Look Out, Corruption Ahead

Independent oversight is the bane of corrupt networks everywhere. Without it, they can inflict incalculable damage. In Afghanistan in 2011, the governor of the central bank had to flee for his life after asking foreign counterparts to freeze the assets of well-connected Afghans suspected of looting the country’s biggest financial institution. Guatemalan President Jimmy Morales managed in 2018 to shutter a respected special-investigations body, the International Commission Against Impunity in Guatemala, whose efforts had uncovered an extensive customs-fraud and campaign-financing scheme that included drug traffickers, businessmen, and the country’s political leaders. President Donald Trump’s recent removal of Glenn Fine, chosen by fellow inspectors general to head the Pandemic Response Accountability Committee, is of a piece with such examples. Patterns of corruption flash more insistently each day, like the blinking of an engine-malfunction light.

In a dozen systemically corrupt countries I’ve lived in or studied, sophisticated networks have infiltrated or essentially replaced the government. These webs cross institutional, even sectoral, boundaries. As in Guatemala, they may include outright criminals. They link politicians,  judges, and other officials with top businessmen. Sometimes members switch positions—what we in the U.S. call the revolving door. Or they may wear more than one hat, serving strategic government functions while also running businesses. Often built around a core of close family members, such as former Afghan President Hamid Karzai and his brothers, or Azerbaijan’s ruling couple and their children, these structures include classmates, colleagues, fellow fighters in the last civil war, or partners in opportunistic business ventures. In Nigeria, according to a former housekeeper for the oil company Total, whom I interviewed in 2015, politicians who hurled insults at each other by day met by night to discuss divvying up oil rights.

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Unstructured, even unruly, though these networks may be, they are highly successful. But not at governing, for governing is not their objective. Their objective is to enrich their members. Government functions, such as ensuring that hospitals are stocked with basic supplies, falter. Great sums of money, provided for post-crisis rebuilding or borrowed from international financial institutions, flow to insiders, while ordinary people needlessly suffer and die.

Mechanisms intended to defend citizens from such larceny are disabled. In some countries, they may simply be abolished, as were the CICIG and its Honduran counterpart, the Mission to Support the Fight Against Corruption and Impunity in Honduras. If that solution is too blatant, audit bodies, inspectorates, or other watchdogs may be understaffed or starved of funds, or handed over to network loyalists.

The point is to ensure that network members are left in peace as they perform their duties—duties to the network, that is. These fall into two categories. One is rewriting the rules of the political and economic game to favor the networks and their ongoing dominance: to turn what ordinary people consider corruption into “business as usual.” Party politics, often just a cover for the rivalry between competing corrupt networks, may serve to cripple the public’s ability to protest. As a Honduran villager put it to me in 2016, “None of our political parties really represents us. They just come in here and divide people. Their aim is to pit the people against each other.”

The other duty that corrupt government officials perform is to steer public moneys to their fellow network members. This is a critical feature of such systems. It is wrong to think—as some Americans do—that corruption happens only when functionaries fill their own pockets. Corrupt networks are bound together by a dense tissue of reciprocal favors, sometimes only repaid years later. The anthropologist Janine Wedel has spent much of her career studying such dynamics, especially in the former Communist bloc. “Individuals,” she emphasized in an article for the journal Trends in Organized Crime, “are acting as part of a group whose members’ agendas and activities are interdependent.”

An emergency offers unparalleled opportunities for the coordinated looting of public coffers that feeds such networks. Life is upended; emotions run high. In the scramble, tested procedures are ignored and structures are disorganized. Exhausted decision makers, pressured to “do something,” miss crucial details, even as quantities of cash are injected into the chaos.

As the United States mobilizes unprecedented resources to address the coronavirus pandemic and the attendant recession, the Trumps and allied officials and business leaders—like corrupt networks in countries most Americans once assumed we could never resemble—could attempt to exploit the crisis, deepening and prolonging the damage caused by the pandemic itself.

Trump’s son-in-law, Jared Kushner, who is playing a central—and ill-defined—role coordinating the federal government’s pandemic mobilization, has a history of profiting from dire situations. In the wake of the Great Recession, as Aaron Glantz alleges in his recent book Homewreckers, Kushner snapped up thousands of rental properties in Rust Belt cities at half their value, then ran them like modern-day tenement houses. Maryland’s attorney general has taken entities controlled by Kushner to court over similar claims in Baltimore.

Treasury Secretary Steven Mnuchin, who will be steering much of the bailout money, got his start at Goldman Sachs, trading the exotic derivatives that gave us the Great Recession. In the midst of that crisis, after he left Goldman, Mnuchin bought out one of the largest mortgage originators, with substantial federal assistance, and then joined the ranks of the robo-foreclosers. His bank was placed under a consent order for its abusive practices.

Read: Mnuchin’s bank was reprimanded by the same department he may lead

Senate Majority Leader Mitch McConnell, who pushed for a rescue package with no guardrails at all, for years refused to bring up for a vote a bill that would use coal-mine cleanup funds to shore up the pensions of retired miners. Before he finally caved, he steered $4 million of that same money to a project for an aluminum plant owned partly by Russian oligarchs. Those oligarchs had directed more than a million dollars to a campaign fund linked to McConnell.

Trump, of course, has profited at taxpayer expense in multiple ways: His resorts have hosted lavish official functions and unusual visits by government entities. His businesses have enjoyed the patronage of people, abroad and here at home, seeking his favor, as well as such other benefits as the waiver of environmental laws for foreign resorts. Lawsuits charging that Trump violated a central anti-corruption provision of the U.S. Constitution—the prohibition on receiving items of value from U.S.- or foreign-government officials or their agents—are making their way through the courts.

In such a context, aggressive enforcement and accountability is imperative for coronavirus relief measures, including the $2 trillion made available by Congress and the Federal Reserve’s power to spend unlimited money borrowed in part through the sale of Treasury bonds. Democrats were right to reject any rescue bill bare of oversight, even as the magnitude of the crisis devastating their constituents screamed for action.

But the provisions they did force into the CARES Act seem almost quaint, like artifacts of some once upon a time when those in power may have respected norms of good governance: a special inspector’s office; an accountability committee made up of permanent inspectors general from relevant agencies, which can subpoena nongovernment witnesses and write reports but not punish; and a congressional commission. None of these bodies is empowered to oversee the Fed’s independent spending. Nor is any yet up and running. And there is no legal deadline for appointing their members. Conditions explicitly attached to the bulk of the CARES loans are weak: a ban on stock buybacks, executive-pay limits, and moratoria on layoffs and evictions only last a year, and can be waived at Mnuchin’s discretion.

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Though seen as a neutral institution, the Fed, charged with moving at least a quarter of the CARES money beyond the trillions it can mobilize independently, is neither set up nor inclined to require compliance. As the former deputy secretary of Treasury and Fed governor Sarah Bloom Raskin put it to me in an email, “The powers being consolidated within the Fed and within Treasury are extraordinary.”

For example, the Fed can lend directly to corporations, as well as guarantee bank loans to them; it can buy unlimited amounts of low-grade exotic assets like commercial mortgage-backed securities, off-limits even in 2008. It will be free to choose which assets to buy and from whom, and what to accept as collateral. Treasury and the Fed will pick certain firms to help do the actual buying, a task rife with potential conflicts of interest. All these decisions can be made in secret.

“Only with a pandemic could such powers have been transferred without meaningful accountability,” Raskin wrote. And only vigorous oversight and enforcement could limit the damage.

Yet even the staid provisions that Democrats forced into the law were immediately repudiated. First, in a signing statement laden with legalese, Trump declared his intention to treat most of the provisions as “non-binding.” He appointed the White House insider Brian Miller—who was among those who rebuffed congressional subpoenas and requests for information during the Trump impeachment inquiry—as special inspector general. Then came the sidelining of the chief independent coronavirus watchdog. These are the moves I would have expected—from a president of Afghanistan or Honduras.

While it is too early to know how much fraud and self-dealing will transpire—and hamstrung oversight means we may never know—the conditions are ideal for malfeasance. There are already concerns that critical medical equipment may have been routed to Trump favorites. Financial-industry insiders have been lobbying Kushner for even easier access to relief money.

Read: How the pandemic will end

The 2008 bailout’s weak safeguards resulted in an epidemic of housing foreclosures, an accelerated collapse of the middle class, and gaping inequality. A handful of interconnected private investors were left in possession of much of the housing stock while countless poor people were thrust into homelessness. The almost inevitable outcome this time around will be a further transfer of wealth and power into the hands of networked insiders, while anonymous, underpaid medical personnel and cashiers and janitors save the nation, and the rest of us struggle to find our feet.

As sick as we are of Washington acrimony, now is the time to pick a fight. At the very least, the terms of a 2008 bill forbidding removal of inspectors general except for specified cause must become law. Congress and the public deserve to know the names of the beneficiaries of stock purchases and loans, as well as the invoices that private firms submit to the Fed for services rendered. Conditions placed on future tranches of money must be clear and enforceable, including clawback provisions for loans that prove inappropriate. A law to require the Fed to spell out its criteria for securities purchases would be a step toward bringing that body under democratic control. With the various oversight bodies still theoretical, the House of Representatives should urgently hire additional staff and launch hearings—virtual, for now—on who is receiving this money and under what conditions. When the viral pathogen is safely in check, we must embark on a comprehensive overhaul of this country’s anti-corruption safeguards and ethical standards.

Crises are opportunities. The outcome depends on who seizes them.