Daniel Rogers: Democracy dies where corruption thrives
Covid19 has caused a dislocation in communities across the world with inequalities being exposed, and for many, trust has been broken. We’re seeing compassionate behaviour from criminal organisations and criminal behaviour from legitimate organisations, but maintaining trust in institutions, governments, the business sector and the rule of law is essential for recovery.
Fraud, corruption and money laundering are already the world’s third-largest ‘industry’ behind foreign exchange and oil. Fraudsters have been fine-tuning their craft well before Covid19, mastering the skills needed to take advantage of a more digitally connected world rife with new products and new technologies and with access to immense resources. Criminals adapt fast and, as Interpol reports, are adapting fast to Covid19.
Previous crises have shown the powerful and connected will find the first path through leaving those in need in their wake. It is amongst this chaos, stress and confusion corruption thrives. Corruption erodes confidence in the political system, private enterprise and the rule of law. It affects everyone and leaves lasting reputational damage. We know from history that fraudsters never let a good crisis go to waste and there are lessons to be learned from failures in government oversight. Transparency is key to recovery and a sound democracy.
During the 2008 financial crisis America led with a bailout package to support ‘Main Street’. Treasury did not maintain oversight and did not require recipients to track the use of subsidies and government assistance. Instead of providing all the funds to propping up Main Street with loans to small businesses as intended, funds were diverted by Wall Street to purchase other financial institutions, pay down debt and speculate on financial markets.
It seems lessons were lost. Without necessary oversight, the powerful and connected found an opportunity to enrich themselves again.
In March 2020 the US Senate passed a 2.2 Trillion relief package overseen by Treasury with independent management by Blackrock. Part of the relief package was ‘Americas Paycheck Protection Plan’ providing $350 Billion to small businesses. This was drained within days as some of the biggest firms claimed support. According to summary data released by the Small Business Administration, banks approved 67,216 loans of $1 million or more. Thirty two firms with millionaire CEOs, drew on a fund meant for small businesses. Small firms with three to four employees missed out because the fund was swiftly exhausted.
While New Zealand acted fast with a support package the fund was not left without oversight. New Zealand has 104 fraud investigators and experts currently reviewing records looking for evidence of fraud to protect New Zealand business integrity. Finance Minister Grant Robertson said auditors would go through all applications. Initial findings suggest it is unlikely New Zealanders will differ greatly from our American counterparts. Some employers and big business have been reported for fraud, or inappropriate drawdowns, and are under investigation. Approximately 1300 applicants have already refunded inappropriate drawdowns totalling $16 million and 56 applicants have refunded $1.25 million with the Ministry of Social Development looking at criminal charges. If the response to date is any indication, we should expect more firms to be investigated and referred to MSD for charges.
The pandemic is shining a light on our preconceptions about who’s ok with committing fraud and the price we’re willing to let democracy pay. Our tolerance for fraud is being shown to vary. Beneficiary fraud has been demonised in politics, the press and the courts for generations whereas white collar criminals have much greater leeway in society, culture and the legal system. Employers and big business simply offer to return the funds whereas a beneficiary or low paid worker who defrauds the IRD or government are more likely to be prosecuted. When trust in our institutions, government and rule of law is so important we are already starting our Covid19 recovery from different places.
The wage subsidy is to support businesses retaining staff to enable a faster restart and to ensure trust in our system. The subsidies are designed to ensure social cohesion because without it workers have few places to turn. The social and economic dislocation inflicts stress and hardship on almost every section of society. People falling through the cracks are reaching out to accept any helping hand, no matter who’s hand that is.
The Italian Mafia are supporting the vulnerable in Southern Italy, Gangs are helping the Favela’s in the midst of a power vacuum in Brazil, Drug Lords are providing food and medicine in Mexico and here at home, local gang members have asked a Māori health provider for food packages to help the community. Whether an isolated incident or a well-established modus operandi, for criminal organisations their currency is loyalty and trust and providing support in a crisis goes a long way to building that capital. The longer term consequences will be an increase in trust for the previously outcaste criminal organisations and a weakened democracy.
The trust being built will be leveraged when needed. Money launderers will have to adapt to a new social distancing world where the typical layering, placement and integration typologies will be even more challenging. It’s likely, criminals will recruit ‘money mules’, multiple people to collect funds, take a small share and transfer the funds to integrate into the banking system. When asked to return the favour it will be hard to say no.
The pandemic is providing opportunity for fraudsters to move with more confidence. Covid19 has created an environment ripe for collusion, coercion and corruption and, if we lose trust in our institutions, society may not remain cohesive enough for stable recovery to take hold.
Daniel Rogers is an anti-money laundering specialist with a professional interest in politically exposed people and white collar crime. He is the founder of RegTech start up Avid AML
This article can be republished under a Creative Commons CC BY-ND 4.0 license. Attributions should include a link to the Democracy Project.