Kai Pfaffenbach/ Courtesy Reuters Graffiti on the fence surrounding the construction site of the new European Central Bank headquarters in Frankfurt, October 2013.

Grappling With Graft

How to Combat the Growing Corruption Epidemic

Corruption is one of the world’s hottest topics. Four decades ago, only about 25 to 30 English-language books on the issue appeared every year; that number increased to more than 400 today. A Google search for the word “corruption” produces more than 45.7 million results, compared with just 26.4 million for “terrorism.” The Corruption Perceptions Index, an annual ranking published by the watchdog group Transparency Internatio­nal, has become one of the world’s most cited reference sources. Yet despite all this attention, no adequate solutions to the problem have come to light.

Meanwhile, corruption has become a major threat to the global economic order. It wreaks havoc on the societies of developing countries, fuels social unrest and violence, and increasingly undermines the stability and security of the West. 

Stopping this epidemic requires a unified global response, led by the foremost developed countries, including the United States and the EU member states This campaign should follow three broad steps. First, Western policymakers must redefine the challenge by clearly distinguishing among different levels of fraud and identifying target areas for intervention. Second, a new international anticorruption pact must localize the problem and prevent its further spread. And third, countries shunning the pact must face financial isolation, while anticorruption movements within them receive international support. Carrying out these measures could go a long way toward stamping out the threat -- a result that would amount to one of the most significant achievements of the twenty-first century.

CALLING GRAFT BY ITS NAME

The first step in fighting a centuries-old problem is defining it better. The commonly understood definition of corruption -- using an official position for personal benefit -- is too broad for the international community to make meaningful headway. There will always be individuals who use their access to administrative and financial resources to pursue self-enrichment. Containing the problem requires pinning it down further by introducing a crucial distinction between corruption and bribery.

Bribery is mostly a low-level phenomenon, neither systemic nor organized. People who collect bribes -- from policemen and clerks to tea­chers and doctors -- do not act within organized networks and wield little influence over broader societal institutions. By contrast, corruption is a high-level systemic phenomenon and is vastly more destructive. Individuals involved in corruption -- politicians, senior bureaucrats, and regional and local administrators -- not only abuse the rules but set them. In an example of the first case, a bribe mediates the relationship between an ordinary citizen and a rank-and-file official. In the second, a powerful bureaucrat receives money from a business leader in exchange for preferential treatment. 

Another difference is where the money ultimately ends up. Although bribery sometimes occurs on an enormous scale, the money generally stays in the local economy. Bribe takers spend it on cars and houses, for example, or on their children’s education. However immoral the act of bribery is in itself, in a purely economic sense it often simply redistributes wealth inside a nation. This contrasts with high-level corruption, which often involves moving and parking vast sums of money abroad, enabling officials from poor economies to enjoy a life of luxury in the West. 

As a result, corruption inflicts double damage on societies. On the one hand, it continuously erodes already weak governance, as corrupt officials manipulate the legal system in favor of themselves and other elites. On the other hand, it drains away critical resources needed for economic development.

The world’s focus must therefore be on fi­g­h­ting corrup­tion, not bribery. Making this distinction would help in concentrating resources where they can have the most impact and not wasting them on less meaningful battles. At the same time, any country that does redouble its efforts to combat corruption should consider significantly relaxing the punishment for low-level bribery. Bribe taking could even be reclassified as an administrative misdemeanor rather than a criminal act. 

THE NEW OLD PROBLEM

Contemporary corruption differs from its historical forms above all in its magnitude and geographic impact. In the late nineteenth century, corruption flourished in major Western countries, including the United States. It took a century to curb it, but today these areas, with a few reservations, have succeeded in reining in the practice. The center of the epidemic has since shifted to developing economies, where high social inequality and weak governance fuel the ruling elites’ desire to enrich themselves at any cost. A slew of Western legislation, including the 1977 U.S. Foreign Corrupt Practices Act, reflected this shift, as policymakers sought to block Western companies from adopting the crooked practices prevalent in their new markets. 

By the early 1990s, several autocratic rulers in the developing world -- such as Su­harto in Indonesia and Mobutu Sese Seko in Zaire (currently the Democratic Republic of the Congo) -- had amassed personal fortunes in excess of $5 billion. Market reforms often only accelerated the trend. In China, for example, the assets recently seized from the family and associates of just one former senior official, Zhou Yongkang, amounted to $14.5 billion. And in today’s Russia, the annual proceeds of corruption are estimated to reach $300 billion, or 16 percent of GDP. The net transfers from the developing to the developed countries stood at $1 trillion in 2010. 

These developments call for a resolute response from the West. Although the epidemic harms developing countries the most, it increasingly threatens the stability of Western economies through two main channels. 

First, large-scale corruption in the developing world is undermining Western institutions from within. In fact, a large part of the reason fraud has grown so pervasive in developing economies is that Western countries allow thieving officials and their family members to hide their loot in local bank accounts, maintain numerous local offshore firms, and resolve any business disputes in London and New York courts. The past four decades have produced a large-scale Western industry -- employing asset managers, bankers, lawyers, and realtors -- dedicated to laundering dirty foreign money and lobbying for laws that make its activities harder to prosecute. As a result, the West is rapidly losing its immunity to corrupt practices, a vulnerability that erodes governance and opens the way for crises.

Second, corruption is fueling instability on the Western world’s periphery that increasingly threatens to spill over. Unbridled government corruption feeds social conflict, making revolt the only option available to disadvantaged populations. In recent years, the actions of kleptocratic rulers have provoked riots around the world and, in the cases of Egypt and Ukraine, brought instability to Europe’s doorstep. Uk­rai­ne’s example is especially revealing. Before the popular uprising ousted President Viktor Yanukovych, proceeds of corruption amounted to a staggering 10 percent of GDP by some estimates. Yanukovych then fled to Russia with $11 billion in cash and reportedly used this money to stoke separatism in Ukraine’s east. It’s past time for the EU and the United States to form a unified front against the root cause of such instability and violence.

A NEW GLOBAL ENFORCER

Only unified global action can halt the corruption contagion. The centerpiece of this effort should be a new international pact -- let’s call it the universal anticorruption convention. To be effective, this pact must be negotiated and signed by the leading developed and developing economies. It would clearly define the crime of corruption, codify the principles of good governance, and formulate protocols for combating money laundering. It would also establish a supranational governing body, dedicated investigative and police forces, and a specialized court (similar to the International Criminal Court) tasked with enforcing the new rules.

To succeed, this project must draw on the support of countries that embody the principles of good governance, including those that perform best on the Corruption Perceptions Index. Among the 20 countries least affected by corruption are Australia, Canada, 11 European states (eight of them members of the EU), Japan, New Zealand, and the United States. These economies account for 57 percent of the world’s GDP, almost 70 percent of international trade, and a significant portion of the world’s foreign direct investment. They have sufficient influence to get the initiative off the ground.

The pact’s central objective, however, should not be to discriminate against smaller economies. Rather, it would pursue a purely defensive purpose: separating the countries that have managed to rein in corruption from the worst-affected states on the outside. The convention would have no direct means of forcing nonmembers to govern themselves a certain way, but it would send a powerful signal that the rest of the world now follows new rules. 

Openness to any would-be member must be the convention’s defining feature. Any country, from Uzbekistan to Zimbabwe, should be able to sign on, as long as it commits to the pact’s requirements: combating fraud, allowing international investigators to act freely on its territory, and permitting international prosecution of its citizens for corruption crimes. In return, every acceding country would receive voting rights in all related supranational bodies and full support of the pact’s investigative and judici­al authorities, which its nationals would become free to join. 

BEATING BACK THE EPIDEMIC

Once adopted, the convention would divide the world’s countries into two camps: the signatories and the outsiders. The signatories would radically curb their financial ties to the most corruption-prone countries, in a manner similar to the developed world’s sanctions on apartheid-era South Africa. They would then identify all assets control­led on their territories by the subjects of nonmember states (both individuals and companies), storing this information in a unified open database. The convention’s governing body would set a deadline for monetizing and repatriating these assets. Failure to do so would lead to their seizure and placement in a special fund es­tablished for this purpose.

As a result, financial interaction with nonmembers would become restricted to trade-related transactions. Citizens of nonmember states would be prohibited from opening accounts in member countries’ banks, establishing companies on their territories, and acquiring local real estate.

To be sure, such measures are certain to spark resistance within the signatory states themselves. Legal and banking syndi­ca­tes that specialize in laundering dirty money would fight to maintain their sources of income; developers and property brokers would decry the inevitable drop in real estate prices. But government budgets would benefit from the eradication of shady financial deals and offshore tax schemes that drain revenues, which would partially offset their losses losses.

Corrupt power holders around the world, of course, would resist signing the charter. But they would soon feel its sting, finding themselves barred from stashing their money abroad or enjoying foreign safe havens if they come under fire at home. They would also face pressure from the local business communities. At present, business elites in many corruption-prone countries support the ruling regimes, preferring to sort out their problems with officials on a personal, case-by-case basis. The West’s punitive measures would fracture these alliances, sparking powerful domestic movements in favor of joining the pact. These forces would ultimately encourage the development of legal systems and independent judiciaries -- or lead to the governments’ ouster, as happened in Ukraine. 

Another potential measure -- curtailing the West’s social openness -- could help mobilize the rank-and-file citizens in the developing world by showing them what they have to lose. At the moment, the West welcomes legions of young, independent people from developing countries who prefer to emigrate rather than battle with kleptocrats. By doing so, the West depletes these societies of valuable human capital and deprives them of a cha­n­ce for change. As a historical analogy, consider the Soviet Union, which collapsed, in part, because those who were discontented with the regime had no freedom to leave. Today, however, such mass migration is possible -- leaving behind stronger bases of support for corrupt regimes. Limiting this freedom of movement, while extending support to domestic anticorruption campaigns, can spur systemic change.

Implementing this pact would not be an easy task -- but it would be a real chance to beat back the global epidemic threatening the very foundation of Western societies. Western countries must demonstrate that no government that abuses power at home could be regarded as a respected partner abroad. If not, the global scourge of corruption might soon wipe out the legal and social achievements that make the world’s leading economies the beacons of law and progress.

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