During the administration of current President Mauricio Macri foreign investors have started paying more attention to Argentina. Macri has yet to kickstart a new wave of meaningful economic growth or eliminate longstanding struggles with inflation, but his government is at least inspiring confidence that Argentina is moving away from the legacy of recent left-of-center presidents who mismanaged macro-economic policy and tolerated high levels of corruption. President Macri is working to partner with investors to build new infrastructure and develop new energy projects, but he is also signaling that he wants to crack down on corruption and money laundering. In 2012 the U.S. State Department listed Argentina as a country of primary concern for money laundering risk. Since, then Argentina's reputation in regards to money laundering controls has begun to improve.
In November, 2017 Argentine police arrested a former Vice-President on corruption charges. Argentine prosecutors are also pursuing money laundering charges against former President Cristina Fernandez de Kirchner. Argentina has long been viewed as a high risk country for corruption where foreign companies may be placed at risk of violating anti-corruption laws in their home jurisdictions. Until recently Argentina was seen as a country with weak money laundering controls, high risk for fraud and financial crime, and weak enforcement of anti-money laundering (AML) controls. Over the last few years the business culture in Argentina has begun to evolve, but it's still not clear exactly how much Argentina has improved when it comes to money laundering, fraud, and corruption risk.
To talk about Argentina's ongoing fight against corruption, I reached out to Eduardo Singerman, a certified fraud examiner and a Litigation Director in the Global Forensics practice at BDO USA, LLP. Singerman has made several presentations at the Latin American annual conferences on financial crimes organized by the Association of Certified Financial Crime Specialists. He has decades of experience researching Argentina.
Nathaniel Parish Flannery: Are you optimistic that the current administration of President Macri is making fundamental improvements to Argentina's capacity to fight corruption, in particular in the areas of money laundering and financial crime?
Eduardo Singerman: The Transparency International Corruption Perceptions Index, or CPI, shows that when it comes to corruption Argentina is a bad performer. Since 1995, the first year the CPI was published, through 2015, the last year President Fernández de Kirchner was in office, Argentina was ranked poorly among the countries surveyed indicating a perceived high degree of systemic corruption. For instance, Argentina’s CPI of 32 in 2015 ranked 107th among 168 countries. By contrast, Uruguay and Chile, two neighboring countries, were ranked 21st and 23rd, respectively. When it comes to corruption, Argentina’s political system still faces serious problems.
Under President Macri’s administration, Argentina’s congress was able to pass three important anti-corruption laws. The first one limits the budgetary reallocations that the chief of the cabinet of ministers can make. For 2017, the chief of the cabinet is restricted to seven and a half percent of the total expenditures budgeted for the fiscal year, while in 2018 and beyond, the limit for budgetary reallocations is set to five percent. The chief of the cabinet budgetary reallocations are further limited to fifteen percent of each total program expenditures budgeted for the year, when the reallocations entail an increase in current expenditures to the detriment of capital expenditures.
The second act establishes penalties against companies which engage in corruption of public officials independently of any officers, employees or agents who participated in the bribes. Subject to certain exceptions, the penalties range from fines of up to five times the profit derived from the corrupt transaction to the suspension of the company from doing business of up to 10 years and/or from participating in public tenders also for up to 10 years. The law also requires that certain companies doing business with the federal government implement an anti-corruption compliance program.
The third law contemplates a reduction in prison terms for those individuals who have engaged in public corruption, if they provide specific and verifiable information that significantly contributes to the investigation, but only if the information is provided before the case is heard by the court tribunal and to the extent that it allows to bring charges to other co-participants with the same or more criminal responsibility. The benefits of this law are not applicable to current or former government officials who are or were susceptible to impeachment procedures.
In addition, President Macri has issued two executive orders establishing special procedures for greater control and transparency of judicial and extra-judicial processes against the federal state and public tenders where the parties involved have conflict of interests with high ranking government officials.
The first decree requires that the Attorney General’s Treasury Office directly represent the federal state in judicial and extra-judicial cases in which it is a party and the president, vice-president, ministers, or similar high ranking government officials have a close relationship with the counterparty or its representatives. In this situation, the decree mandates, among other things, that the respective files and specific information about the cases be publicly disclosed on the Treasury Office’s website.
The second executive order establishes that people who want to be state contractors must indicate in an affidavit if they have any close relationships with the president, vice-president, ministers, or government officials in charge of making the purchase decision. In the event that a close relationship has been reported, the agency within the government where the public tender has taken place must notify the Anticorruption Office, which will be in charge of publicly disclosing the respective files on its website and approving the specific procedures authorized in the decree that were adopted by the agency to resolve the conflict of interest.
A third presidential decree recently issued prohibits close relatives, including spouses and domestic partners, of the president, vice-president, chief of the cabinet of ministers, ministers and other high ranking government officials from being appointed to any federal government office.
Even though these laws and executive orders are necessary to combat corruption, I think that they do not address, by and large, the fundamental flaws in Argentina’s political system or the real problems that are responsible for the embedment of systemic corruption.
While in 2017 there has been some improvement in Argentina’s CPI index due to anti-corruption laws passed by the new congress, Argentina’s CPI of 39 ranks 85th among 180 countries and is below the global average of 43.07. This score indicates the persistence of systemic corruption. Also Argentina’s CPI is very low compared to other Latin American countries such as Uruguay and Chile, which have a CPI of 70 and 67, respectively.
In the area of money laundering, a crime often associated with corruption, the Basel AML Index measures a country’s risk level of money laundering and terrorist financing on a scale from 0 to 10, with 10 indicating the highest risk level. Countries ranked at the top of the list are the worst performers. Argentina’s Basel AML Index of 6.69 in 2017 ranks 41st among 146 countries, an insignificant improvement compared to 2015, the last year in office of President Fernández de Kirchner, when Argentina’s Basel AML Index was 6.71 and the country ranked 36th among 152 nations. Under the current scale, countries with a score between 6.6 and 10 are considered high risk countries. So, by this measure Argentina is still a high risk country for money laundering.
Escaping a corruption trap is extremely difficult. High levels of corruption tend to be very persistent over time. It is unusual to observe high corruption nations becoming low corruption countries. An escape from a corruption trap requires an institutional shock and a combination of policies, which are not only directed at dramatically increasing the cost of corruption, but also focus on the reeducation of an entire society. Economists call these extraordinary measures a big push.
Parish Flannery: There are still a lot of problems that Argentina will need to address to root out corruption. Why do you think Argentina’s political system so vulnerable to corruption?
Singerman: The populist presidents who governed Argentina between 1989 and 2015 were responsible for distorting the democratic system of government and creating a system called hyper-presidentialism. The system is influenced by the fascist corporatist ideology imbued in the Péronist party, which brought an influential leader named Juan Perón to power in 1946. Peron’s government was based around a strong leader who could arbitrate disputes among the different factions. Peron was able to lead the nation with little or no interference by congress or the courts. I think that this emphasis on strict loyalty to the leader is relevant to understanding the phenomenon of hyper-presidentialism in Argentina today.
The political system in Argentina has permitted the executive branch to concentrate power at the expense of the other branches of government. Because short-term returns from corruption are high and Argentina’s frail judicial and legislative institutions reduce the chances that corruption by the executive branch will be detected, prosecuted and punished, government officials and businessmen in the private sector have been more disposed to behave corruptly.
As the numbers of corrupt government officials and businessmen increased, finding a partner with whom to engage in a corrupt transaction became easier. The prevalence of corruption further decreased the chances of detection and punishment. We’ve seen Argentina slip into a corruption trap where high corruption levels generate even higher corruption levels. There are strong incentives for companies and government officials to continue to engage in corrupt activities.
In 1994 Argentina’s constituent assembly passed a constitutional amendment that was intended to curtail presidential powers. But, in practice the amendment did not prevent the president from significantly interfering with congress and the judiciary, and some of the constitutional reform provisions actually contributed to this interference.
Parish Flannery: What are some specific ways hyper-presidentialism has directly contributed to corruption in Argentina?
Singerman: One the most significant ways in which hyper-presidentialism has interfered with the Argentine congress is through the issuance of a type of emergency decree called a DNU. The 1994 constitutional amendment prohibits the president from issuing legislative provisions; but, it also grants the president the ability to circumvent this ban through the issuance of DNUs, which do not require previous approval from congress, subject to certain constraints.
Argentina’s recent leaders have been active in their use of DNUs. President Carlos Menem who served as president from 1989 through 1999, issued 545 DNUs, which he used to privatize Argentina’s airports and reform the country’s central bank’s, among other things. Likewise, Presidents Néstor Kirchner, who served from 2003 to 2007, and his wife and successor, Cristina Fernández de Kirchner, who served from 2007 through 2015, abused this legislative tool. President Néstor Kirchner, for instance, issued DNUs to renationalize a French-owned water and sanitation company and increase his own salary by 100 percent.
In the case of President Fernández de Kirchner, she issued DNUs to order the central bank to transfer a substantial amount of foreign exchange reserves to the federal government to pay Argentina’s foreign debt, and to fire the central bank’s president when he refused to comply with her order.
The power of the presidency has also been augmented by the president’s ability to issue a type of executive order called delegated decrees. Argentina’s congress passed a law in 1996 granting President Menem superpowers which allowed him to reduce tax rates and eliminate certain income tax exemptions, duties which are normally performed by the legislature under the constitution.
In 2001, congress delegated to the executive ample legislative powers to manage a severe economic crisis that included the superpower to modify budgetary allocations at will. And later in 2006, President Néstor Kirchner obtained from congress an act by which this superpower was institutionalized. The law authorized the chief of the cabinet of ministers, who is under the president’s supervision, to reallocate budgetary accounts without any limits and without any legislative oversight, as long as the total amount of budgeted expenditures reallocated did not exceed the total amount of budgeted expenditures approved by congress.
The impact that these kind of delegating laws have had is substantial. During the twelve years and a half that the Kirchners remained in power their six chiefs of cabinet issued 643 administrative decisions that changed budgeted expenditures by 290.3 billion pesos or roughly $19.4 billion.
In November 2016, under current President Mauricio Macri’s government, Argentina’s congress passed a law which now limits the budgetary reallocations that the chief of the cabinet of ministers can make. But this law does not regulate the presidents’ use of DNUs to increase the total amount of expenditures above the ceiling authorized by congress in the budget.
Indeed, when considered together, the Kirchners issued DNUs during their presidencies that increased expenditures by 717.09 billion pesos beyond the amounts authorized by congress in the budgets. Bearing in mind the administrative decisions issued by their chiefs of the cabinet that modified the budgeted expenditures by $290.3 billion pesos, the Kirchners were able to spend 1 trillion pesos without proper congressional supervision.
Hyper-presidentialism has played a fundamental role in weakening the independence of the justice system. The limits on judicial independence in Argentina also contribute to the lopsided balance of power that favors the executive branch. Given the concentration of power in the hands of Argentina’s executive office, it’s not surprising that Argentina suffers from problems with corruption.
Parish Flannery: What steps do you think Argentina needs to take to achieve real success in reducing corruption?
Singerman: In order to achieve real improvement Argentina needs to focus on weakening the hyper-presidentialism model of government that has been mainly responsible for Argentina’s systemic corruption. Measures such as banning presidential and parliamentarian reelections, prohibiting the reappointment of ministers and other top government officials to future governments, and barring the president and his top officials from being elected or appointed to parliamentary, judicial, or other government positions that grant immunity, should all be seriously considered in a constitutional amendment.
Likewise, the constitution should be amended to severely restrict the use of DNUs and to require that they be approved by both houses of congress, in extraordinary sessions if needed, within short period of time from its issuance. Further, to address the ability of the president and chief of the cabinet to reallocate budgetary accounts without any legislative oversight, a constitutional amendment should prohibit congress from delegating this authority. In this way, the executive will be prevented from overspending on projects where there is suspicion that corruption is taking place.
Serious consideration should be given to reform the constitution so as to allow congress to appoint, with the agreement of the Supreme Court, an ad hoc tribunal of foreign judges that will try corruption cases involving top government officials accused of corruption. This will reduce the likelihood that indicted government officials will bribe the judges responsible for trying them and could speed up the resolution of corruption cases.
In order to avoid vacancies in lower federal courts that could delay the processing of corruption cases, a constitutional amendment should require the president to appoint a federal judge within a short period of time from the date that the binding proposal of three candidates is approved by the Council of the Magistracy. The appointment would still need the senate’s consent. Further, the Council size should be increased and its composition changed so as not to allow the ruling party to secure more than one third representation in the Council; a situation that if happened could impede the selection and impeachment of judges.
Provincial constitutions should be reformed in line with the constitutional amendments at the federal level.
In addition to an institutional shock, a big push requires the simultaneous implementation of a number of anticorruption policies that will not only act on individuals’ monetary incentives but also on people’s intrinsic motivations.
Economists believe that individuals act corruptly when the rewards from doing so are larger than the respective costs. Thus, as the first step in combating corruption, the Argentine congress must significantly increase the penalties imposed in corruption cases, making these crimes punishable with lengthy mandatory jail time, with no exceptions for old age, and not subject to probation, parole, suspension, or presidential pardons. Additionally, congress should significantly extend the statute of limitations to initiate enforcement actions against persons charged with corruption.
Likewise, the Argentine congress should pass an asset recovery law that will allow the government to sue individuals and companies in a civil court in order to recover assets that come from corruption activities.
The government should also implement policies that increase the probability of detecting corruption. One such policy is having monitors elected by voters rather than appointed by the president oversee government officials in charge of handling public funds.
Another policy Argentina needs is a whistleblower program by which the whistleblower is guaranteed a monetary reward, confidentiality, and protection against retaliation for reporting corruption to an independent anti-corruption state agency; however, the reward should be granted only if the reported party is convicted, and/or his assets from criminal activity are forfeited, and the whistleblower himself is not criminally convicted.
Finally, policies that call for public awareness campaigns and education programs aimed at increasing people’s mindfulness of the illegality and immorality of corruption, and the costs of corruption to society are an important tool in the fight against corruption.
Note: In this interview Eduardo Singerman is expressing his personal opinion and analysis as a long-time Argentina researcher. He is not speaking on behalf of his employer.
