The way forward for anti-corruption measures

Corruption – the abuse of entrusted power for private gain – is a socio-economic scourge.  

While there is evidence that over time, corruption is gradually receding, there is no magic bullet that will eliminate it. International anti-corruption activists tout some combination of anti-money laundering and anti-corruption laws, compliance frameworks, and transparency initiatives as primary means of reducing corruption.  

Whether these policies work, the widespread adoption of such laws, frameworks and initiatives has significant implications for offshore financial centers in general and Cayman in particular. Here we, as a board, offer some general thoughts on this important issue. 

Anti-corruption – the international movement and its implications 

Major jurisdictions such as the U.S. and EU are using threats of financial and legal sanctions to require offshore centers to demonstrate arduous and sustained anti-corruption efforts. Their requirements include obligations on both public and private sector organizations in such jurisdictions to rapidly implement changes to their internal standards of “ethics,” “good governance” and “transparency.”  These are not perfunctory checklists to whiz through once a year.

Ironically, the larger jurisdictions seeking to impose these requirements – whether the EU, the U.S., or elsewhere – are themselves far from squeaky clean. They do not live up to the standards they seek to impose on others. Instead, they seem to be using the banner of good governance, compliance, and transparency to create an uneven playing field, forcing a competitive disadvantage on the smaller jurisdictions.

Meanwhile, the offshore jurisdictions have little input into the design of effective measures to limit corruption. They face a practical risk of being cut off by the major players for failure to demonstrate onerous anti-money laundering and anti-corruption frameworks combined with sufficient dedicated resources for enforcement.

If offshore businesses and jurisdictions do not comply, their competitors will blacklist them. Cayman and other offshore jurisdictions cannot afford to be perceived as places where corruption is tolerated and so must be seen to be implementing these changes to laws, etc., even if so doing has little practical impact on corruption – or, worse, ends up driving corrupt practices to larger jurisdictions where they are less visible and more difficult to stamp out. This is particularly important in the financial services industry.

Consumers of financial services are the ultimate beneficiaries when there is effective enforcement of financial contracts and the rules of the game are fair and easily understood. It is therefore not surprising and quite appropriate that they should organize to promote honesty and good governance. Certain international organizations are focused on helping the private sector. One example is the International Corporate Governance Network (ICGN), an investor-led organization of governance professionals.

Its stated mission is to inspire and promote effective standards of corporate governance to advance efficient markets and economies worldwide. The majority of ICGN members are institutional investors responsible for assets under management in excess of US$18 trillion. The Global Governance Principles (4th Edition) are the ICGN’s primary standard for well-governed companies and set the framework for a work program focused around influencing public policy, informing governance dialogue and connecting peers around the world. 

As an offshore jurisdiction seeking to attract business, Cayman built a reputation of integrity from the start. Today it requires that both public and private sectors uphold the harshest standards of anti-money laundering and anti-corruption practices.

This strategy helps preserve and strengthen its positive reputation, even if some of the policies aren’t overly effective. Nonetheless, the enemies of offshore jurisdictions use tales of corruption and stolen assets to press for restrictions on financial freedom. If the offshore jurisdictions don’t engage in this debate and demonstrate that they have adequate policies to find, prosecute, and convict those who engage in corrupt activities, they may not survive the anti-competitive attacks in the long run.

A first step towards actually reducing corruption is to have clarity on instances of corruption that are illegal, with a clearly defined range of offenses, starting with undeclared interests and influence in projects. But however clearly “corruption” is defined in law, there will be instances of corruption that remain technically legal. It is therefore important to have standards that seek to go beyond legal requirements. These can vary: Participants in markets governed by extra-legal standards then choose which standards they prefer. Since corruption tends to undermine profitability, market participants will tend to favor standards that remove the most harmful forms of corruption.

Private standards and associated extra-legal sanctions, such as boycotts, work particularly well for multi-national companies. For example, Wal-Mart’s Mexican operations have drawn attention to corruption.

While corruption in private, profit-seeking companies gets much of the attention, it likely represents only the tip of the iceberg. Much more significant problems exist in nonprofit entities and in governments. Indeed, the lack of responsibility to shareholders makes governments and nonprofits particularly susceptible to corruption. Consider the recent corruption scandals involving the Fédération International de Football Association (FIFA) over the selection of Russia and Qatar for the 2018 and 2022 World Cups. 

The Cayman context

Cayman has a legal framework to combat corruption. The jurisdiction’s tool kit includes:

  1. The Cayman Islands Constitution,
  2. Framework for Fiscal Responsibility (FFR),
  3. The Mutual Legal Assistance Treaty
  4. The Public Management and Finance Law (PMFL),
  5. The Freedom of Information Law,
  6. The Anti-Corruption Law and Commission and
  7. The Standards in Public Life Commission and the related
  8. Standards in Public Life Bill promised to be debated by the Legislative Assembly in 2015.

Many of these laws are to be enforced by agencies led by people who wear at least two hats and/or are severely under-resourced. Because of the small population size and limited pool of human resources, conflicts of interest are much harder to avoid, let alone eliminate. Cayman should focus more on developing effective means of handling these problems.

One important step would be for anyone serving on government boards, working for government-owned companies and statutory authorities, or employed as civil servant, to work within a culture of transparency where their interests are declared, effectively managed and routinely updated.

The track record so far in Cayman is mixed. On the one hand, there is an apparent increasing willingness to tackle issues with parliamentarians and civil servants, with respect to unethical behavior and corruption. To date, there has been only one conviction of a public sector official.

The failure to secure convictions leads to questions of motivation and preparation, and parallels a perception that some much stronger cases are not vigorously pursued in order to protect the interests of the parties involved. By contrast with the weak enforcement of anti-corruption laws in the public sector, there has been considerable success in the private sector. In 2014 there two high-profile Cayman money laundering cases brought to court by the U.S. authorities: one with an asset management firm and another with a local businessman. As the year closed, both cases saw the defendants plead guilty.

The way forward

We believe that in the long run, critical success factors to creating a culture of excellence with best-in-class standards for corporate governance, compliance and anti-corruption will be contingent on effective, long-term education and awareness which stress individual accountability.

First, Cayman should embark on teaching ethics from elementary school all the way through university, into the workplace, civic organizations and continuing with regular public education campaigns for the wider community. Unlike other parts of the world, corruption is not endemic to Caymanian heritage and culture.

The public education and awareness campaigns must draw on the most effective of communications strategies, be credible, be age appropriate and reach varying demographic segments. The campaigns must be regularly executed and refreshed. A one-time, one-dimensional effort will fail to achieve the goal. 

Second, Cayman must expect and enforce a single standard for selecting what to pursue using the anti-corruption regime, a single standard of ethics and a single standard of accountability across the public sector. A key step in that is the provision of free, unrestricted access to information. Government information must be timely and accessible. Information about interests in and influencers of government policy, procurement and decision-making must be transparent and accessible.

The wealth, income and interests of politicians and civil servants, the heart of government, must be available for scrutiny and safeguards put in place to prevent the use and abuse of positions of power. And, we must eliminate the “blind eye” syndrome where officials take no action, either out of fear or worse, indifference.

Finally, private sector and not-for-profits must adopt similarly rigorous codes of conduct and corporate governance best practices. And they too must demonstrate the courage and commitment to sanction non-compliant behaviors – from the boardroom to the front line.

Cayman and other offshore financial centers need to exert more influence toward the global adoption of cost-effective anti-corruption measures that apply equally to large and small jurisdictions.
Offshore financial centers rely on effective systems to manage, protect and build integrity into their regulatory frameworks and the service delivery of their participating firms.

The convergence of financial crime regulation – anti-money laundering, anti-terrorist financing and anti-corruption – will support this effort in the private sector but corruption encompasses the public sector which is the foundation stone for private sector and therefore presents a significant risk if not adequately managed.

Corruption hurts everyone who depends on the integrity of people in a position of authority, whether in public or private sector. That is: everyone. A reputation of corruption, or tolerance for corruption, can erode competitive advantage and deter investors.