Corruption

Money dirtying: shining a light on how clean money turns into bribes

There’s a lot of attention to the laundering of “dirty money” – but very little about how clean money can be turned into bribes, kickbacks or payments to terrorists. Together with David Jancsics, I examined the money-dirtying strategies at the heart of one of the world’s most dramatic corruption scandals: the Lava Jato or Car Wash case. How did the multinational company Odebrecht manage to secretly channel millions in legitimately earned funds to bribe politicians and bureaucrats across the continent? Our article Turning Legally Obtained Resources into Illegal Payments: A Money Dirtying Scheme attempts to answer this question and to explore the networks of individuals and entities that made the schemes possible. Exploring the concept and practice of money dirtying could help practitioners get a more holistic view of major financial crime cases. It could also potentially lead to new ways to prevent, detect and intercept illicit financial flows. What is “money dirtying”? We use the term “money dirtying” to refer to the process by which clean, legitimate resources are turned into illicit payments used for corruption, the financing of terrorism and other illegal activities. The term was originally coined to describe the mechanisms of terrorism financing in the late 1990s and early 2000s. Following the terrorist attacks of 9/11, researchers worked to understand the financial structures that allowed Al-Qaeda to finance the attacks. We have repurposed the term to fit the field of corruption, but the underlying idea is the same. What are the typical characteristics? On the face of it, money dirtying has similar characteristics to money laundering: Complex, multi-layered schemes using redundant payments and fake contracts to make funds difficult to trace. The use of specialised professionals who can create sophisticated financial infrastructures and know all the tricks to evade detection. The use of informal actors such as halawadars or doleiros to escape regulatory radars. Often transnational, with money, resources and information shared along a cross-border network of individuals and entities. What makes it different to money laundering? The key differences lie in the purpose and the direction of the flow. Money laundering seeks to clean dirty money by reintegrating it into the legal financial system. It is a circular system, where the funds return to their point of origin. Money dirtying serves to transfer money undetected from the bribe giver to the bribe taker. It is linear. For example, in our case study, the money took the following route: In reality, it looked more like this: The Lava Jato case The Lava Jato case Operation Car Wash was a major judicial investigation launched in Brazil in 2009. Initially focused on money laundering and illegal activities linked to a car wash company, it quickly expanded into one of the largest corruption investigations in history. By the early 2010s, investigations and plea deals had exposed the intricate financial structures and corrupt management systems of the Odebrecht Group at the heart of a web of illicit payments in countries across the region. Unlike other cases, there is significant public information available about Lava Jato thanks to judicial investigations, journalistic work, academic studies and other reports. This allowed us to map and analyse the “money dirtying” network in detail. The case is also an ideal case study in advanced corruption schemes. It was large, long-running and used complex, multi-layered networks that spread across the world. Skeleton and muscles To map the complex networks of the Odebrecht Group’s money dirtying networks we looked at the data in two ways: We analysed the transactions, performing a social network analysis and looking at the “skeleton” of the network – how it was shaped, where transactions centred and how they moved. At the same time, we tried to understand the substance of the network. If you like, the muscles surrounding the skeleton. We read interviews and wiretaps, and looked at personal histories to understand the relationships between people in the network and how they operated together. We then created a coherent framework of both the “skeleton” and “muscles”. This includes a description of each role and its function within the network. So what? Paying more attention to how legitimate funds are channelled towards illegal activities can help anti-corruption practitioners to gain a more holistic view of major corruption schemes. With the increase in internal controls and regulatory scrutiny, those that engage in corruption are forced to use more sophisticated methods than just declaring bribes as “consultancy fees”, for example. A better understanding of these methods could help inform stronger internal controls and compliance systems. This focus also helps practitioners to see how some of the same methods – legal structures in offshore financial centres, shell companies, professional enablers, informal value transfer service providers for example – can be misused not only for money laundering but for other parts of a corruption scheme. The research also showcases the power of social network analysis in mapping the key individuals and entities involved in transforming clean money into illicit payments. Combined with evidence of their relations and interactions, this can create a valuable source of information for both law enforcement and the development of evidence-based strategies for targeting corrupt networks. Learn more Organisational forms of corruption networks: the Odebrecht-Toledo case Quick Guide 4: Social network analysis in combating organised crime and trafficking Research Case Study 3: Exposing the networks behind transnational corruption and money laundering schemes

How (strategic) corruption fuels insecurity by affecting power

How do corruption and security intersect? What is strategic corruption and what can we do about it? These were two fundamental questions tackled at the Countering Strategic Corruption workshop at the 2024 Basel Peace Forum. Claudia Baez Camargo, Head of Prevention, Research and Innovation at the Basel Institute on Governance, spoke at the event. Together with her colleague Saba Kassa, the team’s Deputy Head, she highlights two key ideas: Using the lens of power helps us to better understand how corruption impacts security . Corruption changes power dynamics, which in turn affect security. We need to see how corruption is a highly functional tool for those seeking not just private benefits but – in the case of strategic corruption – geopolitical goals. Power: at the heart of corruption and security issues Corruption fuels insecurity in many ways, directly and indirectly. But the big picture is that corruption affects the exercise of power by undermining it, or by strengthening it in a particular person or group’s favour. Changes in power in turn affect all forms of human security, including a country’s ability to defend itself against internal or external threats. It is useful to think of three different types of corruption: Corruption State power Implications Insecurity Endemic corruption Weakens ability to serve citizens. Erodes trust. Increases inequalities and poverty. Fuels insecurity. Erodes performance of security institutions. State capture Repressive capacities are instrumentalised. State institutions serve elites. Consolidates power in hands of political elites. Impunity is the norm. Enables discretionary and abusive control of security apparatus. Fuels radicalisation of oppressed groups. Strategic corruption State powers abused and weaponised to achieve a geopolitical goal. Funds conflict, weapons. Influences or destabilises other countries. Contributes to polarisation. Emboldens populists, authoritarian or violent groups. Endemic corruption: weakening institutions and trust Widespread and systemic corruption affects the ability of the state to serve citizens. Consider the theft of public funds earmarked for hospitals or medicines, which affects citizens' access to good health care. Consequences include higher inequality and poverty, as well as an erosion of trust in government and public institutions. This is where security risks come in. Popular protests may spur violence and conflict as tensions rise. In conflict-afflicted and fragile contexts, theft of humanitarian aid or resources dedicated to strengthening legitimate state actors and institutions can undermine the prospects for sustainable peace. A related problem is the systematic erosion of defence and security institutions. Corrupt procurement deals and embezzlement leave institutions with underpaid and underequipped staff while draining national budgets. This makes it very challenging to respond to domestic and external threats, and organised crime and terrorism can get a stronger foot in the door. For example, research in Nigeria has shown that corruption in the military affects the ability to respond effectively to the militant group Boko Haram. In other words, corruption undermines the most basic responsibility of states: protecting citizens from violence and conflict. State capture: centralising power State capture is a systemic form of corruption in which political elites, often together with economic elites, control state institutions for their narrow purposes. It is more than about siphoning off state resources with impunity. It can be about getting laws, such as procurement rules, just right for those political elites and their associates to win lucrative contracts or control valuable natural resource sectors. The unchecked ability to shape laws and direct state intuitions puts a lot of power in the hands of a few people. For example, they can instrumentalise enforcement institutions such as the police or courts to neutralise opponents and ensure impunity for their circle. All this strengthens their power base. And it shows again that corruption can be a highly functional tool. The citizens of a country suffering from state capture understand that power is exercised discretionarily and that the rules apply to some and not to others. Fear and powerlessness often close the door to challenging the situation through democratic means. Strategic corruption: a powerful geopolitical tool Strategic corruption goes beyond the kind of narrow personal benefits implied in the common definition of corruption as “the abuse of entrusted power for private gain”. Here, corruption is weaponised to help change power dynamics on the geopolitical stage. In this cross-border and global context, states can use corrupt means and divert public resources to fund their geopolitical objectives. For an in-depth case study of strategic corruption, see the Kremlin Playbook series. Looking at examples of strategic corruption again highlights the functionality of corruption. It’s used not only to gain money and control of resources but because it gives people the power to achieve their goals. That functionality goes both ways. Even in democratic contexts, politicians can use accusations of corruption to erode trust in opponents or public institutions and weaken their legitimacy. On the other hand, politicians with a strong anti-corruption platform can see success in the polls, as Guatemala and Bulgaria have recently demonstrated. What we can learn from corruption’s power and functionality The main takeaway? Looking at power and functionality helps us better understand how corruption affects security and at why strategic corruption is increasingly becoming a concern. The main lesson? That we need to fight strategic corruption by disrupting its functionality, i.e. making it less of an effective strategy for obtaining power and achieving other illicit goals. And to do that, we need to ensure that anti-corruption efforts are strategic, coordinated and effective.

Enriquecimiento ilícito – open-access book on illicit enrichment laws now available in Spanish

Versión en español aquí. We are delighted to announce that our open-access book, Illicit Enrichment: A Guide to Laws Targeting Unexplained Wealth by Andrew Dornbierer is now available in Spanish. The book explores the rapid growth of illicit enrichment unexplained wealth legislation around the world and its use to target corruption and recover illicitly obtained assets. Like the original English version, it is a peer-reviewed publication that is freely available to read, download and share at illicitenrichment.baselgovernance.org. Targeting unexplained wealth in the Spanish-speaking world Many Spanish-speaking countries have drafted and introduced illicit enrichment legislation to target corruption. These laws are particularly prevalent in South and Central America, where 25 countries have already enacted some form of this type of law. While some countries have had success using these laws – such as Argentina and Mexico – other countries seem hesitant to consistently enforce these laws. Most of these countries have never actually used their laws at all. This is a common problem throughout the world. Why? One reason is that there isn’t a significant amount of commentary and guidance regarding how these laws can be drafted, investigated, prosecuted and adjudicated. Enriquecimiento ilícito: una guía sobre las leyes que abordan los activos de procedencia inexplicable will provide much-needed guidance to Spanish-speaking law enforcement agencies throughout the Americas region. It will also provide some foundational knowledge to practitioners regarding the investigation, prosecution and adjudication of these laws. The challenge of translating concepts, laws and practice This book was translated from English into Spanish by Pantoglot, Ltda. The translation was reviewed by Sandra Comesaña of Hengeler Mueller, a leading international corporate and white-collar law firm based in Germany. Commenting on the experience, she said: Andrew Dornbierer's and the Basel Institutes's work on Illicit Enrichment is an important contribution to the international effort of detecting, sanctioning and eventually preventing corruption and other financial crimes by "going after the money". The book's practical guidance on asset recovery in more than 100 jurisdictions is an invaluable tool for practitioners from both the private and public sectors and academics alike that is now finally available in Spanish, facilitating ready access for individuals and institutions specifically from the Spanish and Latin American markets. Hengeler Mueller is grateful for having had the opportunity to contribute to the Spanish version. Hengeler Mueller regularly advises international clients in various matters involving complex questions of multi-jurisdictional asset recovery both on its own and together especially with the members of its Best Friends network of Europe's leading independent law firms. The pro-bono support for the translation review was facilitated by The Academy of Financial Crime Litigators, an independent, non-partisan global centre that shapes and advances financial crime litigation practices for the future. About the book Published in English by the Basel Institute on Governance in June 2021, Illicit Enrichment by Senior Asset Recovery Specialist Andrew Dornbierer features: Extensive analysis of jurisprudence and cases from around the world Tables, flow charts and graphics explaining key concepts Discussion of common questions and challenges Contributions from practitioners around the world, including a discussion of the introduction and evolution of Peru’s criminal illicit enrichment offence by Dr. Alcides Chinchay, a Senior Prosecutor of the Peruvian Public Prosecutor’s Office. Annex 1: A collection of laws from 103 jurisdictions, also as an online database in English Annex II: A step-by-step guide to financial investigations and source and application analyses to support illicit enrichment cases in English Illicit Enrichment was developed and published by the Basel Institute on Governance through its International Centre for Asset Recovery, with research support from the NYU School of Law. Where to find it You can find the online version in both languages at: illicitenrichment.baselgovernance.org. Re-use and re-sharing are encouraged under a Creative Commons CC BY-NC-ND 4.0 licence. The book is also available to print at cost price from Amazon worldwide.

New analysis of the Toledo-Odebrecht case illuminates the complex transnational networks behind corruption and money laundering schemes

What does the web of connections look like that underlies grand corruption and money laundering schemes and the abuse of offshore financial centres? Who are the people involved, how do they interact and what do they do? And what insights can we draw by looking at complex corruption and money laundering schemes from the perspective of social networks, rather than solely individuals? These questions are at the heart of a new analysis of the so-called Lava Jato or Odebrecht scandal that has engulfed Latin America. In Working Paper 36: Revealing the networks behind corruption and money laundering schemes , we have applied a combination of social network analysis and network ethnography to a specific nexus within this complex of cases: former Peruvian President Alejandro Toledo and the network that enabled him to launder bribes obtained from the construction giant Odebrecht through offshore jurisdictions. What do the results show? First, it shows how the illicit scheme worked, step by step, and the functions of the different individuals and clusters of individuals involved. The scheme was highly sophisticated both technologically and financially, involving complex illicit exchanges across borders and within the murky space of offshore financial infrastuctures. The interaction between the “business” pillar Odebrecht’s leadership and representatives and the “political” pillar senior public officials and other politically exposed persons was smooth and efficient, facilitated by a web of service providers and revolving around companies, offshore corporate vehicles and bank accounts. It was this “social-financial complex” of individuals and structures that enabled the beneficiaries to disconnect themselves from the corrupt acts and money laundering – not just the technical and legal loopholes that exist in offshore financial centres or even the weaknesses of international cooperation on crime and corruption. Second, the research illuminates the social norms and informal governance practices that regulated the scheme. The inner circles of the key players on both the business and the political sides acted as the first line of defence. This is common in corruption schemes and made possible by the level of proximity, trust and reciprocity between a business leader and their subordinates, or between a politically exposed person and their circle of relatives, colleagues and friends. The second line of defence is the set of knowledge, skills and social capital that service providers and financial intermediaries bring to the table. Through their services, these actors design the complex financial infrastructure that allows the illicit proceeds of corruption to be laundered through multiple layers and tangled chains until it is nearly impossible to be traced. These service providers and intermediaries, together with the financial infrastructure they design, form a multi-layered ecosystem that works efficiently thanks to a strong informal governance system. Strategic decisions on inputs, outputs and rules are centralised among the core political and business actors. Operations are decentralised and spread out among lower-level business managers or employees and among the political actors’ sprawling networks, who in turn employ service providers and financial intermediaries to carry out the work. This mix between centralisation and decentralisation results in an efficient, effective and resilient way to govern such a large, cross-border, multi-layered and complex social-financial structure – and most importantly, to keep it hidden for so long. Shifting the focus from individuals to networks The research results add a further illustration to the growing recognition that corruption is a form of collective, social behaviour that slips easily across borders and involves highly sophisticated financial strategies and transactions. The clear implication is that narrow approaches to corruption, from a national perspective and focused on individuals and their self-interested behaviours, provide an incomplete picture at best. Shifting the focus from individuals to networks through techniques such as social network analysis and network ethnography can offer valuable insights to inform anti-corruption policies, law enforcement strategies and the academic theories that underpin these. For law enforcement, this analysis illustrates how SNA and network ethnography techniques can be applied to identify key individuals and clusters, the spaces in which they operate and the criminal strategies they employ. This approach has the potential to make major investigations and prosecutions more efficient, more targeted and more likely to succeed, as it opens up new pathways and tools to break into the case and gain the information hidden within the network. For policy, the research provides further insight into some of the legislative weaknesses that allow offshore financial centres to be abused, as well as the consequence of these weaknesses for global efforts to combat corruption and other crime. Shining a light on the illicit nexus that exists between corruption and money laundering may help policymakers to close those gaps. For the academic debate, the research adds fresh empirical evidence to the study of the relation between grand corruption and money laundering. It explores key analytical and theoretical concepts that are as yet under-explored in this field, and provides a starting point for future research to illuminate these. Widening perspectives All of us who wish to find more effective ways to combat corruption and money laundering should be open to new ways to analyse corruption schemes, understand their workings and to follow the money as it flows around the world. The value of the “network” perspective is something that our wider Public Governance research demonstrates time and again in very different contexts. Learn more about the research, training and technical assistance activities of our Public Governance team and about how our International Centre for Asset Recovery helps build the capacity of partner countries to trace illicit financial flows and recover money stolen through corruption. View and download Working Paper 36: Revealing the networks behind corruption and money laundering schemes: an analysis of the Toledo–Odebrecht case using social network analysis and network ethnography.

Silence around sextortion: new report highlights need for research and policy action on gendered corruption

A new short report on gendered corruption highlights the urgent need for more research and policy action on non-monetary corruption affecting women, such as sextortion and so-called double bribery. Gendered corruption: Initial insights into sextortion and double bribery affecting female businesswomen in Malawi offers an initial insight into sexual corruption based on interviews with 19 businesswomen in Malawi. Part of a wider research project into procurement corruption, the interviews aimed to explore the extent of gendered corruption as a coercive form of social exchange, as well as the role of informal corrupt networks in magnifying gender-specific inequalities. Though based on a small sample in one particular context, the findings indicate that more research into this topic is urgently needed globally with a view to mainstreaming sexual corruption into anti-corruption programming. Initial findings indicate that: Sextortion, forced sexual favours, "double bribery" and other forms of sexual corruption are perceived to be widespread in Malawi. Women's risk of being subjected to sexual corruption increases in informal network settings, such as those in which business takes place. Socio-economic factors and gender-imbalanced power dynamics play an important role in enabling sexual corruption to take place with impunity. Trustworthy reporting and support mechanisms for sexual corruption are said to be lacking. Existing female-only business self-help groups could provide a strong base for enabling women to address issues of sexual corruption and related gendered violence. Overall, there is a great need for more research and policy attention globally to gendered corruption and related issues that still remain – tragically – hidden from view or considered as normal. Read the report.

When You Have Corrupt Friends Abroad: The Impact of Strategic Corruption on Sudan’s Democratic Collapse