BEEFING UP ASSET RECOVERY FOR THE 21ST-CENTURY:

LEGAL CHALLENGES TO NEW CONFISCATION TYPOLOGIES IN LATIN AMERICA

Beefing up Asset
STEFAN RecoveryBASEL
MBIYAVANGA, for theINSTITUTE
21st-Century:
ON GOVERNANCE
Legal Challenges to new confiscation typologies in Latin America
STEFAN MBIYAVANGA, BASEL INSTITUTE ON GOVERNANCE

What this research is about:

Many Latin American countries are enacting new laws to facilitate the confiscation of illicit objects and assets. In Peru, for instance, the «Extinción de Dominio»
allows confiscation outside of criminal proceedings and without requiring a criminal conviction (see left box). However, the aggressive nature of the Extinción de
Dominio might lead to problems where the Latin American country needs to request mutual legal assistance (MLA) to achieve the confiscation of assets located
in a foreign country. In Europe, where many of the tainted Latin American assets have traditionally reemerged, MLA will generally only be provided
unconditionally, if internationally guaranteed rights and procedural guarantees are respected (see right box). This research looks at whether the Extinción de
Dominio complies with the international due process and fundamental rights framework.

The new Latin American confiscation
typology: Extinción de Dominio
The Extinción de Dominio primarily
foresees confiscation in the following
scenarios:
a) Goods constituting the object,
instrument, proceeds or profits of
the commission of illicit activities
b) Goods that constitute an
unjustified increase in the assets
of a natural or legal person, for
which there are no elements that
reasonably allow them to be
considered to hail from licit
activities
c) Goods of lawful origin that have
been used or are intended to be
used to conceal, cover up, or
intermingle with unlawful assets
d) […]
See for example Art. 7.1. Decreto
legislativo sobre extinción de dominio
no. 1373 of 31. January 2019 (Peru)
The research contrasts the Extinción
de Dominio with the following
guarantees of the European
Convention on Human Rights (ECHR),
which need to be complied with in
order to ensure access to MLA in
Europe.
- Right to a fair trial (Art. 6.1 ECHR)
- Presumption of Innocence (6.2
ECHR)
- Legality principle (Art. 7 ECHR)
- Right to property (Art. 1 Prot. 1
ECHR)
Research findings
- While the Extinción de Dominio is formally independent
from any criminal procedure, it contains a number of
provisions which are arguably criminal charges [especially
confiscation pursuant to c) in the box on the left].
- However, the asset holder is not awarded the full panoply
of rights and protections for defendants in criminal
proceedings guaranteed by international law.
- Therefore frictions are likely to appear where the
Extinción de Dominio action targets assets located
abroad and depends on MLA.
 HOW SOCIAL MOVEMENTS TRANSFORM PUBLIC TOLERANCE OF
CORRUPTION: AN AUTOPSY OF THE SPANISH INDIGNADOS MOVEMENT
HOW SOCIAL MOVEMENTS TRANSFORM PUBLIC TOLERANCE OF
CORRUPTION: AN AUTOPSY OF THE SPANISH INDIGNADOS MOVEMENT
ELISA ELLIOTT ALONSO

ELISA ELLIOTT ALONSO

QUESTIONS: CONTEXT: economic crisis of

2008
- How did the 15M movement change
perceptions and tolerance towards Unemployment, increased inequality
corruption in Spain? and poverty and austerity measures
lead to massive demonstrations
- What overarching lessons can be
learned from this specific case study in
the global fight against corruption?

DATA: Spike in concern about political corruption, even after the economic situation improved
70
15M
60

50

40

30

20

10

0
Se 1

Se 4
Ju 0 2

Fe 0 5

Se 8
M 97
D 99
Ju 5

Ju 3

Ju 0 6

Fe 0 9

Se 2
O 5

Ju 7

Ju 10

Fe 1 3

Se 6
O 9

Ju 1

Ju 1 4

Fe 1 7
Ja 88
N 95

N 02

O 3

Ju 5

Ju 18
Fe 01

M 05
M 95

Ap 00

M 02

Ja 04

N 06

O 17
Ap 3

M 09
M 06

Ja 08

N 10
Ap 7

M 13
D -03

M 10

Ja 12

N 14
Ap 1

M 17
D -07

M 14

Ja 16

N 18
Ap 15
D 1

8
D 5
-0

-0

-1
l -1

-1
l -1
r-0

r-0

r-0
-8

-0

r-1
-0

-0

r-1
-0

-1

-1

-1
n-
n-

n-
p-

n-
-

n-
-

p-

n-

n-
-

p-

n-

n-
-

p-

n-

n-
-

p-
-
b-

-
-
-

b-

-
b-

-
b-

-
b-
-
ct
ov

ec

ov

ec

ct
ov

ec

ct
ov

ec

ct
ov

ec

ov
ar
ar
ay

ar

ay

ar
l

ay

ar
l

ay

ar

ay
M

Corruption and fraud Politicians in general, political parties and politics The Economy

CONCLUSIONS:

I. Collective moral development can occur without III. Underlying change in perceptions and tolerance towards
resulting in increased disaffection. corruption may take time to surface and consolidate itself.

Change in political culture IV. Crisis opportunities are not enough: honest political agents
conscious of the importance of integrity also need to be
II. Social movements as a positive way of bringing present to promote real change. Factor still to be confirmed.
about an active and enlightened citizenry, essential
for integrity reform. V. Technology has the potential of placing ordinary citizens at the
centre of public affairs.
 Is there a role for blockchain to enhance
IS THERE A ROLE FOR BLOCKCHAIN TO ENHANCE PUBLIC
PROCUREMENT INTEGRITY?
Call for bid
•Tender docs
•Evaluation
criteria public procurement integrity?
CHAN YANG
Chan Yang

Demand Call for Bidding Bid Contract Order &

Context and problems planning bids evaluation award payment
Procurement
steps
Public procurement is one of government
activities most prone to corruption.
Digital flows
All steps of the process can be targeted,
potentially implicating any party involved.
Incompetence or lack of training further
Market analysis Standard tender Bid proposal1 Results1 Contract with Purchase
increases the risk of corruption. Budget & documents (incl. Bid proposal2 Results2 winning bid orders &
procurement terms & conditions, Bid proposaln Resultsn invoices
Some common forms of corruption planning tech requirements,
evaluation criteria) (Confidential) (Confidential)
Document tampering & fraud
Biased tender specification
Blockchain
Biased bid evaluation records
(hashed data)

Blockchain’s key attributes may

Open data portal
mitigate certain integrity risks in (full document with hash
Budget
planning
Tender
doc
Evaluation
results &
Inspection
Audits
Contract
public procurement displayed)

1
Strengthen record integrity
Prevent document tampering
better than regular e-procurement
systems
Provide aggregate
2 to end procurement corruption at the
traceability
De-silo fragmented e-procurement
systems, combine with big data
analytics for more accurate pricing
estimate and tender specification
development
Reduce the need for a
3 Institutional barriers to adoption may
trusted central entity
Open up bid evaluation to reduce
risk of biased decision-making
However, there is no free lunch
Record integrity is not absolute &
depends on the choice of consensus
model + system architecture
“Security-scalability-decentralisation
trilemma”: the most secure & “honest”
blockchain may be the slowest, and
probably quite costly
Digital trust does not replace physical
trust (dishonest data)
be high if the new system dilutes the
state’s decision-making power
Conclusions & recommendations
Given blockchain’s current technical
trade-offs, its role for integrity may be
desirable if decision-makers are willing
cost of relinquishing some efficiency &
decision-making power
Blockchain is, however, powerless if
users do not first comply with proper
procurement practices
Combatting corruption needs a holistic
approach; human agency is always
needed to proactively inspect, audit &
enforce accountability
 INTERNATIONAL SLAPPS AGAINST POLICE POWERS: HOW INVESTMENT
International SLAPPs Against Police Powers: How Investment Arbitration
ARBITRATION IMPOSES A RISK ON FOREIGN BRIBERY INVESTIGATIONS
Imposes a Risk on Foreign Bribery Investigations
David Chriki DAVID CHRIKI

Investment arbitration: Possible
Implications on the Regulatory
Space of Countries
International investment agreements (IIAs) are treaties between two
or more countries, designed to protect foreign investors. Almost all
IIAs include obligations to refrain from discriminating foreign
investors; prohibition on the expropriation of property of foreign
investors for an improper purpose without proper compensation; and
granting foreign investors fair and equitable treatment. Finally,
almost all IIAs include investor-state dispute settlement (ISDS)
mechanisms. These mechanisms allow foreign investors of one party
to the agreement to submit arbitration claims against the other party,
due to potential violations of the IIA.
One of the most pressing issues regarding the international
investment legal regime is the concern for a regulatory chill:
governments might refrain from adopting regulations that serve public
interests out of fear that such regulations would trigger costly and
unpredictable investment arbitration disputes
Strategic Lawsuits Against Public
Participation (SLAPPs)
SLAPPs are unfounded tort claims filed in order to prevent public
criticism against the claimants, and not in order to provide any
remedy to compensate for the direct damage caused to them. These
claims are usually filed against social activists who led social protests
against the activities that hinder public interests, usually carried by
wealthy corporations.
Lengthy and expensive legal proceedings often exhaust
inexperienced social activists who enjoy limited resources and cannot
afford adequate legal representation. Eventually parties tend to reach
a settlement and agree to cancel the claim in exchange for a
cessation of public activity directed against the Plaintiffs' actions.
The main concern that arises from SLAPPs is of a chilling effect on
public participation as a result of a claim filed against them, or out of
fear that a claim would be submitted against them in the future if they
act in the public sphere
Introducing “STRAPPs”: Strategic
Arbitrations against Police Powers
Though investment arbitration targets governments, and not
individuals, several investment arbitration claims strikingly resemble
“conventional” SLAPPs.
Arbitration claims targeting policies that are in the core of the doctrine
of "police powers" are rarely successful. Still, IIAs often contain
standards of treatment that create uncertainties about how an
arbitration panel would interpret and apply them. Moreover,
arbitration proceedings are timely and costly. Thus, inexperienced
and poor governments may wish to avoid arbitration by terminating
the initiatives that triggered the arbitration claim in the first place.
Arbitration claims of this kind targeting bribery investigations could
impose a significant setback on the combat against foreign bribery.
Developing countries with limited resources, who are arguably in
greater danger of becoming a victim of foreign bribery, might rather
drop bribery investigations once the investor threatens with
arbitration.

“Conventional” SLAPPs
Social activists address government Settlement: Termination of
(Pring & Canan, 1996) decision-makers about some public Lawsuit against the social activists proceedings in in return for halting
concern and call for change of policy public criticism

STRAPPs using
investment arbitration Government introduces a measure Arbitration threats against the host
Settlement: : Termination of
proceedings in return for cancelation
exercising legitimate “police powers” State of measures – causing a
REGULATORY CHILL

“STRAPPing down” bribery Settlement: Termination of

Bribery investigations + forfeiture
investigations using of property / arrests
Arbitration threats proceedings in return for
cancelation of investigations
investment arbitration

Possible Solutions for STRAPPs

Adopting anti-SLAPP procedural rules allowing a swift dismissal of
Supporting governments through an international insurance fund
certain (bribery investigation) claims
 ANALYZING THE CORRUPTION ON A PROCUREMENT NETWORK
USING GRAPH THEORY
ANALYZING THE CORRUPTION ON A
IOANNIS FOUNTOUKIDIS, DEPARTMENT OF ECONOMICS AT ARISTOTLE UNIVERSITY OF THESSALONIKI (AUTH) GREECE
PROCUREMENT NETWORK USING GRAPH THEORY
DR ELENI DAFLI, SCHOOL OF MEDICINE AT ARISTOTLE UNIVERSITY OF THESSALONIKI (AUTH) GREECE

Ioannis Fountoukidis, Department of Economics at Aristotle University of Thessaloniki (AUTH) Greece

Dr Eleni Dafli, School of Medicine at Aristotle University of Thessaloniki (AUTH) Greece

Corruption is impossible to be Let’s have a better look!

Graph analytics are analytic tools that identified in public
Using Cypher many
procurement procedures! Yeah!!! You are absolutely
use graph theory in order to analyze right. Use a declaration Queries were run in the
data which are stored as nodes and form. database.
relationships. Have you ever heard Furthermore, the
What is the connection of graph of graph analytics? database was connected
analytics and corruption? with Gephi, the “Graph
No!!! Tell us!
Corruption includes: Photoshop”.
- Conflict of interest
- Bribery
- Bid rigging
So, corruption behavior could be
translated as relationships between the
nodes of the network which should not
exist.

Ιn which area is it applied? A graph database was created using

In order to evaluate the results of the neo4j.
method, the public procurement A network of 43722 nodes (33 labels) and
procedures for health goods were 44196 relationships (12 rel. types) was
selected. created, so as the contracts of 23 Hospitals
with 33 Companies (at only 2 cpv) to be
A virtual scenario of
analyzed.
Greek Hospitals’
public contracts for Everything looks ok!
the year 2018 was - No conflict of interest
created. between the boards of
The scenario was the companies and the
The analysis of the network has
based on open data boards of the hospitals.
shown that the functioning of the
and it included the - Nobody complained for
market can be studied. Additional
awards at: money transfer.
cases of conflict of interest and bank
cpv:33111730-7 and - Market analysis looks
transactions have been identified
cpv:33111710-1 impossible.
 BRIDGING THE GAP BETWEEN SFO AND DOJ PRACTICE IN
Bridging the gap THE
REMEDIATING between SFO
VICTIMS and DOJBRIBERY
OF FOREIGN practice in
remediating the victims of foreign bribery 

SAMUEL HICKEY
SAMUEL HICKEY

The victims of foreign bribery are in
most cases left without remedy
• In 2014, the Left Out of the Bargain
Report by the Stolen Asset Recovery
Initiative indicated that only 3% monies
extracted through foreign bribery
settlements were returned to the victim
state in which the initial act of bribery
occurred.
• Demand-side enforcement has proved
largely ineffective at remedying the
harm caused by foreign bribery.
• The supply-side of bribery is policed to
a far greater extent and provides a
more promising platform for remediating
the victims of foreign bribery.
• There is a growing sentiment in the
literature which urges countries such as
the United States to pursue remediation
for the benefit of those harmed by acts
of foreign bribery.
• However, there are numerous practical
issues that need to be addressed
before national enforcement agencies
like the DOJ will be able to confidently
adopt a policy of remediation and put
that policy into practise on a consistent
basis.
• In June 2018, the United Kingdom
government formally adopted its
‘compensation principles’, which are
geared toward providing a guiding
framework that can be used to indicate
Current SFO Practice
• These principles are too broad and lack the
specificity necessary to provide effective
guidance or to function as a normative
framework.
• Nonetheless, the United Kingdom has, both
before and after the adoption of the
compensation principles, ordered that corrupt
actors remediate foreign governments directly.
For example, the foreign bribery case against
Standard Bank in 2015 resulted in a deferred
prosecution agreement mandating that
Standard Bank pay $US7 million to the
Tanzanian Government (see here). Similarly, in
2018 a court order was issued against Alstom
Power Ltd which provided that £10,963,000 in
compensation be paid to the Lithuanian
government (see here).
• Remediation has also been achieved for the
benefit of the citizens of developing nations. For
example, the SFO reached a settlement
agreement with BAE Systems in 2010 for an
accounting offence which required it to pay £30
million for the purpose of buying educational
materials in Tanzania (see here). In 2014, the
proceeds of a confiscation order made over the
course of the Smith and Ouzman foreign
bribery case were used to purchase a fleet of
ambulances in Kenya (see here regarding the
foreign bribery case and here regarding the
purchase of ambulances), and most recently, a
£4 million civil forfeiture order against Griffiths
Energy for foreign bribery was put toward
development projects in Chad in 2018 (see
here).
Feasibility of U.S. adopting SFO practice
• This paper considers issues that arise
in attempting to argue that the United
States should follow the United
Kingdom in adopting a policy of
compensation.
• Policy issues:
• To what extent does current U.S
anti-corruption policy align with a
policy of remediation?
• Does an unwritten policy of rent-
seeking drive FCPA enforcement?
• Practical issues:
• How to identify the victims of foreign
bribery?
• How to ascertain the loss caused by
foreign bribery?
• How to ensure that money given
back to foreign governments and
citizens is not used in future corrupt
schemes?
• Should the United States practice of
insisting upon a nexus between
harm and remediation that is
employed in environmental
regulation carry over into anti-
bribery enforcement?
LOGS

whether compensation will be

appropriate on a given set of facts. 



 CRYPTOCURRENCIES
CRYPTOCURRENCIES – OPPORTUNITIES,
– OPPORTUNITIES, RISKS AND
RISKS AND CHALLENGES
CHALLENGES COMPLIANCE
FOR ANTI-CORRUPTION FOR ANTI-CORRUPTION
SYSTEMS COMPLIANCE SYSTEMS
KATARZYNAKATARZYNA
CIUPA, WARSAW SCHOOL
CIUPA, OF ECONOMICS
WARSAW SCHOOL OF ECONOMICS

LACK OF UNIFIED DEFINITION THEFT AND BRIBERY TAX AND ACCOUNTING

CRYPTOCURRENCY IS: • No harmonized tax approach5

In 2018 USD 950 million • No clear accounting rules
worth of cryptocurencies • Not many systems able to

?
VIRTUAL was stolen from exchanges investigate various blockchains
DIGITAL (3,6 more than in 2017)2 • Cryptoassets –
CURRENCY
CURRENCY new asset class
(IMF, ESMA,
(BIS, WB) needed?
ECB,EBA)

COMPLEX ECOSYSTEM MONEY LAUNDERING NEW OPPORTUNITY

CRYPTOCURRENCIES+BLOCKCHAIN Blockchain is:
Crypto-Laundering:
VS LAYERING • Decentralized
around 3-4 % of the
EXTERNAL INFRASTRUCTURE continent’s annual • Distributed
criminal takings • Immutable
INVENTORS WALLETS INTEGRATION making USD 4.2-5.6 • Synchronized
USER/INVESTOR EXCHANGES billion (Europol)3 • Transparent
• Secure
MINERS TRADING PLACE

SCAM AND MARKET ABUSE DARK MARKETS POTENTIAL AGENDA

15% USD ~25% of all BTC users and 1. Analyse the patterns
1,34 B ~44% of BTC TRX are 2. Act against the initial problem
associated with illegal activity 3. Reframe
USD ~USD 72 billion of illegal
78% 4. Have a holistic approach
8,27 B activity p.a. involves BTC 4
5. Disrupt the disrupter
6. Not over-regulate
7. Set international boards
2017: 78% projects (USD 1,34 billion) 8. Use blockchain to your advantage
ended up being scams1

1) https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU0gDgFQ; 2) https://ciphertrace.com/wp-content/uploads/2019/01/crypto_aml_report_ 2018q4.p df, 3) https://www.economist.com/finance-and-economics/2018/04/26/crypto-money-laundering,

4) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645 ; 5) https://www.loc.gov/law/help/cryptocurrency/index.php
 CORRUPTION TRAP:TRAP:
CORRUPTION THE CASE OF THE
THE CASE COLOMBIAN
OF THE STATES
COLOMBIAN STATES
CAROLINA ISAZA, LAURA URIBE, DANIELA FRANCO,
Carolina PATRICIA
Isaza, Laura Uribe, Daniela Franco, Patricia
GARCÍA-MÁRQUEZ, LAURA SARMIENTO
García-Márquez, Laura Sarmiento.

Transparency Index Development Index

Corruption trap:
The Case of the Colombian states

Since the 1990s, corruption has been increasingly studied from various disciplines and diverse theoretical approaches
and perspectives all around the world. Nevertheless, until now, few are the studies that take regional or local views into
consideration for understanding the behaviour of this phenomenon within countries. This study addresses corruption in
the regions of Colombia in relation to their levels of development.

Literature points out that there are different ways in which corruption and development are related. Some authors
conclude that corruption increases income inequality and poverty by distorting the level and effectiveness of social
spending. However, in these vicious cycles the causes and consequences are not yet clear. Considering the above, this
paper analyses the relationship between corruption and development in Colombia from a subnational perspective.

We claim that there is a corruption trap that makes it difficult to establish the dependent and independent variables
between corruption and development. The question that guides our paper is: What are the dynamics between
corruption and development at the state level in Colombia?

To answer it, we collected 22 indicators for the 32 departments that make up the administrative division of Colombia.
These indicators were grouped into three dimensions: development, institutional capacity and transparency. To identify
the relations between these categories we used a development proxy and we built an institutional capacity index and a
corruption/transparency index.

From this, a scatter plot chart was built to categorize the different departments of Colombia by their levels of corruption,
institutional capacity and development. Also, the data obtained by the diagram was georeferenced to identify specific
characteristics of each region. The conclusions include a categorisation of the departments of Colombia according to the
existing links between corruption and development on each one of them with institutional capacity as an intervening
variable.

Conclusions Capacity Index State Ranking

● 6 Colombian states are in a good place and have at least some of the necessary elements to continue
improving on Development, Transparency and Institutional capacities dimensions. First
● Another 13 states are in an intermediate stage but have also something to work on to avoid falling in a Category
corruption trap.

● There are 13 states in a corruption trap. In this last group, states are on the periphery of the country, on the Second
borders and far from the center (the capital, Bogotá), as can be seen in the maps. Some of these have high
levels of violence and they have been particularly affected by the presence of illegal armed groups and drug
Category
trafficking. Additional proof of their low capacity is that it is in these states there are no complete data for
development indicators such as Gini or poverty. Third
● The question that remains to be answered is how to break this trap. With the evidence we have, we can
Category
suggest that it would be possible to improve the situation of these states starting with the institutional
capacity and the presence of the State.

● Limitations to our study: Although we managed to make a consistent analysis from a statistical point of view, it
is also true that in contexts such as that of Colombia, studies at the territorial level may present limitations
such as missing data and under-report by states or local authorities. Even with open data and e-government
initiatives present in Colombia, access to complete and high-quality datasets for understanding local
governance remains a challenge.

● There is probably a corruption trap for many countries and regions of the world. While not all of those are
necessarily underdeveloped, it is clear that lower socio-economic and human development and lower
institutional capacity reduce the probabilities of getting out of that trap, as the necessary resources are not
present to take action on corruption, improve accountability, sanction wrongdoers and put in place more
transparency and integrity tools.

Acknowledgements:
Universidad Externado de Colombia for its support
Juan Manuel Pedraza, for his invaluable technical support with the data analysis
John Moreno, for useful discussions and ideas on data analysis
 SHOULD
SHOULD ANTI-CORRUPTION LAWS APPLY TO ASTROTURFING?
APPLY
LUCAS DE LIMA CARVALHO, UNIVERSITY OF SÃO PAULO
LUCAS DE LIMA CARVALHO, UNIVERSITY OF SÃO PAULO
What is Astroturfing?
Astroturfing is the practice of hiding a
vested sponsorship of an idea or a claim
behind the veneer of “grassroots
supporters”.
The first incidents of astroturfing date back
to the early 1900s, but the advances of
instant communication and social
networking have arguably enhanced its
effects on the political arena and on
relevant social issues nowadays.
Cases of Astroturfing
• Americans against Food Taxes (soda
tax, sponsored by food and beverage
companies)
• Coalition for Medicare Choices
(sponsored by healthcare companies)
• #EuSoudaLapa (residential real estate
sales campaign in Rio de Janeiro)
ANTI-CORRUPTION
TO ASTROTURFING?
Threat to public integrity
The very nature of anti-corruption laws is
to help protect public integrity, or the
integrity of public institutions or public
“goods” that are relevant for society.
Though astroturfing may be viewed as
primarily a regulatory, antitrust or
consumerist issue from a legal standpoint,
it begins to affect public integrity when it
produces tangible results in public
discourse.
Why anti-corruption?
• Astroturfing creates an atmosphere of
misinformation that contaminates public
discourse
• It violates public integrity as a principle
of Public Administration
• It offends international commitments
undertaken by modern democracies
(such as the ACHR)
LAWS
Challenges
We live in times of fake news and mass
usage of social media by people
everywhere, a practice that has reduced
the scope of influence of traditional news
outlets over select “audiences”. There are
many ways of creating astroturfing
movements today using Twitter bots, fake
Facebook or YouTube user accounts, and
carefully crafted TV ads, which would go a
long way in convincing voters of the
“urgency” and “relevance” of their claims.
To successfully implement anti-corruption
policies against astroturfing, jurisdictions
should:
Distinguish between cases of genuine
astroturfing and cases of improper
identification of funders/supporters
Identify the link between astroturfing
and the “damage” caused to public
policy
Establish a link between the
astroturfing campaign and the
appropriate penalty
 THE IMPACT OF CORRUPTION ON PROCUREMENT PERFORMANCE.
ANOF
THE IMPACT ASSESSMENT
CORRUPTIONOF
ONITALIAN PUBLIC PERFORMANCE.
PROCUREMENT WORK CONTRACTS AND SUPPLIERS
AN ASSESSMENT OFMILANI
RICCARDO ITALIAN PUBLIC WORK
(UNIVERSITÉ CONTRACTS
DE LAUSANNE, ANDDES
ECOLE SUPPLIERS
SCIENCES CRIMINELLES)
RICCARDO MILANI (UNIVERSITÀ CATTOLICA DEL SACRO CUORE)

Explore firm-level
Develop a new corruption risk indicator at the contract level corruption red flags

N: 4960 Corruption Risk Firm Firm

Open procurement data public Indicators Financial Ownership
work data data
contracts

Profile suppliers to identify

Explain inefficiency Transform
Estimate contract
scores by means of corruption-related red flags
inefficiency though residuals into
Time Delay and Cost factors that only corruption risk at the firm-level
Overrun denote the presence indicators
of “pure inefficiency”

+ INEFFICIENCY
• More profit margins
• Contracts managed by • Less debts over total assets
municipalities
• Complex contracts • Less days to receive payments
• Extreme savings in
contract awarding • More days to pay customers
• More Connection with opaque
- INEFFICIENCY jurisdictions
• Quality of Institutions
• EU contracts
• Contracts managed by
State-owned firms
 FIGHTING CORRUPTION IN COMMODITY TRADING THROUGH
BLOCKCHAIN TECHNOLOGY
SHAN “HELEN” JIANG
Fighting Corruption in Commodity Trading Through Blockchain Technology
Shan “Helen” Jiang
Problem Identified: Corruption in
Commodity Trading
Basics of Commodity Trading
Commodities are naturally grown products; they can be either “hard” – such as oil, gold, minerals – or
“soft” – like cotton, wheat, sugar. Commodity trading takes place in both primary and secondary
commodity markets. In the primary markets, commodities are extracted from nature and are prepared
for transportation at the production site, where they then would be delivered to refineries or smelters for
processing and then sold to energy users or manufacturers in the secondary markets. Through trading,
commodities are transported often across continents from its production site to the destination where
they are going to be consumed – this is the most obvious effect of commodity trading. It also balances
supply and demand of commodities in the global market, as both supply and demand can fluctuate for a
variety of reasons including seasons, production capacity, politics, among others.
The Commodity Trading Companies
Commodity trading companies (CTCs) provides vital support for the business model of trading. They conduct
arbitrage across globe, acting upon price signals and mainly operate as middlemen in the global value chain.
CTCs possess some unique features:
First, CTCs serve to build relationships among counterparties in the trading. They act as intermediaries with
comprehensive protocols and provide logistics for trading parties across the globe, administering the delivery
chain for primary economic products from the extraction site to the ultimate buyers.
Second, it is common that CTCs primarily adopt a business model called “transit trade,” where they rarely have
physical possession of the commodities, or register with customs authority of a country as such trade only
qualifies as an export of services. This model of transit trade has major implication for corruption detection and
monitoring.
Third, CTCs typically help build connections between buyers and foreign officials and politicians, interacting with
political exposed persons (PEPs). In particular, through loans pledged on future commodity deliveries, CTCs
also pre-finance extraction activities by indebted governments, who otherwise would not be able to get loans
from banks or other financial institutions. Emerging economies, for example, particularly find such commodity
pre-payment via CTCs is a useful substitute for bank loans. The way for CTCs to do it is to present such pre-
payment deals as security to negotiate a syndicated lending agreement with international banks.
Corruption in the Commodity Trading Sector
The reality for the commodity market is, perhaps unsurprisingly, highly opaque: particularly in the markets for
“hard” commodities like oil, gas, or minerals, where CTCs would frequently interact with foreign governments
and state-owned enterprises, the risk of corruption is alarming. PEPs would also take advantages of the opacity
of commodity trading to launder illicit proceeds derived from corruption, which is termed trade-based money
laundering. A few recent cases have put the issue of corruption in commodity trading under the spotlight.
I. Flipping
This scheme works like this: A small private CTC arranges for the initial purchase of commodities from
governments or national oil companies (NOCs) at a low purchase price, and then immediately resells these
commodities to a larger and better-known CTC at a higher price.
In this regime, the small CTC would claim to provide logistics services or other expertise to parties of the trade,
in fact, the true owner of the small CTC is a government official or that official’s close associates, and the profits
earned from the “flip” are, in effect, bribe payments orchestrated by the large CTC. Moreover, these small CTCs
act as buffers that dissociate the bigger CTCs from fishy deals, so these larger, more reputation-conscious firms
need not disclose in their filings transactions with corrupt governments or high-risk regions.
II. Swap deals
In a swap deal, rather than conducting a monetary transaction, the CTC swaps refined products (such as
gasoline) for a primary product (such as crude oil) of equivalent value with the producing country, or the CTC
lifts a certain amount of crude oil from the country, refines it offshore, and delivers the final products back to the
country. In-kind payments such as in swap deals are highly context-specific, with the terms negotiated by the
parties, and there is no benchmark estimate or other objective standards against which to measure their value.
NOCs can only publish high-level figures for the products supplied by the CTCs or the crude oil that has been
lifted; therefore, without getting access to information from the CTCs, there is no way to compare NOCs’ figures
with the value of the refined products. Any discrepancy between revenue remitted to the country and the actual
value of the crude indicates a loss of national oil wealth, from which many CTCs are profiting.This lost wealth,
unsurprisingly, often finds its way into the pockets of kleptocrats who are the true beneficial owners of the CTCs.
Revolutionary Role of Blockchain
and Smart Contracts: How they fit
in?
Blockchain is most fit in scenarios where:
• There are multiple players in the system
• Establishing trust in the system is rather difficult
• The system is susceptible to contamination or is easily corruptible
• Eliminating information asymmetry and improving transparency is conducive to the well-
function of the system
• Preventing record from being tampered with is a crucial goal
Applying those standards to commodity trading, it seems it ticks all the box. Commodity trading
is a dispersed system with multiple stakeholders who do not know or trust one another; the
sector is extremely opaque where corruption can happen between any two ends of a relationship
and monitoring corruption in the sector would incur formidable cost, and such efforts may still
turn out to be futile
3 Features of Blockchain
I. Traceability and Identity Proof: Cryptographic Keys
Blockchain has a solution to the identity authentication issues among multiple players through the use of
cryptographic keys. Moreover, the proved and recorded identity can help stakeholders to trace and
capture data along the supply chain.
In a Blockchain platform, identity can be created, verified and distinguished through a digital signature
matched to a specific wallet, which contains pair of a public key and a private key. The signature – or
the public-private key pair – is associated with an address that can, for example, receive funds. The
signature proves ownership of one’s assets and allow one to control the funds. The private key is used
for encryption of transactions, while the public key is used for decryption and is shared with third parties
in the platform. A typical scenario is that the sender of the funds encrypts the transaction with a private
key and the recipient decrypts it with a public key. If the transaction fails to go through, it can only mean
that this transaction is not from that particular wallet, i.e. the identity is false or is impersonated, and
some party is trying to defraud the others.
II. Tampering-resistance: Hash Function, Proof of Work (PoW) and Consensus
Hashes are used together with digital signature to ensure the integrity of data on Blockchain. Hash is a
one-way cryptographic function, a method of transforming large quantities of data input into numbers
and codes that are hard to decipher. Bitcoin network normally uses Secure Hash Algorithm (SHA). An
important feature of hashes is that a tiny change of input data would alter the output in a significant way.
The relationship between public and private keys is determined by hash function: the public key is
mathematically derived from the private key, but to reverse the process would take supercomputers
trillions of years to crack, making it impossible in reality. This feature ensures that the digital signatures
and Bitcoin address would be resistant to any tampering.
Proof-of-Work (PoW) is yet another function to ensure the integrity of information on the Blockchain.
PoW is used to confirm transactions and add new blocks to the chain, where miners compete to get
rewards by generating valid blocks of transactions, including collecting all relevant transactions, verifying
them through running all data via the SHA algorithm, and arranging blocks. This is the process of
mining. The hash of each block contains the hash of the previous block; changing the data in the block
means regenerating all successor blocks and redoing all the computing work done through previous
mining – this is practically infeasible to achieve.
III. Transparency: Distributed Ledger Technology (DLT)
and Single Source of Truth
Once a transaction is validated, it is synchronized among all nodes
and all ledgers in the network, in other words, it becomes public
record. Since there is no single control in the network and parties are
dispersed, consensus provides protocol for its operation. This results
in a transparent and open platform nearly tailored for global trade. For
example, solutions such as the Blockchain-based shipping and
logistics platform TradeLens enables all players in the supply chain to
benefit from a shared ledger that updates and validate instantaneously
with each network participant.
Consensus of nodes ensures the integrity of the system by isolating
and eliminating those who tries to defraud the rest. For example, if one
party denied having received the payment, he will not be trusted as
every party in the network has a proof of such transaction, and under
the consensus algorithm, the data is still reliable and trusted by parties
in the network – this is how a single source of truth is maintained in
Blockchain. Essentially, Blockchain acts as a global notary to verify
authenticity of credentials and transactions.
Application of Blockchain in
Commodity Trading
I. Streamlining Verification Process
A Blockchain-based platform would ask every party to upload the proof of completing their
job and share this information simultaneously with the rest of the parties. This may include
seller initiating the transaction by confirming the goods are transferred to a shipping
company, bank confirming issuance of a Letter of Credit to the seller, and the shipping
company confirming that goods have been loaded. Every single action of parties on the
Blockchain would be recorded and formed a block to be added upon the previous block.
Meanwhile smart contract would only release the funds when all conditions – including
shipping companies’ proof of delivery and presentation of Bill of Lading, confirmation of
delivery from the buyer – are satisfied.
II. Inter-entity Account Verification
Blockchain will also come in handy for reconciling accounts among different entities,
targeting the special corruption schemes such as flipping and swap deals. Inter-entity
account reconciliation is about making sure records in different entities – meaning all
balances owed to and from entities – are in agreement.
III. Space for Regulatory Agencies such as the Commodity Futures Trading
Commission (CFTC) to oversee regulatory reporting from the entities and
ensure compliance
One node on the Blockchain can be connected to CFTC’s reporting system, providing CFTC
a real-time window into market activities. Moreover, reporting can also be designed as a
condition in a smart contract, and compliance will automatically trigger the events followed.
Blockchain can also be used in a more sophisticated way for CFTC to detect trade-based
money laundering. A reporting requirement on the Blockchain as a prerequisite for the
execution of transaction would effectively alert CFTC about irregular trading activities
through a self-generated Suspicious Activities Report (SAR), and record all the information
the agency may need to find out the identity of the fraudsters.
Smart Contract
a smart contract is a piece of computer code with pre-defined set of rules that describes a
transaction step by step. It sets the conditions under which all parties to the smart contract
agree to interact with each other. It can connect to multiple Blockchains and track multiple
assets, hence it can swap those assets as needed to execute the transaction. Smart
contracts would unlock the cryptographic keys as long as the conditions are met. Such
automatic execution of agreements eliminates the needs for intermediaries, who are often
brought into the picture to build trusted relationships.
• Eliminating Intermediaries: Automatic Execution
The transaction conditions are formed by simple opt-in actions from the parties, then
digitalized and become readable by computers. Hence a transaction can be
automatically executed as long as the conditions are met.
• Standardizing Record-keeping and Verification: Oracle
An Oracle is part of the Blockchain, and links the outside world with the Blockchain.
It brings in external data and triggers smart contract executions. It fills in the blanks
in the pre-defined conditions where external information is needed and maintain
objectivity through various ways.
 IDENTIFYING POLITICALLY CONNECTED FIRMS:
A MACHINEIDENTIFYING POLITICALLY CONNECTED FIRMS:
LEARNING APPROACH
A MACHINE
DENI MAZREKAJ, LEARNING
FRITZ SCHILTZ AND VITEZSLAVAPPROACH
TITL

DENI MAZREKAJ, FRITZ SCHILTZ AND VITEZSLAV TITL

Motivation Methodology Predictor Variables

Politically connected firms may generate substantial economic ML models more naturally accommodate discontinuous and
and welfare costs for the society: nonlinear interactions (Varian, 2014). Thus, we are able to capture
TABLE 1: DESCRIPTIVE STATISTICS OF PREDICTOR VARIABLES
complex patterns in firm and industry data in our prediction.
• Higher product prices, poorly executed public works, erosion in
We apply and compare 3 methodologies:
employment standards (Fisman, Schulz, & Vikrant, 2014; Fisman & Predictor Variable Mean S.D. Min. Max.
Wang, 2015). 1. Logistic regression
Number of employees (FTE) 28.65 225.05 1 31742
• Misallocation of public funds (Cingano & Pinotti, 2013; Goldman, 2. Random forest
Registered capital (million euros) 22.21 598.84 0 120909
Rocholl, & So, 2013; Titl & Geys, 2019), 3. Boosting
Assets (million euros) 140.48 5463.483 -68.49 825497
• Lower economic growth (Olson, Sarna, & Swamy, 2000). The last two methods can be seen as building a set of trees, and
applying the set of learned rules when making predictions. Operating assets (million euros) 85.07 4816.30 -68.49 780238
A proper control of connected firms is important as it can bring
large economic savings. To evaluate the relative performance of each model, predictions are Operating profit (million euros) 5.73 198.40 -15983.32 36850
made using the exact same set of variables and the same data for
all three methods. Financial profit (million euros) 6.09 227.57 -16280.51 36850
Results
Equity (million euros) 47.93 1110.65 -20871.61 192600
Goal Age of the firm (years) 16.21 6.34 0.11 78.07
We introduce machine learning (ML) to predict which firms are
politically connected. Results
Main advantage: ML methods add flexibility by capturing To compare methods, we report out-of-sample prediction accuracy.
nonlinearities and complex interactions (Breiman, 2001). In Figure 1,
you can see an illustration of a fictional decision tree, similar trees are Both classification tree ensemble methods (random forest and
grown and together they are used to predict whether a firm is boosting) display a very strong ability to predict which firms are
politically connected. politically connected. Furthermore, the machine learning techniques
Using a unique dataset of all Czech contracting firms, we show that also exhibit lower variance in the prediction accuracy.
politically connected firms can be identified with a high degree of
precision using only information from their annual accounts.

Figure 2: Model construction and validation, using training and test set.
TABLE 2: OUT-OF-SAMPLE ACCURACY OF PREDICTIONS (%)

Data Outcome Logistic regression Random Forest Boosting

All connections 63.12 71.30 72.29
Our data include all firms registered in the Czech Republic
supplying public procurement contracts to all levels of government (95% CI) (62.53-63.74) (71.16-71.44) (72.14-72.43)
in 2011. Donations 63.57 70.49 71.22
We match them with financial and industry indicators from Magnus (95% CI) (63.15-63.99) (70.27-70.70) (71.01-71.43)
database to obtain standardized annual accounts, financial ratios,
sectoral activities, and ownership data. Pers. connections 65.54 73.99 74.58

The information on political connections is compiled from three Conclusion

sources.
1. Firm donations: obtained from the annual reports of political
parties provided by EconLab (www.politickefinance.cz).
Figure 1: Illustration of a fictional decision tree.
2. Donating board members: obtained from exact matching of
individual persons who donated with the lists of board members of
all Czech companies.
3. Personal connections: obtained by matching elections’
candidate lists (www.volby.cz) and the lists of board members of
all companies.
(95% CI) (65.40-66.08) (73.83-74.15) (73.90-74.40)
Our simulations suggest that boosting could identify political
connections with about 75% accuracy. This level of accuracy is
36% higher compared to the accuracy of the logistic regression model
used to predict binary outcome variables.
We propose that our approach could be used by public institutions to
identify potential political connections of firms. The identified firms can
be then audited and/or controlled by public authorities. As such, this
approach would allow for more targeted control of companies
with conflicts of interest.

The final dataset includes 83,125 firms, with each record containing
financial and industry information as well as whether the firm was
politically connected in 2011.
 LOGOS, MYTHOS AND ETHOS OF BLOCKCHAIN: AN INTEGRATIVE
LOGOS, MYTHOS AND ETHOS
FRAMEWORK FOR ANTI-CORRUPTION OF BLOCKCHAIN:
AN INTEGRATIVE FRAMEWORK FOR ANTI-CORRUPTION
IGBAL SAFAROV, PHD, UTRECHT UNIVERSITY
IGBAL
ZIYA ALIYEV, SAFAROV,
PHD, ERASMUSPHD, UTRECHT
UNIVERSITY UNIVERSITY
ROTTERDAM
ZIYA ALIYEV, PHD, ERASMUS UNIVERSITY ROTTERDAM

METHODOLOGY & DATA RELEVANCE OF

BLOCKCHAIN FEATURES

Smart contracts
100
STUDY EXPERT TEST OPEN FIRST SECOND
DESIGN SELECTION STAGE ROUND ROUND ROUND
Private 50
(permissioned) Non-reversibility
blockchain
ANTI-CORRUPTION VS 0

BLOCKCHAIN CONFLICT OF INTEREST

90
80 Public
Decentralisation
COMPETITION POLICY INCL. blockchain
70 MERIT-BASED RECRUITMENT
PUBLIC PROCUREMENT
60
50
40
30 CHALLENGES OF BLOCKCHAIN
RECORDS MANAGEMENT
20
FAIR ELECTIONS IN ANTI-CORRUPTION
10
0
Privacy issues
80
60
40 Maturity of
Use for
blockchain
FINANCIAL REPORTING AND corruption 20
FREEDOM OF SPEECH technology
ACCOUNTABILITY 0

Financial Cross-border
ACCESS TO INFORMATION JUDICIARY INDEPENDENCE
resources nature

CONCLUSION

LOGOS. MYTHOS. ETHOS. INTERACTIVE

Several blockchain features can be considered as a
strong facilitator for anti-corruption activities.
Blockchain can clearly provide more transparency
with disintermediation, immutable accountability,
distribution of power and peer-to-peer solution.
Blockchain cannot be considered as a
solution for all anti-corruption situations.
After the second round of Delphi study,
only 3 out of 9 anti-corruption subjects
were found significant consensus.
Before considering the implementation of FINDINGS
the blockchain, several ethical questions and
technical challenges need to be addressed.
Blockchain regulation and self-governance PARTICIPATE IN
mechanisms need to be matured. THE STUDY