Fighting corruption: contemporary measures in Canada

ABSTRACT

The fight against the breed of corruption that exists in Canada today requires a two-pronged approach: reduction of economic rents that can be exploited through corruption, and increase in the cost of engaging in corruption. Most of the recent efforts within Canada have targeted the second approach. Attempts are being made to weaken the link between private business and public officials (elected or appointed) through constraints on political contributions, lobbying abilities and the exchange of gifts. The challenge is to also allow competition to prevail while limiting the misuse of the regulatory powers of the government. In addition, Canada must make a serious effort to decrease its acceptance of corruption abroad.

RÉSUMÉ

La lutte contre le type de corruption qui existe au Canada aujourd’hui exige une approche à deux volets : la réduction des rentes économiques pouvant être exploitées à travers la corruption, et l’augmentation du coût de la pratique de la corruption. La majeure partie des efforts récents menés sur le territoire canadien sont englobées dans le deuxième volet. Sont lancées des initiatives d’affaiblissement du lien entre les sociétés privées et les agents publics (élus ou nommés) à travers l’application de contraintes concernant les contributions politiques, les capacités de lobbying et l’échange de cadeaux. Le défi est de permettre à la concurrence de prévaloir tout en limitant l’utilisation à mauvais escient des pouvoirs réglementaires du gouvernement. De plus, le Canada doit s’employer sérieusement à diminuer son niveau d’acceptation de la corruption à l’étranger.

KEYWORDS:

• corruption
• crony capitalism
• oligarchy
• political contributions
• whistle blowing
• transparency

Acknowledgements

The author wishes to thank M. Feltham-Lauzon and A.M. Lanno for their help with data collection and preparation of this article.

Disclosure statement

No potential conflict of interest was reported by the author.

Notes on contributor

Arvind K. Jain is a professor of international banking and finance at Concordia University, Montreal. He has edited two books on corruption: Economics of corruption (Kluwer Academic, 1998) and Political economy of corruption (Routledge, 2001). His other books are in the areas of international finance and macroeconomics.

Notes

1 To see how the definitions of corruption have evolved, see Johnston (2001) and Public Safety Canada (2014, pp. 8–28).

2 For a discussion of the relationship between power and corruption, see Bliss and Di Tella (1997, pp. 1002–1003).

3 While corruption has sometimes been thought of as being as old as human interactions, Fukuyama (2016) identifies corruption as a modern phenomenon because in pre-modern times, the concept that the state should represent the interests of the populace would not have existed. Chayes (2015), on the other hand, traces thousand-year-old manuscripts in which rulers are advised to shun corruption if they wanted to be liked. Wenar (2016) traces the role of corruption in the flow of natural resources through the ages.

4 At other times, two private entities may negotiate, for example, a price. The price they agree on determines who captures what share of the rent. This situation does not involve corruption even if we conclude that one party is much stronger than the other and has made what may be considered an unfair deal.

5 The focus of this paper is on corruption, which must be distinguished from fraud and unethical behavior. Recent scandals involving four Canadian senators who were accused of using their budget allocations for personal expenses may be considered repulsive and unethical, but this behavior does not fall under the rubric of corruption.

6 When organized crime manages to extort money through protection rackets, kickbacks or control of some activities, it can be viewed as an expropriation of regulatory authority by organized crime. Compensation may take the form of payment to the real agents who possess the law-enforcement or regulatory authority and who decide to look the other way, or a complete loss of authority by the agent when it is incapable of controlling the crime syndicate.

7 Rose-Ackerman (2001) laid the foundations for distinguishing various types of political corruption based on the constitutional structures.

8 Definition from Wikipedia; https://en.wikipedia.org/wiki/Crony_capitalism. A somewhat similar definition is given by Investopedia: “Instead of success being determined by a free market and the rule of law, the success of a business is dependent on the favoritism that is shown to it by the ruling government” (http://www.investopedia.com/terms/c/cronycapitalism.asp).

9 Recent events in the United States Supreme Court highlight the identification as well as legal challenges associated with this type of corruption. In June 2016, the Supreme Court of the United States overturned the conviction of former Virginia Governor Bob McDonnell for having accepted gifts, money and loans to the tune of US$175,000 from a businessman because the government was not able to demonstrate that there had been a quid pro quo.

10 In August 2016, Eric Ben-Artzi, who had blown the whistle on Deutsche Bank's false reporting that had led Securities and Exchange Commission (SEC) to impose a fine of C$55 million on the bank, refused to accept his share of the third largest whistleblowing award in the history of the agency because the SEC had failed to punish the managers responsible for the acts. He attributed the agency's actions to the revolving door between the agency and the bank. “The most obvious concern is that Deutsche's top lawyers ‘revolved’ in and out of the SEC before, during and after the illegal activity at the bank. Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC's chief counsel in 2013. Robert Khuzami, Deutsche's top lawyer in North America, became head of the SEC's enforcement division after the financial crisis. Their boss, Richard Walker, the bank's longtime general counsel … was once head of enforcement at the SEC” (Braithwaite 2016).

11 Tunisia, under Ben Ali, may have been better labeled as an oligarchy or grand corruption, not merely a “crony” capitalist country.

12 These authors also summarize other evidence on the value of connectedness (Diwan et al. 2015, pp. 2–4) but they do not identify how the connected firms compensate the policymakers.

13 Links between Putin and Andrei Kostin, the head of the second largest Russian bank, VTB, provide an example of how these relationships work. The Russian state has provided help to VTB to grow from C$4 billion to C$191 billion during the 14-year tenure of Kostin. In exchange, VTB facilitates the flow of funds to Putin's associates such as Sergei Roldugin (identified in the Panama Papers) to create an offshore network of accounts to the tune of C$2 billion; (Seddon 2016).

14 Chayes (2016b) describes how this network operates, with examples from three countries listed below.

15 “By the late nineteenth century, however, industrialization had created a powerful economic elite that held political power at all levels, with its supporters in substantial control of the Senate, the Republican Party, and the presidency” (Johnson and Kwack 2010, p. 22).

16 The Economist (2014) makes no attempt to distinguish between crony capitalism and oligarchy. Its list of industries included as part of crony capitalism is large enough to encompass the description of an oligarchy.

17 Burgis (2015) provides examples from Africa. It is the same story in any country where warlords and oligarchs assume control of the political institutions of a country. Chayes (2015, p. 92) quotes the opinion of a Tunisian about the country's rulers: “they looked upon Tunisia as a vast personal enterprise that they could tap at any moment.”

18 The successes of Hong Kong's (ICAC, established in 1974) and Singapore's Corrupt Practices Investigation Bureau (CPIB) are legendary. Yeung (2000, pp. 4–5) emphasizes the importance of these two commitments in summarizing the success of ICAC; also see Hui (2014). Lee (2016) shares the Singaporean experience. Semi-autonomous commissions are also known to have had success in Indonesia and Romania. Sometimes, individuals’ commitment can make a difference. See the examples of Brigitte Alepin in Canada (Marotte 2016), Katica Janeva in Macedonia (Byrne 2016) and Thuli Madonsela of South Africa (England 2015).

19 Some of these form important planks in the strategy of the Anti-corruption League of Canada. See “Four Key Corruption Cures,” (http://www.canadiananticorruptionleague.org/). Similar sentiments are scattered in the recommendations of Transparency International UK (2016).

20 Bliss and Di Tella (1997) provide the theoretical foundations for this assertion as well as challenges to its applicability in practice.

21 Baksi et al.’s (2009) empirical conclusion about a U-shaped relationship between corruption and liberalization is based on dubious assumption and tests. Their tests, for example, are based on the assumption of a causal relationship between gross domestic product (GDP) and corruption.

22 Wade (1985) describes a situation in which this type of corruption will permeate all levels in a bureaucratic organization until the goal of the bureaucracy becomes maximization of rents. See Chayes (2015) for a description of how state institutions are used to support serious forms of political corruption (oligarchies or grand corruption) in Afghanistan, Egypt, Nigeria, Tunisia and Uzbekistan.

23 The activities of a previous United States president provide a good example of how these connections can be put to good use. Bill and Hillary Clinton “have profited financially by using their connections to the global elite. … After leaving the White House in 2001 in self-described penury, Mr and Mrs Clinton made close to a quarter of a billion dollars” (Gary Silverman 2016).

24 The author is cognizant of the possibility that due to corrupt bureaucrats' ability to learn and adapt, the auditors could be subjected to corruption. The recommended strategy in that case would be to rotate auditors. Corrupt police officers in Nairobi leaned that accepting bribes over Mpesa (mobile money transfer system) exposes them to scrutiny. They started insisting that bribes be paid in cash (Aglionby 2016).

25 Countries vary in terms of requirements for political candidates to reveal their wealth and income either before or after elections, as well as the extent to which they allow income to escape domestic taxation by allowing it to be reported at off-shoring financial centers. Disclosure requirements in Canada are already quite elaborate; see Table 3 in Djankov et al. (2010).

26 Proposals of the previous Prime Minister Cameron to introduce the disclosure of tax returns of MPs ran into this objection. Transparency, however, is important because “secrecy is, if not its cause, then at least a necessary precondition. … Transparency is a power-reducing mechanism so it matters whose affairs are made transparent and for what purpose” (Heather Brooke, “Sunlight is the best disinfectant for democracy,” The Financial Times, 14 April 2016).

27 That is, public office holders are required to disclose the information, but that information is not released to the public.

28 Perez-Truglia (2016) finds that the same disclosure in Norway also adds to the sense of well-being of its citizens.

29 Offshore accounts become “nodes in the vast and complex set of ‘enablers’ of corruption and tax evasion around the world” (Kaufmann and Gillies 2016). On the one hand, industrialized countries appear to be the biggest facilitators of the practice of tax-avoidance, as demonstrated by the Financial Transparency Index created by the Tax Justice Network (http://www.financialsecrecyindex.-com/introduction/fsi-2015-results). On the other hand, there is evidence that cultural norms play some role in tax-avoidance behavior (DeBacker et al. 2012).

30 The Panama Papers give many more examples of legal and illegal accounts help in offshore locations.

31 By May, Afghanistan, Argentina, Bulgaria, Colombia, France, Georgia, Ghana, Italy, Malta, Mexico, Nigeria, Romania, the United Kingdom and the United States of America had committed to implementing the Open Contracting Data Standard (http://standard.open-contracting.org/latest/en/). Also see “A network map of the Open Contracting Partnership,” http://www.open-contracting.org/2016/06/09/a-network-map-of-the-open-contracting-partnership/.

32 Also see Center for Global Development (2014).

33 See note 11 above for an example of ideology-driven whistleblowing.

34 See, for example, the determination of Antoine Deltour of LuxLeaks revelations' fame (Robinson 2016).

35 This study failed to find evidence for the importance of some demographic factors like gender, age or education.

36 They cite evidence from the Ukraine that shows that, in spite of lower salaries, public employees have the same consumption levels as their private-sector counterparts: “In this case the economic efficiency losses (or gains) from corruption depend on whether the deadweight loss imposed by the bribes they collect is greater (or smaller) than the equivalent deadweight loss from taxation that would be needed to raise the revenue to pay the equivalent amount of money in salaries where corruption was eliminated” (Olken and Pande 2012, p. 14).

37 See full details in The Economist 2016; http://www.economist.com/news/finance-and-economics/21689642-theory-higher-pay-cuts-corruption-practice-opposite-happens-wages

38 See the details of the corruption of that regime in Quiroz (2013, Chapter 7).

39 See The Globe and Mail (2016) to understand the importance of difficulties associated with bid-rigging in Canada and OECD, and the importance of whistleblowers.

40 The Charbonneau Commission's approach is in sharp contrast to the recent stance of the United States Supreme Court that was summarized in note 10 above. In the words of one journalist, “The Supreme Court's decision in Citizens United marches like a zombie precedent, destroying all in its path. First the case turned the law of campaign finance into a useless corpse. Now it appears the law of political bribery is the next victim.” See Jeffrey Toobin (2016).

41 Bliss and Di Tella (1997) examine the complex relationship between corruption and competition, especially when corruption is endogenous. In this situation, however, it is reasonable to assume that the presence of more firms will help the competitive environment.

42 According to Open Contracting, “57% of foreign bribery cases prosecuted under the OECD Anti-Bribery Convention involved bribes to obtain public contracts. According to a 2013 Eurobarometer survey, more than 30% of companies participating in EU public procurement say corruption prevented them from winning a contract” http://www.open-contracting.org/why-open-contracting/.

43 See http://www.liberal.ca/openness-and-transparency/ for updates.

44 Full information about this program is outlined in WHISTLEBLOWER PROGRAM, (OSC POLICY 15-601), (Ontario Securities Commission) http://www.osc.gov.on.ca/en/SecuritiesLaw_20160714_15-601_policy-whistleblower-program.htm.

45 Chayes (2015, 2016b). Also see Burgis (2015) and Wenar (2016).

46 Nazir Karigar was the first person to be sentenced to jail under this act in 2014. Resources for the Royal Canadian Mounted Policy have since been increased (Petter Hurich, “Corruption of Foreign Public Officials: Was the Karigar Prosecution an Outlier?” http://www.thecourt.ca/2013/10/criminal-liability-for-corruption-of-foreign-public-officials-was-the-karigar-prosecution-an-outlier/).