ICC Commercial Crime Service

The Year of Governments Living Dangerously

In the midst of agonizing media coverage of international terrorism, a massive flow of refugees into Europe and the shifting sands of politics around the world, government fraud and corruption managed to make news in 2015. It was the year of governments living dangerously as enormous frauds crippled economies, burdened already beleaguered taxpayers and all but destroyed trust in government and political leadership in some countries.

Although it may not be clear whether instances of government fraud are actually increasing, we do know that the size, scope and complexity has grown over the years. As citizens of a global economy, we also recognize that sooner or later, we all feel the ripple effect.

What do these crimes in far flung parts of the world have in common? A look at the economic tragedies in Moldova, Guatemala and Brazil -- three of the largest, most complex cases that made headlines in 2015 – reveals some common themes and potential strategies.

They did not occur over night. The participants were all part of a system that not only allowed, but enabled fraud to take place on a large scale. While the bulk of the fallout may have happened in 2015, these schemes had been operating or were in the planning stages for years.

The governments of Moldova and Brazil were entangled with another enormous entity with strong ties to government. In Moldova, it was the banking system. In Brazil, it was Petrobras, the government oil company. In Guatemala, the business of politics and fundraising was so intertwined with government that the process was corrupt, lacking a strong enough system of checks and balances.

In all three cases, there was a history of corruption, not enough oversight and inadequate strategies and enforcement in place to protect the government and taxpayers. All three countries also include large numbers of poor and working poor with much to lose.

Immediate action to address these weak links must include aggressive efforts to recover hundreds of millions in stolen assets that rightly belong to taxpayers. Amidst the news of potentially crippling financial frauds, there is good news. Earlier this year, after 16 years of negotiations, a deal was reached in which Switzerland agreed to give Nigeria U.S. $380 million, allegedly stolen by the former military dictator Sani Abacha and stored in European bank accounts. In addition, asset recovery professionals won a landmark court victory in 2015 in the UK in the largest corruption and asset recovery case ever undertaken by the Municipality of Sao Paulo and the government of Brazil outside of Brazil. The judgment, which will have a significant effect on the law of civil fraud internationally, entitles the government to U.S.$28 million.

As the sagas continue, here’s both an update and a look back at three of the largest government corruption scandals of the year.

Moldova
A billion dollar bank fraud was discovered in the former Soviet Republic of Moldova, estimated to be about 15 percent of the country’s GDP. The fraud cleaned out three of the country’s banks, and plunged Moldova, already the poorest country in Europe, into recession. A huge bailout rescued the banks, but at the hefty price of a half of the country’s annual budget.
Since the scandal broke, the government has been on the verge of collapse with a rapid fall in the value of the leu, the national currency, and a steep rise in the cost of living. Thousands have taken to the streets to protest, calling for the resignations of government leaders. Earlier this month, Moldova’s former Prime Minister Vlad Filat was arrested and detained on charges of theft of Moldova’s money from Banca de Economii. Analysts fear that with political parties in disarray, Russia may take control.

The Moldova scandal came to light with the release of a report by international private investigation firm Kroll, which found that individuals and legal entities linked to Ilan Shor, a 28-year-old millionaire businessman, took control of the banks. Shor has denied involvement, but the report found that financial trails in several countries all lead back to Shor. Shor took over as chairman of Banca de Economii in April 2014, and is also mayor of a small town in Moldova.

Guatemala
A customs fraud scheme of mega proportions brought down Guatemala’s president, vice president and dozens of other government officials this year. In October, Juan Carlos Monzón, ex private secretary of Guatemala’s former Vice President Roxanna Baldetti, surrendered to authorities after a manhunt. He identified former Guatemalan President Otto Peréz Molina, who was forced to resign in September and is now in prison, as the ringleader of the million dollar fraud known as “La Linea” (the line), but prosecutors and the U.N. backed International Commission Against Impunity in Guatemala have alleged that Monzón is the mastermind. Discovered last year by prosecutors and the U.N. commission investigating criminal networks in Guatemala, La Linea is a scheme in which business executives paid bribes to the customs agency to avoid import duties. The fraud network is believed to have defrauded the government of millions of dollars. The U.N. commission was established in 2006 under an agreement between the UN and the Guatemalan government as part of efforts to bring down secret criminal organizations within the national government responsible for corruption, intimidation and violence. A report released in July by the U.N. commission said that the country’s political system is a large part of the problem, with widespread illegal money flowing through the process. Political parties take in much more money than they report.

Like citizens of Moldova, Guatemalans are outraged, and thousands protested in the streets almost daily.

The U.N. Commission said in a report released in mid-July that illegal money is widespread in the country's elections, as parties take in much more money than they report and often without consequence. Corruption is built into the system, and carries over into government.

Brazil
An enormous fraud scheme involving Petrobras, the oil giant controlled by the Brazilian government, has threatened the nation’s economy this year. Standard & Poor’s cut Brazil’s long-term debt rating to just above junk status, while unemployment rose. Workers were laid off, and more than 200 companies involved lost credit lines. Petrobras was once the sixth-largest company in the world (by market capitalization), accounting for about ten percent of the country’s gross domestic product.

Beginning in 2004, a few Petrobras officials colluded with a cartel of companies to overcharge the oil company for construction and service work. The fraud is estimated at more than US $30 million. A fake competition for contracts with the company was managed by Petrobras affiliates, who received bribes, who shared with political leaders. The Petrobras scam is now recognized as the largest corruption scandal in Brazil’s history, including kickbacks overseas accounts, fraudulent contracts and overbidding. With a fraud so massive, analysts have predicted that Brazilian taxpayers will ultimately get stuck with the bill.

In systems so broken, with millions of taxpayer dollars missing, help from independent investigative bodies, including asset recovery professionals who know how to work with governments to track down money hidden around the world is needed. As these governments go about the process of cleaning house, punishing the guilty and hopefully instituting serious reforms, implementing serious strategies for track down stolen money can begin to rebuild government coffers as well as the people’s trust.

Stéphane Bonifassi, of Lebray&Associés, specializes in representing victims of fraud, and is the executive director of ICC FraudNet. Named as one the Word’s Most Highly Regarded Individuals by WhosWhoLegal: Asset Recovery 2015, he is the former president of the criminal law commission of the International Association of Lawyers (UIA) and the former chair of the business crime committee of the International Bar Association (IBA). Bonifassi regularly speaks and writes about issues including corruption, fraud, asset recovery and mutual legal assistance. He contributed to the book, Asset Tracing & Recovery: the FraudNet World Compendium, and his article The Long Arm of the Law – Obtaining Jurisdiction and Evidence in France, was published in International Legal Practitioner.





ICC FraudNet is an international network of independent lawyers who are leading civil asset recovery specialists in each country. Recognized by Chambers Global as the world’s leading asset recovery legal network, our membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. Founded in 2004 by the Paris-based International Chamber of Commerce (ICC), the world’s business organization, FraudNet operates under the auspices of the ICC’s London-based Commercial Crime Services unit.