such fears).

The Strategy recognizes that it cannot determine the success of any of its initiatives unless it develops “metrics to measure progress against each strategic objective.” That sounds reasonable, right? Sure, as an aspiration, but it is an impossible goal. The Department of Justice‘s Bureau of Justice Statistics publishes information on crime rates throughout the United States--known as the National Crime Victimization Survey (NCVS). The FBI publishes its own data on crime rates. Their report, which is most often cited in the press, is called the Uniform Crime Reporting Program (UCR).

There are significant difference between the two. The NCVS is based on estimates from a nationally representative sample of persons in U.S. households. The UCR, by comparison, is based on the number of reports of crimes to law enforcement agencies, weighted to compensate for incomplete reporting. These two agencies also differ in the kinds of crimes that they report and the make-up of the crimes they report in common. Both the BJS and the FBI agree that in the cases or robbery and sexual assault, there is significant underreporting of the crimes committed. According to the BJS, 44% in the case or robbery and 80% in the case of sexual assault. But these are just estimates. In a Bulletin published in October of 2018, the BJS revised its 2016 analysis because it discovered that changes in the methodology it used made comparisons between 2016 and prior years unreliable.

I am not aware of any academic study into the reliability of estimates of unreported crime. But I believe that such a study would show that it is not possible to determine how much crime is actually being committed. Yet to be fair, to the extent that we have any understanding of the scope of the problem and the trend of criminal activity over time, this information is useful. But in the case of white collar crime, neither the FBI or the BJS even attempts to collect data. Why?

Take money laundering. There are no “victims” to report this crime to the authorities. Usually, the government uncovers this crime as a result of its investigation of other offenses such as drug trafficking or health care fraud. What about bribery? When mayors or councilmen or building inspectors or any number of state or local or federal officials are bribed, both sides receive a benefit, so there is no reason to report the crime. What about employees who take kickbacks from vendors? They are rarely discovered, and when they are, they are fired. Embezzlement often goes unreported because the FBI is not interested in cases where the losses are less than hundreds of thousands of dollars and, with the exception of embezzlement of banks, it leaves such cases to local law enforcement; but local police and prosecutors don’t have the time or the expertise or the inclination to devote to white collar investigations when people are being robbed and raped and murdered. How about health care fraud? It’s usually detected because the offenders are so greedy or, in the case of some professionals, so arrogant, that they so overbill Medicare or insurance companies that their offenses cry out for investigation. Even with all the prosecutorial resources poured into health care fraud investigations over the past 20 years, the National Heath Care Anti-Fraud Association estimates conservatively that health care fraud costs the nation about $68 billion annually, and others put the figure much higher, at $230 billion. How is the government going to develop metrics when the estimates of the scope of the crime vary so widely?

Or consider tax evasion. Here the government doesn’t even seem to want to know the extent of the problem. From 2010 to 2018 Congress gutted the IRS. In an article published by ProPublica in 2018, that organization found that:

As of last year, the IRS had 9,510 auditors. That’s down a third from 2010. The last time the IRS had fewer than 10,000 revenue agents was 1953, when the economy was a seventh of its current size.

What has been the impact of these personnel cutbacks? The IRS conducted 675,000 fewer audits in 2017 than it did in 2010, a drop in the audit rate of 42 percent.

No one really knows how much tax is evaded each year. Again, it’s anybody’s guess. But paying one’s taxes is not just a legal obligation, it is a civic responsibility. It is the most visible and tangible expression of a citizen’s participation in our democratic government, impacting more people than elections, military service, even social security. A culture of tax evasion, as innocuous as that sounds as compared to drug trafficking, arms dealing, money laundering, and kleptocracy, is the greatest enabler of corruption because it causes acceptance (or tolerance of or resignation to) of other criminal conduct as a way of life; for proof, just look at Italy. But instead of directing resources to compliance, the Strategy only seeks to punish criminal actors for tax evasion resulting from their other criminal conduct.

Finally, the Strategy recognizes that the various initiatives to confront corruption will require an international effort to succeed. “An international framework is only as strong as its implementation, including at the country level, where operational, law enforcement, and legal components of an anti-corruption system must work together effectively to deliver results.”

Let’s take a look at our partners in Europe. There is no question that much of the success of the U.S. government’s efforts to combat white collar crime has resulted from the system of rewards provided to, and the statutes protecting, whistleblowers. The government’s success in recovering over $62 billion dollars pursuant to the federal False Claims Act has led Congress to authorize the Securities and Exchange Commission, the Internal Revenue Service, the Commodity Futures Trading Commission, and the Department of Treasury’s Financial Crimes Enforcement Network to create their own whistleblower programs.

What has the EU done? On December 16, 2019, the EU Directive on the Protection of Whistleblowers came into force. That document directed member states to amend their respective laws to provide significant protection against retaliation for whistleblowers disclosing information as to public procurement, financial services, money laundering, corporate tax, transport, environment, food and animal welfare, public health, consumer protection, privacy, financial interests of the EU and the internal market. The countries were given two years, that is, until December 17, 2021 to “transpose” their domestic laws. Thus far, none of the member states had met this deadline.

Assuming that some or all of these nations transpose their laws to conform to the EU Directive, it will still be a meaningless gesture. While it’s really great that these nations will have signed on to giving whistleblowers significant protection against retaliation, but as compared to the United States, there are hardly any whistleblowers to protect. The reason is that there are no incentives for whistleblowers to report crime in Europe. Whistleblowers don’t receive financial rewards for disclosing evidence of criminal activity. The Europeans look down on paying whistleblowers believing that they should go to the authorities because it’s the right thing to do.

The reality is that whistleblowers, at least in the United States, are often loyal employees who go to the government only after they tried to get their employers to stope engaging in illegal conduct and failed. In the majority of cases the rewards they receive barely compensate them for being denied raises or promotions, or the loss of their jobs, or being blackballed in their industry and having to work in jobs for a fraction of what they previously earned.

Thus in the one area, where there is the greatest potential to actually confront corruption, the new Strategy practically ignores it and the EU completely ignores it.

What is the takeaway from this analysis? First, that a nation cannot prosecute its way out of corruption. Second, that the Administration’s new Strategy is not the best way to confront corruption here and abroad.

So, what is the solution? The answer takes us back to the war on drugs and the year 1970. What if between the years 1970 and 2021, we had not spent a trillion dollars putting millions of men in prisons for conduct that most people today no longer think is even criminal? What if the money had gone into better schools, and vocational training, and childcare, so that single mothers could go to work, and better transportation, so that people who wanted to work could get to where the jobs were. What if these men had not been in prison so that millions of children did not have to grow up in single family homes or look to gangs for a strong male influence? Just imagine what kind of nation we would live in today.

Or consider the war in Iraq. Even if you think the invasion was justified, it didn’t take long for the U.S. to realize that there were no weapons of mass destruction in Iraq or that Saddam Hussein was never a threat to the United States or our vital security interests in the Middle East. We didn’t have to devote seven years and $2 trillion to nation-building. What if that money had been spent on health care for the very young and the very old, better nutrition for families that lived in communities that had no access to fresh fruits and vegetables?

It is vitally important that criminals be prosecuted and that law enforcement have the tools to effectively investigate and stop white collar crime and street crime. You cannot have democracy without security. Criminals must be punished to maintain respect for the rule of law. But we should not allow our decisions about what is best for society to be governed by fear: fear of drugs, fear of terrorists, fear of corruption. We should not allow ourselves to be manipulated by fear into believing that the solution to crime is punishment.

Now go back to 1964. The Civil Right Act and the Voting Right Act dealt a death blow to Jim Crow (though admittedly not to racism). The enactment of Medicare provided universal, almost free health care to the elderly. The enactment of Medicaid did the same for the poor. But then came the Vietnam War. And money that could have gone into creating the Great Society went elsewhere. Another victim of fear. Imagine what our nation would like today had we not fought in Vietnam. Just imagine. It isn’t hard to do.