THE ANTI-CORRUPTION TRIANGLE

Originally published in ACAMS Today I December 2015–February 2016 | Vol. 15 No. 1

BY PAUL CAMACHO

As Prime Minister David Cameron so succinctly put it, “Corruption is the cancer at the heart of so many of the problems we face around the world today.”[1] A look across the globe yields in plain view corruption squandering the hopes of citizens yearning for an equitable government. Corruption—more than any other factor—has thrust many a nation into a sea of kleptocracy, civil war, starvation and the loss of basic human rights. Corruption is a nation killer.

The World Economic Forum estimates that corruption adds 10 percent to business costs globally and the World Bank believes that about $1 trillion is paid in bribes every year.   When high-level officials within regulatory agencies are bought off, there is no chance for a level playing field and competitive commerce is stymied. Even worse, graft can cause death and massive destruction as seen in China where a warehouse filled with hazardous chemicals exploded and killed 114 people, many of which were fire-fighters.  Authorities that were supposed to ensure safety had been bought off.

Sarah Chayes, the author of the acclaimed book titled Thieves of State, makes a compelling argument that extremist movements are the product of unbridled corruption. According to Chayes, the type of graft that evokes extremist assimilation is what she calls the “in your

face” corruption. “It’s when the cop does not shake you down just once or twice,” but repeatedly until you pay. When graft becomes so embedded into daily life, the disease metastasizes. Once a country hits this “stage [four] malignancy” it approaches a tipping point destined to a state of failure.[2]                                                 

Organized crime is a symptom of corruption. Whether it is Al Capone or El Chapo Guzmán, both owe their meteoric rise to graft takers—those willing to look the other way for a price. It is hard to imagine, but the U.S. came close to its corruption tipping point. Up to the early 1930s, the U.S. resembled what Mexico looks like today: criminal enterprises controlling daily commerce in many regions.

Gangsters in the U.S. were merely taking advantage of the culture of corruption that had permeated many municipalities. One of many egregious examples of “in your face” corruption was the New York county clerk who openly shook down young couples for extra fees lest they would not receive a marriage license.

Even though the fight against corruption was arduous, long-suffering and not without major setbacks, the U.S. eventually overturned the capsizing ship and sailed far away from the corruption tipping point. They tamed the carcinogenic effects and over the years instituted systems that inoculated the nation from serious, nation-threatening outbreaks.

However, no nation can truly escape corruption. Even the U.S. is periodically rocked by the convictions of high-level officials. Recent high-level officials who chose greed over duty were U.S. Congressman Chaka Fattah, former U.S. Representative Jesse Jackson Jr., the ex-governor of Virginia, the ex-Detroit mayor and the ex-New Orleans mayor. Moreover, the conviction of the infamous gangster Whitey Bulger (who many compared to Capone in terms of ruthless- ness), reminds us that corruption could even occur within the executive ranks of the world-renowned FBI. These are all constant reminders that greed could elicit corruption anywhere; it is human nature.

Moreover, corruption almost squandered the U.S.’ chances for a sound republic and vitality. As mankind has innumerably demonstrated, those who fail to learn from history are doomed to repeat it. It would be an act of hubris to think such a dire situation could never happen again in the U.S. There is tremendous value, especially for future leaders, in understanding how the U.S. turned the tide in the battle of corruption. A study of the U.S. experience may also serve others outside of the U.S. in their efforts to combat corruption. Corruption is not contingent on race, nationalism or form of governance.

Three primary factors drove U.S. efforts in turning the tide in their battle of corruption and inoculated it from life-threatening outbreaks.

1. Leaders with integrity and courage that rose to the occasion
2. A judicial system that grew responsive to instances of corruption
3. Enactment of regulatory regimes that detect and inhibit graft/money laundering

 Leaders with integrity and courage

There is an axiom in leadership: Lead by example. When leaders do not have the fortitude to keep their hands out of the graft cookie jar, then corruption swiftly becomes institutionalized and a herd mentality. Up to the early 1930s in the U.S. there were many high-level government officials setting the unethical tone of greed over duty. Consider the Secretary of the Interior in the President Harding administration. This top cabinet level official had the temerity to sell on the side oil drilling rights to federal land to various cronies. Back then graft takers were merely mirroring the examples set by leaders.

Going after corruption is not without peril. In the heydays of the Prohibition era, death threats were not merely words, but real hazards for those committed to fight corruption. Beyond the fear of death, a pursuit of corruption usually stepped on the huge influential toes of an elected officially who could swiftly end careers.

What turned the tide for the U.S. were dedicated civil servants such as Mable Willebrandt, the highest-ranking female in the Department of Justice (DOJ) and Elmer Irey, chief of the IRS Criminal Intelligence Unit. These individuals unlimbered their courage and led unprecedented successful fights against corruption. Through their unwavering integrity they were impervious to graft and became strong beacons of example for others to follow.

Responsive judicial system

Graft takers have an Achilles’ heel: the money trail. As a great book of ancient wisdom states, if you want to know a man’s heart, look toward their treasures. Instances of unexplained wealth have been the downfall of many a corrupt official. In the early years, the U.S. evolved an unlikely tool—the criminal tax laws— to reign in high-level corruption. Soon after, corrupt officials who were once untouchable fell swiftly onto the sword of tax crimes.

But the tax laws did not mandate significant prison time and criminals learned to launder their money. Furthermore, criminal organizations refined the art of confederated corruption. In response to combating pernicious conspiracies, the U.S. enacted the Racketeer Influenced and Corrupt Organizations (RICO) Act. Soon after, money laundering laws were enacted to surgically attack the lifeblood of the disease. RICO focused on roping in the broader organization and the outer rim conspirators. The money laundering statutes made the money trail even more deadly and encompassing. Both of these criminal statutes significantly increased the prison time and provided a powerful tool to remove the fruits of the crime: civil forfeiture.

What’s more, a responsive judicial system needs to be adequately resourced. A nation may have the effective criminal statutes, but without skilled prosecutors and criminal investigators who can sleuth the most sophisticated graft trails, they are like a well-built car without an engine. In the early 20th century it was the U.S. Treasury Department that resourced and honed the art of following the money through skilled financial investigators. J. Edgar Hoover’s FBI soon followed Treasury’s lead by hiring CPAs and accountants. As corrupt officials and their compatriots got better at hiding their money trails, so too did investigators and prosecutors in their ability to follow the money and present the evidence in court.

Effective regulatory regimes

The U.S. Internal Revenue Code (IRC) is certainly not without its flaws, tributes to special interests and inequities. Few can argue against the belief that the IRC is long overdue for a major overhaul. But those advocating the complete scrap may want to retain one aspect of the IRC. Each year, everyone, including those in a position of trust, have to declare under penalty of criminal prosecution all their income. No other regulatory requirement has had such a pronounced impact in fighting corruption in the U.S. than the duty to file an income tax return. Even U.S. Vice President Spiro Agnew fell victim to its bite. The tax return filing requirement created a paradigm shift forcing corrupt officials to live in the financial shadows. Anyone contemplating graft has a vexing dilemma: Do not claim the amounts received from graft and be subjected to tax evasion or claim the graft but create a money trail to your illicit activity.

Interestingly, the most effective tool in the U.S. for lenders to validate the honesty of a loan application is the receipt of certified federal tax returns.

The inception of sophisticated money laundering techniques in the U.S. was born out of the need to hide money from income tax auditors and criminal investigators. After the conviction of Al Capone, big-time gangster Meyer Lansky opened up a Swiss Bank account and then taught other gangsters how to pocket money oversees away from prying IRS investigator eyes.

As money trails began to grow cold and criminals got better at hiding their money, the U.S. enacted the Bank Secrecy Act (BSA) mandating financial institutions to file currency transaction and suspicious activity reports (CTRs/SARs). The original intent of the BSA was to combat tax evasion in the underground economy and currency base criminal activity. The BSA also increased the height of the financial speed bumps faced by criminals. CTRs and SARs gave investigators critical clues of possible unexplained wealth or attempted money laundering of public officials and their associates.

When the BSA was supercharged with the USA PATRIOT Act, a greater window opened into nefarious activities of those in positions of trust. The public simply does not have the capability to appreciate the full breadth of how the BSA has empowered anti-corruption efforts because it is unlawful to disclose their existence. However, it is not hard to decipher circumstantially the benefits by examining the facts of significant corruption convictions. Take for instance the FIFA investigation. Much has been publicly revealed regarding the flow of money in and out of financial institutions.

The anti-corruption triangle

The three prongs critical to a successful fight against corruption can be visualized as follows:

1. Judicial system

• Responsive to instances of graft and conspiracies.
• Emphasizes the Achilles’ heel: the evidentiary money trail.
• Adequately funded and competently staffed
• Responsive to instances of graft and conspiracies
• Emphasizes the Achilles’ heel: the evidentiary money trail
• Adequately funded and competently staffed

2. Regulatory regime

• Requires financial institutions to prove to law enforcement the tools to follow the money and prevent acts of corruption
• Binds those in position of trust to account for unexplained income and wealth

3. Leadership

•  Sets a tone of unwavering integrity for others to follow
• Courageous in addressing corruption at all levels
• Nurtures ethical character early with future leaders

At the base of the triangle are leaders with integrity and courage. Without this base the other two components cannot be effectively erected. The test of true integrity is doing the right thing even if there is little to no risk of being held accountable for your actions. Leaders do not automatically become ethical. An admirable character is usually acquired through osmosis early on in life, by the influence of others around you.

When the anti-corruption triangle is complete, a nation erects a powerful force field that thwarts serious conflagrations of corruption—a firewall if you will. If any component of the triangle breaks down, the disease will most likely incubate.

A correct sized triangle

Since the enactment of the USA PATRIOT Act, there has been exponential growth in regulatory requirements and government oversight for AML programs. In this zeal to expand the BSA scope to detect and prevent money laundering, we should never lose sight of potential side effects. The treatment to control the cancer of corruption should never be so potent it makes the patient sicker. The anti-corruption triangle has to be proportionate and fit within the constraints of a sound governance, protected liberties and a vibrant commerce.

 Today, the U.S. is facing some proportionality challenges. In an ever-increasing compliance cost environment, some financial institutions have shut their doors simply because they are unable to compete given regulatory demand. De-risking has become the new mantra for financial institutions seeking to stay far out of regulatory crosshairs. This has caused certain spectrums of banking clientele to go unbanked, driving the demand for nontraditional and often unregulated means to transfer value. Structuring is the most commonly reported suspicious activity in the U.S., but many federal jurisdictions have instituted policies not to prosecute the crime of structuring unless there is convincing evidence illicit funds were used in the transactions. As regulators become more granular in their audit scope, the practice of filing defensive SARs is becoming common place.

In order to maintain long-term public confidence and faith in the regulatory system, the U.S. will need to constantly evaluate the AML regime. Such analysis should include:

• Cost to financial institutions versus the material benefit to law enforcement
• Dollar value of transactions required to be reported given ever-increasing minimal thresholds for prosecution
• Changing nature of criminal activity that is more dependent on non-currency based illicit activities
• The impact on citizens unduly being associated with suspicious activity by means of defensive SAR filings

For the AML professional

The FIFA scandal is a resounding reminder that financial institutions will continually face the risk of being used to facilitate corruption.  As the media focuses on international schemes, we should not lose sight that similar risks could exist with domestic politically exposed persons (PEPs). Moreover, AML professionals need to assess the risk of anyone (domestic or foreign) in a position of trust, regardless if they are senior officials. In particular, attention should be paid to situations where there is an appearance of living beyond one’s means. Money laundering is not just the movement, cleaning or hiding of funds, but it is also the enjoyment of funds. Consequently, expenditures may hold valuable clues in ascertaining risk.

AML professionals should also regularly sharpen their awareness of untraditional methods to transfer value. The Internet has exponentially expanded criminals’ ability to express their financial creativity. Currency is no longer always the method chosen to facilitate illicit activities.

Lastly, AML professionals need to under- stand that law enforcement has limited resources. Due to budget cuts and retirements, the U.S. is experiencing an unprecedented shrinkage of investigators skilled in the art of following the money. IRS-CI, the primary users of BSA information, is now down to 1970s staffing levels. To deal with limited resources, in many areas of the country if the alleged financial crime is under $500,000 there is a good chance it will not be accepted for investigation. Now more than ever law enforcement is reliant on well-developed SARs associated with high-dollar values in the aggregate.

Final thoughts

Movies and TV shows love to overly dramatize crime stories with bullets and car chases. But even in the underworld battle in the U.S., mighty gangsters, such as Al Capone and Nucky Johnson of HBO’s famed Boardwalk Empire, fell. In reality it was law enforcement’s ability to follow the money that led to their down- fall. Such is the power of the money trail. In the continuing battle of corruption, the money trail, or lack thereof, will deter- mine the fate of those who chose greed over their official duty.

The work AML professionals do not only results in bad guys going to jail, but also goes toward the soundness of a nation. We should never lose sight that corrup- tion can be a nation killer. The foun- dation of the anti-corruption triangle (leadership with integrity and courage) also applies to AML professionals in their efforts to deploy sound and effec- tive AML programs.

[1] David Cameron, “Corruption is the Cancer at the Heart of So Many of the Problems We Face Around the World,” Huffington Post, June 6, 2015

[2] Sarah Chayes interview, The Daily Show with Jon Stewart, January 29, 2015.