STATE CAPTURE: AN OVERVIEW

QUERY SUMMARY

Can you provide information on state capture in a State capture is one of the most pervasive forms of seemingly well-run country? Are there many similar corruption, where companies, institutions or situations? What can be done to better understand powerful individuals use corruption such as the the issue and to influence the system in the right direction? buying of laws, amendments, decrees or sentences, as well as illegal contributions to political parties and CONTENT candidates, to influence and shape a country’s 1. Overview of state capture policy, legal environment and economy to their own 2. Addressing state capture interests. 3. References The literature on state capture focuses to a great \\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\\ extent on former Soviet countries, but this form of Author(s): corruption can also be found in other countries Maíra Martini, Transparency International, where politics and business have very close ties [email protected] and transparency is lacking, such as in Singapore, South Korea, the United States and other European Reviewer(s): Marie Chene, Transparency International countries. State capture may also be a problem in countries where the military, ethnic groups or Date: 11 March 2014 organised criminal groups are powerful and use the state to extract rents. NOTE This answer draws on a previous U4 Helpdesk answer on This answer provides an overview of the main “Influence of Interest Groups on Policy-Making”. issues related to state capture and the reforms necessary to address it.

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This Anti-Corruption Helpdesk is operated by Transparency International and funded by the European Union. OVERVIEW OF STATE CAPTURE

1. OVERVIEW OF STATE CAPTURE the challenges in terms of determining the extent to which a set of state institutions is captured is that it What is state capture? does not necessarily matter how many firms are engaged in state capture. In this context, a powerful State capture refers to “a situation where powerful monopoly could generate a much higher level of individuals, institutions, companies or groups within state capture than a larger number of smaller/less or outside a country use corruption to shape a influential firms competing to capture public officials. nation’s policies, legal environment and economy to benefit their own private interests” (Transparency Against this backdrop, there have been only a few International Plain Language Guide, 2009). It is one attempts made to measure levels of state capture. of the most pervasive forms of corruption. The Business Environment and Enterprise Performance survey (BEEPS), which was first Public institutions such as the legislature, the conducted in 1999 by the World Bank and the executive, the judiciary and regulatory agencies both European Bank for Reconstruction and Development at the federal and local levels are subject to capture. (EBRD) to assess obstacles in the business environment across 22 transition economies, As such, state capture can broadly be understood as included questions regarding state capture. The the disproportionate and unregulated influence of questions aimed to analyse the extent to which firms interest groups or decision-making processes, where make illicit payments to public officials in order to special interest groups manage to bend state laws, influence the formation of laws, rules, regulations, or 1 policies and regulations through practices such as decrees by state officials . illicit contributions paid by private interests to political parties and for election campaigns, parliamentary Where can we find state capture? vote-buying, buying of presidential decrees or court decisions, as well as through illegitimate lobbying A great deal of the literature on state capture focuses and revolving door appointments. on countries in Central and Eastern Europe, where the transition from socialism entailed radical State capture can also arise from the more subtle transformations of political and economic institutions, close alignment of interests between specific which in turn created opportunities for powerful business and political elites through family ties, interest groups to influence the formulation of friendship and the intertwined ownership of economic economic policy to their own advantage. In these assets. countries, state capture was facilitated by: (i) the rewriting of an exceptional volume of laws, The main risk of state capture is that decisions no regulations and policies; (ii) the unusual redistribution longer take into consideration the public interest but of wealth from the state to the private sector; and (iii) instead favour a specific group. Laws, policies and the virtual absence of institutions either within or regulations are designed to benefit a specific interest outside the public sector that could effectively check group, often times to the detriment of smaller firms the abuse of public office (World Bank 2000: 25). and groups and society in general. State capture can seriously affect economic development, regulatory State capture can also be found in other nations quality, the provision of public services, quality of where the military, ethnic groups, kleptocratic education and health services, infrastructure politicians or organised criminal groups become decisions, and even the environment and public extremely powerful and manage to shape laws and health. policies. For instance, this is the case in Colombia,

1 Measuring state capture Companies were asked the extent to which the following six types of activities had a direct impact on their business: (i) sale of parliamentary votes on laws to private interests; (ii) sale of There are several methodological challenges presidential decrees to private interests; (iii) central bank mishandling of funds; (iv) sale of court decisions in criminal cases; involved in measuring state capture. Hellman, Jones (v) sale of court decisions in commercial cases; (vi) illicit and Kaufmann (2000), for instance, note that one of contributions paid by private interests to political parties and election campaigns.

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Pakistan, conflict states in Sub-Saharan Africa, power and influence of these conglomerates on among others (Kupferschmidt, 2009; Kaufmann, decision-making. Hellman & Gerain 2000). Americas While literature on state capture in other countries is scarce, there is evidence suggesting it is also a In the United States, corporations have become problem in developed countries where government extremely powerful and they have been using and businesses have very close ties and where lobbying, the revolving door and campaign financing economic interests are often times intertwined. to exercise control over the rules governing their operations, as well as over the allocation of public Asia resources in several sectors (Monks 2012; Kupferschmidt 2009). In Asia, for instance, there is evidence of policy and regulatory capture by the elite and powerful business The recent events in the financial sector are a good groups in Singapore and South Korea. example of how regulators have failed to reform existing rules for ensuring more transparency and In Singapore, research conducted by the Tax Justice accountability, as well as for punishing irresponsible Network (2013) shows that the financial services behaviour due to pressure from business groups. sector in the country exercises strong influence over law-making. According to one of the politicians The final report on the financial crisis published by interviewed, laws are always approved according to the Financial Crisis Inquiry Commission (2011) the wishes of the offshore financial services sector, concluded that the financial industry itself played a and since the 1990s the country has been liberalising key role in weakening regulatory constraints on financial markets and banking sectors. Former institutions, markets and products. For instance, from ministers and civil servants are members of the 1999 to 2008, the financial sector spent US$2.7 boards of banks and according to one diplomat, “the billion in reported federal lobbying expenses, and notion of conflicts of interest does not exist, because individuals and political action committees in the everyone is in some form a shareholder of Singapore sector made campaign contributions of more than Inc.” (Tax Justice Network 2013). US$1 billion (Financial Crisis Inquiry Commission 2011). Moreover, according to the former chair of the In South Korea, businesses have long maintained Securities and Exchange Commission (SEC), the controversial relationships with politicians agency responsible for overseeing financial (Transparency International 2006). The so-called institutions in the United States, “lobbyists exerted a huge amount of pressure once word of a proposed Chaebol, large conglomerate family-controlled firms, regulation got out. Members of Congress would then are characterised by their strong ties with “harass” SEC with frequent letters demanding government agencies. In addition to the control these answers to complex questions and appearances of conglomerates are said to have over politics, they officials before Congress”. According to the former also benefited from government bail outs on three chair, these requests consumed much of the different occasions (1974, 1987 and 1997), which led agency’s time, impacting its ability to make and to government reforms after labour unions, enforce regulations (Financial Crisis Inquiry international investors, small shareholders, as well as Commission 2011). other civil society organisations advocated for more regulations (Lee 2008). Past investigations into the influence of An anti-trust law was approved in the 1980s pharmaceutical industries on US law-making show (Petersen 2011) and several reforms were that money spent on lobbying and campaign implemented in the late 1990s aimed at making financing may have helped favourable laws be Chaebol leaders more accountable, eliminating loan adopted at the federal level, and led to a more guarantees among affiliates and enhancing industry-friendly regulatory policy at the Food and managerial transparency. However, it is still not clear Drug Administration, the agency that approves whether the reforms implemented actually reduce the pharmaceutical products for sale and most directly

3 OVERVIEW OF STATE CAPTURE oversees drug companies (Center for Public Integrity 2. ADDRESSING STATE CAPTURE 2011). Addressing state capture requires reforms and Europe improvements across a whole range of institutions and in relation to the internal organisation of the In European countries, the risk of state capture is political system, as well as a complete overhaul of often debated due to extensive opaque lobbying the relationship between state and business. practices and politicians’ dependence on private Consequently, anti-corruption strategies addressing donations for financing of election campaigns state capture usually aim at enhancing state capacity (Transparency International 2012). and public sector management, strengthening the accountability of political leaders, enabling civil Important business groups often have direct access society and increasing economic competition to politicians in many European countries. In addition, (Kaufmann, Hellman & Gerain 2000). as the EU becomes a key policy-maker, businesses have increasingly tried to influence officials both at Enhancing the accountability of political the commission and the parliament to shape laws leaders and regulations according to their interests (AlterEU). Within this framework, countries should encourage The 2011 “cash for amendments” scandal, where civic participation, facilitate (or enforce) open members of the European Parliament (MEP) were hearings on policies and consultative decision- caught accepting money in return for tabling pro- making processes (Transparency International 2009). industry amendments, has helped shine a light on the issue. Since then, several other cases of Other measures that may enhance transparency and amendments that are favourable to powerful interest accountability in policy-making and help to identify groups, sometimes drafted by industry lobbyists suspicious/illegal relationships between private themselves, have been disclosed by non- groups and politicians include for example: freedom governmental organisations advocating for more of information legislation to allow access to transparency in lobbying. In 2013, a Belgian MEP government documents related to the policy-making tabled 229 amendments against the European data process; E-government mechanisms to encourage protection directive. After the issue became public, consultation and public feedback on draft laws and the MEP declared that his assistant had met with regulations; and public disclosure of parliamentary several lobbyists and had tabled the industry votes (Hellman 2011)2. Political competition should amendments without his knowledge (Corporate also be enhanced by strengthening civil liberties. Europe Observatory 2013). Beyond that, special attention should be given to the At the domestic level, for example, the close ties following issues: between the German government and the car industry became more evident in 2013 (Spiegel Transparency in political financing 2013). After the elections, Chancellor Angela Merkel’s party the Christian Democratic Union (CDU) Illicit political finance is one of the mechanisms often received a donation of €690,000 (almost used by large corporations to influence policies, laws US$900,000) from major shareholders of the BMW and regulations. While international evidence shows automotive company. Following the donation, there is no universal blueprint for ensuring the Germany took a stronger stance in favour of effectiveness of political finance regimes, postponing the implementation of an EU agreement transparency is essential to curb opportunities for limiting CO2 emissions. If implemented, the new EU corruption and undue influence. In this context, in rules on emissions would have had an impact on the order to enhance transparency and accountability German car industry (Project for Democratic Union 2013). 2 For more information on civic participation in policy-making, please refer to a previous Anti-Corruption Helpdesk answer available upon request.

4 OVERVIEW OF STATE CAPTURE and avoid state capture, countries should seek to independent oversight agency. It is also essential (Transparency International 2009; Council of Europe that such information is presented in a timely 2003): manner and is accessible to the public.

 Reduce the costs of election campaigns: High For more information on political party financing, campaign costs increase politicians’ reliance on please see the previous Anti-Corruption Helpdesk private funds, providing companies and wealthy answer Political Party Accountability: Intra-Party individuals with a great tool for manipulating Democracy, Funding, and Minimal Standards for policy-making or buying political favours. Candidates. Countries should establish spending ceilings regulating both the type and amount of Conflict of interest rules expenditures (for example limits/bans on advertisements, public events, amount of money Conflict of interest is defined by Transparency spent on staff, public opinion surveys, etc.). International as a “situation where an individual or the entity for which they work, whether a government,  Limit/restrict private donations: Restrictions on business, media outlet or civil society organisation, is donations aim to reduce the excessive or confronted with choosing between the duties and inappropriate influence of private money in demands of their position and their own private politics. These restrictions may involve limits on interests” (Transparency International 2009). In private contributions (regulating the maximum particular, lawmakers and policy-makers in countries permissible contribution amount) or restrictions liable to state capture are uniquely vulnerable to on the source of funding, including conflicts of interest. prohibition/limits on anonymous contributions, foreign contributions, donations from legal entities Regulation may take a number of forms, including and state enterprises, or firms which provide laws, codes of conduct and internal rules or goods or services to the public administration management guidelines, and cover a wide range of (Council of Europe 2003). Attention should also issues, including: be given to illegal donations coming through loans or entities related to political parties.  Asset and interest declaration requirements: Public officials and politicians should be required  Guarantee public funding: Public funding also to regularly (at least once a year) declare their plays a key role in preventing the dependence of assets, liabilities, income from all sources, gifts, political parties (and candidates) on private advantages and other benefits, as well as unpaid donors. The success of a public funding scheme contracts and employment, unpaid board depends on whether political parties and memberships and directorships, participation in candidates report on how funds are used as well organisations, trade-unions, NGOs, and post- as their other sources of income. tenure positions and employment.

 Establish efficient disclosure and reporting It is also important to request the disclosure of mechanisms: Political parties and candidates precise amounts of all income and the must be required to disclose information on all identification of concrete sources, as well as to the donations received (including name and make such information available to the public in address of donors and amounts). Political parties, an easily searchable database. Finally, an in addition to reposting donations, should also be independent and capable oversight agency is required to carry out proper bookkeeping and instrumental to safeguarding the correct publish audited annual accounts of all income implementation and enforcement of the law. and expenditure. Such requirements are a prerequisite for the enforcement of spending For more information on asset declaration rules ceilings, contribution limits and the allocation of and examples please see the previous Anti- public funding. The effectiveness of a disclosure Corruption Helpdesk answers: Asset Declaration mechanism also depends on the existence of an Rules for Politicians and Declaration of Interests,

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Assets and Liabilities: Oversight Mechanisms and financial information (how much is being Sanctions. spent to influence decisions). Effective implementation also requires robust  Post-public employment: Regulation regarding mechanisms of oversight and enforcement conflict of interest should also cover post-public (Zinnbauer 2009). employment and establish mandatory “cooling- off’” periods to avoid the revolving door, as  Establish “legislative footprints”: while lobby enterprises and their consultants often use former registers are instrumental for keeping track of public officials for lobbying purposes, or promise lobbyists’ interactions with decision-makers, lucrative follow-on employment in the private in many cases the information provided is not sector to public officials that promote their enough to precisely identify how lobbyists are interests while holding public office. seeking to influence decisions/laws. This is exactly what the legislative footprint aims to For more information on the revolving door, do; it is a document annexed to draft laws please see Transparency International’s 2010 and decisions detailing the interest group Working Paper. representatives who were consulted and provided input during the preparation of the bill/report. Lobbying regulations  Establish robust oversight and enforcement Regulation on lobbying is a relatively new global mechanisms: Effective implementation of practice and some countries are still lagging behind lobbying rules requires robust mechanisms of in ensuring the relationship between lobbyists and oversight and enforcement, including an public officials, particularly decision-makers, is independent and well-resourced oversight transparent and ethical. Rules regulating lobbying agency, a strong verification mechanism and should establish integrity safeguards for both proportionate and dissuasive sanctions. lobbyists and decisions-makers. In order to enhance transparency, regulations on lobbying should seek to  Mobilise civic groups and the media to track (Transparency International 2009): and oversee the information disclosed about lobbying activities: Citizens and the media  Adopt a broad definition of lobbyists: can play an important role in questioning Lobbying activities can be carried out by their political representatives regarding different individuals, companies or excessive contact with interest groups. organisations, such as lawyers, consultants, public affairs staff, and non-governmental organisations in different forms (meetings, For more information please see the previous Anti- phone calls, written text, e-mails). It is Corruption Helpdesk answer on Best Practice in important that there are clear definitions of Regulation of Lobbying and on Legislative Footprints. the activities exercised by lobbyists as well as their role. Ensuring a competitive private sector  Establish mandatory lobbying registers: Mandatory lobbying registers are Fostering competition in the economy and in the fundamental to ensure that the interactions marketplace for political influence is one of the main between private interests and public officials challenges in preventing and combating state are more transparent and accountable. capture. Ideally, registration systems should allow for public disclosure of lobbyists’ names, their Therefore, it is possible to constrain the ability of clients, the specific issues in which they have powerful economic interests to capture the state by engaged, targets, techniques, as well as restructuring monopolies to increase competition,

6 OVERVIEW OF STATE CAPTURE encouraging trade, fostering a more favourable 2000). business environment, simplifying tax procedures and facilitating market entry (World Bank 2000). For more information, please see the previous Anti- Corruption Helpdesk answer on Best Practices in Economic policy liberalisation Reducing Bureaucracy and Corruption. Corporate governance Deregulation of prices or other aspects of production or trade are important steps toward reducing Weak corporate governance institutions may also opportunities for state capture. Price subsidies, tax facilitate corruption and state capture. According to exemptions and other benefits provide politicians and the World Bank, a wide range of corporate public officials discretionary power that is highly governance reforms have proven effective in curbing subject to abuse. Reforms towards greater both incentives and opportunities for corruption. liberalisation can help to reduce this discretionary Among other things, such reforms include: public power, if conducted in a transparent and non- disclosure of share ownership and cross-holdings; discriminatory manner; otherwise, there is a risk that strong penalties for insider trading and pyramid the reform process itself will be captured by powerful schemes; the appointment of outsiders to boards of and influential groups (World Bank 2000). directors; the introduction of regular, published independent audits of financial accounts based on standardised rules; the establishment of an effective Enhancing greater competition legal framework for the exercise of creditors’ rights; and the strong enforcement of ethical standards Enhancing competition by lowering barriers to entry, (World Bank website). requiring competitive restructuring (in particular of monopolies and prior to privatisations) and clarifying ownership structures are important elements for reducing the concentration of power in the hands of large vested groups (World Bank 2000). These 3. REFERENCES measures will in turn reduce the likelihood of small group of influential conglomerates capturing Center for Public Integrity. 2011. Drug lobby second to institutions and the benefits of market reforms. none. http://www.publicintegrity.org/2005/07/07/5786/drug- lobby-second-none

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Corporate Europe Observatory. 2013. Belgian MEP in Regulatory reform lobby amendments scandal. http://corporateeurope.org/lobbycracy/2013/11/belgian- mep-lobby-amendments-scandal Routine aspects of business operations should also be simplified where possible. This includes Financial Crisis Inquiry Commission. 2011. The Financial registration and licensing procedures (for example Crisis Inquiry Report. http://fcic- establishing one-stop registration) or workplace static.law.stanford.edu/403B563C-52B2-4F9F-9231- safety (for example simple and clear rules for site 73913C299762/FinalDownload/DownloadId- inspections), in order to promote new market entry, A3CD6E735DFFDF9F942B20CAFF41FA25/403B563C- growth, and to limit companies’ contact with 52B2-4F9F-9231-73913C299762/cdn_media/fcic- reports/fcic_final_report_full.pdf bureaucrats. This thereby reduces the opportunities/reasons for firms to capture the state. Hellman, J. 2011. Strategies to Combat State Capture and Firms should also be provided with low-cost methods Administrative Corruption in Transition Economies. for challenging administrative decisions (World Bank Background Paper Prepared for the Conference: “Economic Reform and Good Governance: Fighting Corruption in Transition Economies”.

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