Global Capitalism, Trust and Accountability Conference: Why Trustworthy Governments are Essential

Key Concepts

• Impersonal Rules vs. Identity Rules: The shift from a system where ruling coalitions maintain power through favors and special rules (identity rules) to a system governed by rules that treat everyone or broad categories of people the same (impersonal rules).
• Kleptocracy: A government or state ruled by thieves, especially those in positions of power.
• Rule of Law: The principle that all people and institutions are subject to and accountable to law that is fairly applied and enforced; the principle of government by law.
• Enforcement: The act of compelling observance of or compliance with a law, rule, or obligation.
• Corruption: Dishonest or fraudulent conduct by those in power, typically involving bribery.
• Financial Market Development: The process of improving the efficiency, stability, and accessibility of financial markets.
• Regulatory Arbitrage: The practice of exploiting differences in regulations across jurisdictions to gain a competitive advantage.
• FCPA (Foreign Corrupt Practices Act): A United States federal law that prohibits U.S. citizens and entities from bribing foreign government officials to benefit their business interests.
• Unexplained Wealth Order (UWO): A court order requiring a person to explain the source of assets that appear to be disproportionate to their known income.

Capitalism and Democracy: The Role of Impersonal Rules

• Political Stability and Democracy: The most democratic nations are politically stable, while autocracies are less so. Countries transitioning to democracy are the most unstable, often reverting to autocracy.
• Transition to Impersonal Rules: Stable democracies have shifted from identity rules to impersonal rules, fostering economic and political stability.
• Identity Rules and Instability: Identity rules hinder economic development by creating barriers to resource allocation and fuel factionalism, leading to political instability.
• Elections and Factionalism: Elections introduce randomness, incentivizing coalitions to shower resources on select factions, excluding others and fostering discontent.
• The US Example: State constitutional changes in the mid-to-late 19th century mandated general laws, barring special legislation and promoting a more competitive economy and less factionalized politics.
• Conditions for Credible Change: A well-functioning court system, a competitive economy, and long-lived political parties are crucial for sustaining impersonal rules.
• Weaknesses Today: Economic concentration and the temptation of political parties to subvert impersonal rules pose challenges to the stability of democratic systems.
• Interest Groups and Polarization: Impersonal rules stimulate interest group formation, leading to parties becoming more similar and moving to the center, leaving fringe groups feeling excluded and causing polarization.

Dysfunctional Court Systems and Financial Market Development: The Case of India

• Delays in India's Judicial System: India faces significant delays in its judicial system, with approximately 30 million pending cases and the Supreme Court having 30,000 cases scheduled for hearings.
• Consequences of Delays: Delays weaken deterrence, increase frivolous litigation, and delay access to justice.
• Impact on Debt Markets: Delays hobble debt markets by making collateral and fixed interest less valuable, severely impacting infrastructure debt and home mortgage markets.
• Home Mortgage Market Workaround: Banks used bounced check laws to enforce mortgage payments, leading to a surge in bounced check cases (4.8 million) and predictable extortionary behavior by the police.
• Equity Market Development: Delays in enforcing investor protection rights hindered equity market development until 1991. Litigation is often brought to obtain interim orders, reversing the burden of delay but worsening accuracy.
• Costly Workarounds: While workarounds can lead to market development, they are extremely costly.
• Addressing Delays: Technology and AI can help with case management and screening cases, but vested interests benefit from delays, making reform difficult.
• AI Implementation: AI models are being used to analyze case law and identify factors correlating with successful cases, leading to a reduction in filed cases and improved win rates for the government in tax departments.

The Evolving International Dimensions of Countering Kleptocracy

• Transnational Connectivity of Corruption: Corruption is not confined within national borders but involves a global network of actors and service providers.
• The Role of Intermediaries: Western-based intermediaries, such as accounting firms, banks, and law firms, offer legal services that facilitate corruption.
• Destination Havens: Corrupt individuals seek safe havens where property rights are protected, often investing in luxury real estate and engaging in philanthropic activities to enhance their reputation.
• Evolution of Intermediaries: Intermediaries have evolved from individuals like James Gifin to global accounting firms and banks, making it harder to trace corrupt transactions.
• London's Role: London offers a wealth of services that facilitate kleptocracy, with limited precautions and enforcement capacity.
• Unexplained Wealth Orders (UWOs): UWOs can be used to investigate the source of wealth, but their effectiveness depends on cooperation from the country of origin.
• Foreign Policy and Corruption: The US has shifted between prioritizing foreign policy and anti-corruption efforts, with the Ukraine war fusing geopolitical and anti-corruption work.
• Erosion of Anti-Corruption Norms: The pause on FCPA enforcement, Treasury's non-enforcement of the CTA, and the introduction of golden card programs raise concerns about the survival of anti-corruption norms.
• Golden Passport Programs: The European Parliament views golden passport programs as vehicles for corruption, money laundering, security threats, and tax avoidance.

Commentary on Enforcement in the International Anti-Corruption Space

• Private Enforcement: Article 35 of the UN Convention Against Corruption requires state parties to allow individuals injured by corruption to file lawsuits.
• Patching Defective Institutions: Workarounds can be used to address defective institutions, such as physically removing corrupt employees.
• Citizen Enforcement: Citizens can monitor violations of bright-line rules, but it is difficult to detect bribery.
• International Actors: The IMF and World Bank can impose conditions related to corruption as part of bailout loans.
• OECD Anti-Bribery Convention: The OECD anti-bribery convention monitors compliance among member countries, but its effectiveness is limited.
• Norm Changes: The Foreign Corrupt Practices Act (FCPA) and vigorous enforcement by the US have helped to promote norm changes.
• Focus on Individuals: Controlling transnational capitalism requires focusing on the individuals within companies, not just the companies themselves.
• Attorney-Client Privilege: The American Bar Association has resisted efforts to waive attorney-client privilege in cases of corporate wrongdoing.

Discussion and Potential Solutions

• Technology and AI: Technology and AI can be used to improve case management and screen cases, but incentives need to be aligned.
• Enablers Act: Legislation to expand the responsibilities of service professionals to conduct due diligence and flag illegal activities has been proposed.
• Professional Associations: Normative change is needed within professional associations to prioritize ethical behavior over privacy.
• Natural Experiments: Stinging operations and experimental settings can be used to catch individuals and companies in the act of violating rules and obligations.
• Crisis Moments: Crisis moments can be used to stigmatize the servicing of corrupt officials and oligarchs.
• Distribution of Income: Addressing income inequality and the needs of those left out is crucial for preventing polarization.
• Money in Politics: Reducing the influence of money in politics is essential for promoting a more equitable system.
• Accountability: Prioritizing justice, deterrence, accountability, and normative change is important for addressing corruption.
• Civil Society: Supporting civil society groups can help to promote transparency and accountability.

Synthesis/Conclusion

The panel discussion highlights the complex and multifaceted nature of corruption, emphasizing the importance of impersonal rules, effective enforcement, and international cooperation. The discussion underscores the challenges of addressing corruption in both developing and developed countries, as well as the need for innovative solutions, such as technology and AI, and a focus on individual accountability. The panel also raises concerns about the erosion of anti-corruption norms and the need to prioritize ethical behavior and social justice.