The reality of corruption reminds me of that famous line about not being able to define pornography, but knowing it when you see it. Except that with corruption, it would be: I can’t prove it, but I know it when I see it.

One hallmark would probably be a state rich in natural resources, led by some fabulously wealthy potentate yet whose population remains largely poor. That rough description could apply to at least a handful of the countries that TOL covers.

Investigative reporting in such places is at best difficult, at worst suicidal. Now a nearly 300-page World Bank report (registration required) on corruption shows that it’s not only reporters, but also investigators, who face a monumental task in following the money.

I haven’t finished it yet (it was released Saturday) but I began plowing through it hoping that I would either find surprising information about TOL’s countries or that it would help me to guide our correspondents in their reporting. What I have found so far is a bit different.

In great detail the authors take us from the starting proposition of corruption, our feet firmly on the ground:

Suppose you want to give someone some money, and because it is for an illegal purpose, you do not want anyone else to know about it. What would you do? You could hand it over in cash — but that might be difficult if it were a large sum of money or if the recipient lived a long way away. Alternatively, you could transfer funds from your bank account to the recipient’s — but then your respective banks would know about it. And they might tell the police, or at least they might offer information if the police came knocking. So your ideal solution would involve a bank account that you control, but that no one can link to you — or at least only with the greatest difficulty.

Then the authors plunge us deep into the murky waters of obfuscation and financial chicanery: companies directed by corporations rather than people; shell companies; already existing “shelf” companies that provide a ready-made corporate history for a fee; “nominee” directors that play no real role in a company’s management and do not have to be identified as the proxies they are; trusts that can obscure the real controller of an asset; “bearer shares,” or pieces of paper that often do not have to be registered and confer shares on the person who has physical possession of them; and the list goes on.

It is apparently not with the “greatest difficulty” that the link between a corrupt official and his ill-gotten gains is hidden. Posing as “a representative would-be miscreant” auditors sent emails to what they call trust and company service providers looking to set up a shell company.

They chose a mix of countries where banks, professional incorporators, and the like would or would not be required by money laundering laws to verify the identity of the person controlling or benefiting from the business in question. The email contained red flags, like the need for confidentiality and “tax minimization as part of an international consultancy project.”

Of the 217 emails that went out, 102 got responses. Now this is what surprised me (but probably shouldn’t have): Of the 47 responses that came from countries belonging to the overwhelmingly Eurocentric OECD, only 12 complied with the law. By contrast, nearly all of the responses that came back from countries that the OECD had identified as tax havens did.

Any guesses for who comes out worst? Of the 27 responses that came from the United States only three “said they asked for any form of identity documentation, whereas the others (24) were prepared to form companies without conducting any due diligence whatsoever.” (I wonder if this would rate them highly on the World Bank’s Ease of Doing Business index.)

The report quotes U.S. Senator Carl Levin as saying in November 2009, “Our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies.”

According to the study:

Interviews with trust and company service providers (TCSPs) conducted in the context of this study showed that it is not expensive or time-consuming to establish an anonymous shell corporation. A company-formation agent’s fees range from US$800 to US$6,000 as an upfront cost, followed by a slightly smaller amount on an annual basis. … At the upper end of this price range, in six cases, service providers (perhaps perceiving deceptive intent) recommended holding the ownership of the shell company in an overarching trust or foundation that undoubtedly would present additional obstacles to investigating authorities seeking to identify the beneficial owner.

The report is valuable to anyone who is serious about understanding how corruption works, but it also reminds us how important the industrialized countries are in underpinning the graft of places like Russia, the Balkans, and Central Asia.

Barbara Frye

Barbara Frye is Transitions Online’s managing editor. Email:

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