Sunshine Recorder

…. In the past couple of months, there’s been reporting on a pair of crimes in the business world so flagrant as to literally take the breath away. The first of these wasn’t actually that widely reported on — in fact, I only know about it because a friend in the healthcare industry sent along an article on it. It’s a long read, but it’s worth taking the time to do so. It details how a medical device company decided to bypass FDA clinical trials and use bone cement in the spines of humans. Given that the cement wasn’t properly tested, it should come as no big surprise that a number of people died as a result. In sentencing the executives responsible for what happened, the judge described how “what has occurred in this case, in terms of wrongfulness — it’s 11 on a scale of 10.” In fact, the judge, for “the first time in his 25-year career… sentenced someone above the federal guidelines.”

That executive, for his role in what happened, received nine months in jail. (The federal guidelines actually suggested six months for this type of offence, which was not even a felony, but a misdemeanor). One of his fellow executives received a lesser sentence of five months.

And then there’s a case that was much harder to miss: that of HSBC, and their foray into the world of money laundering for drug cartels:

Despite the fact that HSBC admitted to laundering billions of dollars for Colombian and Mexican drug cartels (among others) and violating a host of important banking laws (from the Bank Secrecy Act to the Trading With the Enemy Act), Breuer and his Justice Department elected not to pursue criminal prosecutions of the bank, opting instead for a “record” financial settlement of $1.9 billion, which as one analyst noted is about five weeks of income for the bank.

Lay those two cases down beside that of a 26-year old kid who did the online equivalent of checking out too many books out of the library. For doing that, Aaron Swartz was initially charged with four felonies. The prosecutors in the Synthes case agreed to charge the executives only with one misdemeanor each. In the instance of HSBC, they used their discretion to avoid pursuing criminal charges altogether. In Swartz’s case, the government decided to use that same discretion to bolster its initial four felony charges with a further nine — hence the possibility of over three decades of jail time and a $1M fine. Now, Aaron had only been charged — if justice had prevailed, it could have all been thrown out in court — but even in that circumstance, he would have still been roughly $1.5 million out of pocket just defending himself. Those HSBC executives never even got to that point.

I actually had the opportunity to talk with Aaron online a few weeks ago; partly as a result of an article that I wrote for HBR about corruption and its effect on innovation. Looking at the three cases above, I can’t help but see similar symptoms seeping into the justice system. I simply don’t know how else to explain the huge disparity in how justice was sought in these very different cases — other than regulatory capture. It seems you can get away with laundering money for the drug cartels, so long as you’ve been generous with the those responsible for appointing district attorneys; or better yet, if your industry has paid to undo all the regulation that prevents you from getting too big to fail. Similarly, when your lobby has been helping Congress draft the laws that govern food, drugs, and cosmetics, you can make sure that the federal sentencing guidelines are only six months should you breach the responsible corporate officer doctrine. This in turn means you can inject unsafe cement into people’s spines with relative impunity (apparently, those in the healthcare industry were actually surprised when the officers were sentenced to jail, even if it was for only a few months. One of the convicted executives went so far as to ask the judge to delay the beginning of his sentence until after the holidays). But woe betide you if, in the name of openness and sharing human knowledge, you decide to download academic journals. Because that sounds a lot like piracy — and we all know how much has been spent to stamp that scourge out.

It is hard not to be impressed when you arrive in the newly rich nation of Equatorial Guinea, especially when you are invited as a guest of the president. There is just a brief wait in the VIP lounge, with its white leatherette sofas and The Naked Gun playing on a flat-screen television, before you are whisked into your limousine, the usual hassles of passport control handled by friendly officials. Leaving Malabo airport you see what looks almost like a modernist sculpture of discarded aeroplanes, one of which has its nose pointing into the air. You wonder if this is some kind of weird memorial to the infamous Wonga coup attempt, when British-led mercenaries failed to overthrow your host in an attempt to get their hands on his oil wealth.

Then there is a drive for several miles along a new three-lane highway. Strangely, it is devoid of traffic – we passed no more than five cars coming in the opposite direction. On either side are new buildings planted among the impossibly lush foliage. There are offices for oil and construction companies, together with scores of new blocks of flats – again all empty.

Eventually you pass the conference centre, a concrete edifice built to host a recent African Union summit. Beside it is a complex of 52 identical mansions, one for every African leader attending the week-long event. It has its own heliport, of course. The houses are all empty.

“Fantastic infrastructure here, isn’t it, compared with the rest of Africa,” enthuses one of my companions as we speed past. This is Adrian Yalland, an ebullient former spokesman for the Countryside Alliance who now speaks up for this West African dictatorship. He has not visited the country before.

Next, you pass an artificial beach and an ultramodern hospital before turning into an impressive Sofitel hotel with 200 rooms, the country’s first spa and a bespoke island nature walk. An 18-hole golf course is being hacked from the verdant jungle. Even the obligatory picture of President Teodoro Obiang has been given a black-and-gold makeover, giving him the look of JFK. There are, however, hardly any guests.

Welcome to Sipopo. This Orwellian complex, grafted on to the capital, Malabo, is the face Equatorial Guinea wishes to present to the world. Obiang, now the longest-serving ruler in Africa and a man accused of presiding over one of the world’s most corrupt, kleptocratic and repressive governments, spent more than half a billion pounds creating it as part of his drive to rebrand his regime. It is small change for a man alleged to pocket £40m a day in energy revenues; his tiny country is sub-Saharan Africa’s third-largest oil producer.

It is like something out of The Truman Show, one of many illusions in a land of artifice. Sipopo cost four times the annual education budget in what is perhaps the planet’s most unequal society, a country where per-capita wealth exceeds Britain but three-quarters of its 675,000 citizens live on less than a dollar a day. Infant mortality rates are among the worst in the world, but that spanking-new hospital, said one doctor, has no patients most of the time. Ordinary people, it turns out, are barred from the area.

The woman’s exhausted eyes reflected the flames dancing in front of her. A 38-year-old grandmother, she is also a leader of the civilian insurgency that has taken over this mountain town in the state of Michoacán, 310 miles west of Mexico City. Sixteen months of cold and sleepless nights at Bonfire No. 17, one of a number of permanent burning barricades set up here, have taken their toll.

But like the rest of the residents, she cannot afford to let her guard down.

On the morning of April 15, 2011, using rocks and fireworks, a group of women attacked a busload of AK-47-armed illegal loggers as they drove through Cherán, residents said. The loggers, who local residents say are protected by one of Mexico’s most powerful criminal organizations and given a virtual free pass by the country’s authorities, had terrorized the community at will for years.

Cherán’s residents said they had been subjected to multiple episodes of rape, kidnapping, extortion and murder by the paramilitary loggers, who have devastated an estimated 70 percent of the surrounding oak forests that sustained the town’s economy and indigenous culture for centuries.

What happened next was extraordinary, especially in a country where the rule of law is often absent and isolated communities are frequently forced to accept the status quo. Organized criminal syndicates, like the drug cartel La Familia, created in Michoacán, act like a state within a state, making their own rules and meting out grisly punishments to those who do not obey.

But here in Cherán, a group of townspeople took loggers hostage, expelled the town’s entire police force and representatives of established political parties, and forcibly closed the roads.

The Mexican government authorities had previously ignored their repeated pleas for help, the residents said, so the people of Cherán simply took the law into their own hands.

“I felt my knees shake like castanets,” said the woman standing vigil at Bonfire No. 17, Rocio, who, like others here, withheld her last name for fear of reprisals by the criminal networks they are resisting. She recalled her overwhelming fear during those first days of revolt, when residents gathered around as many as 200 bonfires set up at every intersection in town to prevent the loggers from retaliating.

In the months since then, Cherán’s townspeople have established a simple but effective internal protection system. There are fewer bonfires today, but several remain active and a security patrol of residents, or “ronda,” keeps watch at all times. Armed townspeople — from middle-age men to teenage girls — guard the barricades blocking all entrances into town. Their weapons are AR15 assault rifles, seized from the police when they expelled them.

Inside the town, they say, crime is now down almost to zero and most residents seem to feel safe. In recent days, however, people from nearby communities have taken several federal police officers captive, demanding that the newly instated forest patrols be canceled so that they can continue their logging activities. (The officers have since been released.) It is unclear if the hostage-takers were illegal loggers, but tensions are flaring in Cherán as the rest of the country looks on with concern.

Last November, in a court appeal, Cherán acquired a degree of autonomy from the Mexican government; the town still receives federal and state money, and its people must pay taxes, but they are allowed to govern themselves under a legal framework called “uses and customs” that has been granted to some indigenous communities.

Legal experts and academics say that Cherán is the first community to be granted this right as a result of a conflict over natural resources with one of the country’s increasingly powerful criminal syndicates.

After Sergei Magnitsky was beaten to death in a Moscow jail for uncovering fraud by Russian authorities, investor Bill Browder devoted himself to publicising the case.

A decade ago, Bill Browder was flying high as one of the most successful foreign investors in Russia. With $4.5bn under management, Browder had committed his career and a lot of his investors’ money to proving his proposition that the shares of Russia’s newly privatised, resource-rich companies were absurdly cheap.

The cocksure, US-born fund manager aggressively argued to anyone prepared to listen – and to many who weren’t – that President Vladimir Putin had been unfairly maligned in the western press and was intent on bringing prosperity and order to the biggest country in the world, after the rapacious criminality of the 1990s. To the disgust of many, Browder declared himself delighted when Mikhail Khodorkovsky, once Russia’s richest and most powerful oligarch, was arrested in 2003 and jailed. “Who’s next?” Browder asked cheerfully.

Two years later, however, Browder’s fortunes suffered a similar convulsion of fate. Returning to Moscow one Sunday evening in November 2005, after a routine trip to London, his visa was rejected for unexplained reasons. He was expelled from the country the next morning and declared a threat to national security. His panicking investors stampeded out of his Russia fund, known as Hermitage Capital Management. He was forced into a fire sale of his Russian assets, reducing his funds to just $50m. Hermitage’s offices in Moscow were later raided by the Russian tax police, amid allegations of fraud.

Browder’s career as an investor in Russia had been wrecked, but worse was to follow. Sergei Magnitsky, a dogged lawyer who worked for the law firm that represented Hermitage, later discovered that the Russian authorities had perpetrated a tax refund fraud, using forged Hermitage documents to transfer $230m of state money to a criminal gang. Rather than congratulating Magnitsky for his assistance, the authorities accused him of orchestrating the fraud himself and arrested him in November 2008. After almost a year’s detention, during which time he was repeatedly denied medical treatment, he was beaten to death in his jail cell.

In this exclusive interview, we speak to Raymond Baker (Director of the Task Force on Financial Integrity and Economic Development). We discuss the true scale of the global illicit economy and understand how issues such as government theft, drug trafficking, global wealth, money laundering and the shadow financial system contribute to some of our most intractable issues ranging from poverty to hunger, terrorism and even economic crises.

It is an astonishing testament to our society’s economic development that the decade from 1999-2009 saw OECD countries giving over US$1.07 trillion (around 1.7% of world GDP) in overseas development aid, predominantly to developing economies. It is even more astonishing when you realise that in the same period, over US$8 trillion (an amount larger than the combined size of the economies of China and India) was illicitly transferred from these developing economies into the western world, in most cases- permanently. This amount, combined with the developing world’s estimated US$4 Trillion in external debt, means that 80% of our world population (some 5.15 billion people) live in poverty.

Some may argue that even against the backdrop of debt and outflows, it should still be applauded that these economies have received such a significant amount of aid. Surely, they may add, it must be helping? Economist Loretta Napoleoni notes that, “what turns a developing into a developed nation is not the amount of foreign aid it attracts, but how the money is spent.” Using the example of Africa she continues to describe how, “most of the half-trillion dollars received by Africa since the 1960s has funded military coups and civil wars, not economic development. Between 1982 and 1985, Zimbabwe spent $1.3 out of $1.5 billion of foreign assistance on arms and ammunition. In war-torn countries such as Ethiopia, Somalia and Sudan, foreign asset transfers have provided the most lucrative source of revenue for local armed groups. During the civil war in Sudan, the bulk of food aid intended for famine-stricken regions was spent by local armed groups and warlords, who bought Iraqi weapons to use against the Sudanese army and the population… in fact, 70% of the loans given to developing economies go to purchasing goods and services from Western corporation.” She also refers to the Swedish Economist Fredrik Erixon who has shown that since the 1970s, the volume of aid received by African countries has proven inversely proportional to economic growth. Far from being the cure he says, foreign aid has caused the disease. The more a country receives, the more it sinks into poverty.

The existence of a ‘market’ has been a core feature of human society since the Stone Age. At the heart of this market exists the exchange medium of ‘money’, governed by the ideological science of the ‘economy’. Napoleoni notes, “…The birth of new outlets for exchange has triggered economic progress. Human discoveries and innovations gain new meaning when they are shared with others and this happens when they are traded…” (Rogue Economics, 2008). In this regard, one can observe that a properly functioning economy, in which participants have confidence, is essential to the fundamental operation of society. It is clear to even the most casual observer however, that our global economy is faulty. This system, designed to support human progress, is inaccessible or inequitable for the vast majority of humanity. So what is the true scale of the faults in our economy?

Why the Russian youth have tolerated the political situation in their country for so long and why they are no longer tolerant.

Political freedom has never existed in Russia. Which is why in our country even critically minded people are not used to thinking about society as a whole. […] Politics is one thing, life is another. Russian society, particularly when it comes to my generation, is extremely unpolitical and this gives the government more or less unlimited freedom. We are not concerned about the government and that suits the government just fine. 

Of course there are people, plenty of them, who very definitely do make this connection. But even they do not get involved. There are a number of reasons for this. Firstly, the entire political system in Russia – from village soviet to federal committee – is based on lies, on the pursuit of private instead of societal interests, and on theft. Even an honest person who ends up in politics has to play the game to some extent, otherwise he will be “eaten” by less upstanding colleagues. This is why honest people give politics a wide berth. And engage in civil society in other ways. Such as in the voluntary movement which in recent years has become a mass phenomenon. 

Secondly, there has been neither political nor personal freedom in Russia for a very long time. Throughout the 20th century the totalitarian state wanted to control all spheres of life. This is no longer the case. The state no longer reaches into personal affairs, into the family and into people’s inner lives. Beyond this, many people don’t ask more of the state. People are left in peace, they are no longer shot for reading forbidden poetry, they are allowed to wear whatever they want, listen to whatever music they like, travel the world and even think what they wish about the state – and that’s just fine. It is a sort of silent agreement, a mutual nonaggression pact: leave us in peace and we will leave you in peace. The right to live one’s life in exchange for keeping out of politics in exchange. And for quite some time this seems to have satisfied both sides. 

Of course the state does not waste any time in dealing with those who dare to violate this agreement, who poke their noses into things or disrupt the status quo. The attacks on civil rights activists, the murders of prying journalists, the brutal suppression of demonstrations – these are all as much symptoms of the time as social networking or security checks in public spaces. In other words, it is not only hard work to stand up for your rights in Russia, it is also dangerous. And you cannot blame anyone for not wanting to risk their lives. After all, not everyone is a hero and a fighter.

The middle-aged Gladki’s career has traced the rise of Russia’s first mafiosi, the so called vory v zakone or “thieves in law”, from a quasi monastic order of gang leaders that ran life in the gulags under the USSR, through the wild west days of the capitalist 1990s, to the decade of Vladimir Putin’s Russia. “Now all the vory have gone to work for the FSB [the Federal Security Service, successor to the KGB], and life has got duller,” conceded Gladki, over lunch at a coffee house around the corner from my office. Top ranking “thieves in law” now own legitimate businesses, drive armoured Maybachs, hang out with judges, politicians, and have policemen on their payrolls. But while Russia’s vory have started to go legit, the opposite has happened to Russia’s authorities. Indeed, the basic functions of organised crime – protection rackets, narcotics, extortion and prostitution, have increasingly been assumed by the Russian state. In a WikiLeaks cable, a Spanish judge – an expert on the Russian mafia, who has studied the mob for 11 years – told US diplomats that he considered Russia a “mafia state”, where “one cannot differentiate between the activities of the government and OC [organised crime] groups”.

Riot police in helmets roughly dragged more than 550 protesters into detention vans Tuesday evening in central Moscow but the opposition warned they would stage a major protest organised via the internet at the weekend. Protesters were planning more demonstrations today. Amid growing international alarm, Mr Gorbachev said the results of Sunday’s poll should be annulled and new elections held due to “numerous falsifications and rigging. The results do not reflect the will of the people,” Mr Gorbachev, president when the Soviet Union collapsed two decades ago, told the Interfax news agency. ”Therefore I think they (Russia’s leaders) can only take one decision – annul the results of the election and hold new ones.” Vladimir Putin’s United Russia party won the polls with a sharply reduced majority, amid signs the prime minister’s once-invincible popularity might be waning.