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2019 Youth ResearchEdge Competition Winners

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View the winning posters of the 2019 OECD Youth ResearchEdge Competition.

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2019 Youth ResearchEdge Competition Winners

  1. 1. BEEFING UP ASSET RECOVERY FOR THE 21ST-CENTURY: LEGAL CHALLENGES TO NEW CONFISCATION TYPOLOGIES IN LATIN AMERICA STEFAN MBIYAVANGA, BASEL INSTITUTE ON GOVERNANCEBeefing up Asset Recovery for the 21st-Century: Legal Challenges to new confiscation typologies in Latin America STEFAN MBIYAVANGA, BASEL INSTITUTE ON GOVERNANCE The new Latin American confiscation typology: Extinción de Dominio The Extinción de Dominio primarily foresees confiscation in the following scenarios: a) Goods constituting the object, instrument, proceeds or profits of the commission of illicit activities b) Goods that constitute an unjustified increase in the assets of a natural or legal person, for which there are no elements that reasonably allow them to be considered to hail from licit activities c) Goods of lawful origin that have been used or are intended to be used to conceal, cover up, or intermingle with unlawful assets d) […] See for example Art. 7.1. Decreto legislativo sobre extinción de dominio no. 1373 of 31. January 2019 (Peru) The research contrasts the Extinción de Dominio with the following guarantees of the European Convention on Human Rights (ECHR), which need to be complied with in order to ensure access to MLA in Europe. - Right to a fair trial (Art. 6.1 ECHR) - Presumption of Innocence (6.2 ECHR) - Legality principle (Art. 7 ECHR) - Right to property (Art. 1 Prot. 1 ECHR) Research findings - While the Extinción de Dominio is formally independent from any criminal procedure, it contains a number of provisions which are arguably criminal charges [especially confiscation pursuant to c) in the box on the left]. - However, the asset holder is not awarded the full panoply of rights and protections for defendants in criminal proceedings guaranteed by international law. - Therefore frictions are likely to appear where the Extinción de Dominio action targets assets located abroad and depends on MLA. What this research is about: Many Latin American countries are enacting new laws to facilitate the confiscation of illicit objects and assets. In Peru, for instance, the «Extinción de Dominio» allows confiscation outside of criminal proceedings and without requiring a criminal conviction (see left box). However, the aggressive nature of the Extinción de Dominio might lead to problems where the Latin American country needs to request mutual legal assistance (MLA) to achieve the confiscation of assets located in a foreign country. In Europe, where many of the tainted Latin American assets have traditionally reemerged, MLA will generally only be provided unconditionally, if internationally guaranteed rights and procedural guarantees are respected (see right box). This research looks at whether the Extinción de Dominio complies with the international due process and fundamental rights framework.
  2. 2. HOW SOCIAL MOVEMENTS TRANSFORM PUBLIC TOLERANCE OF CORRUPTION: AN AUTOPSY OF THE SPANISH INDIGNADOS MOVEMENT ELISA ELLIOTT ALONSO QUESTIONS: - How did the 15M movement change perceptions and tolerance towards corruption in Spain? - What overarching lessons can be learned from this specific case study in the global fight against corruption? 0 10 20 30 40 50 60 70 M ay-85Jun-88Jan-95N ov-95M ar-97M ar-99D ec-00Apr-01Sep-01Feb-02Jun-02N ov-02M ar-03Jul-03D ec-03Apr-04Sep-04Jan-05M ay-05O ct-05Feb-06Jun-06N ov-06M ar-07Jul-07D ec-07Apr-08Sep-08Jan-09M ay-09O ct-09Feb-10Jun-10N ov-10M ar-11Jul-11D ec-11Apr-12Sep-12Jan-13M ay-13O ct-13Feb-14Jun-14N ov-14M ar-15Jul-15D ec-15Apr-16Sep-16Jan-17M ay-17O ct-17Feb-18Jun-18N ov-18 Corruption and fraud Politicians in general, political parties and politics The Economy DATA: Spike in concern about political corruption, even after the economic situation improved 15M CONTEXT: economic crisis of 2008 Unemployment, increased inequality and poverty and austerity measures lead to massive demonstrations CONCLUSIONS: I. Collective moral development can occur without resulting in increased disaffection. Change in political culture II. Social movements as a positive way of bringing about an active and enlightened citizenry, essential for integrity reform. III. Underlying change in perceptions and tolerance towards corruption may take time to surface and consolidate itself. IV. Crisis opportunities are not enough: honest political agents conscious of the importance of integrity also need to be present to promote real change. Factor still to be confirmed. V. Technology has the potential of placing ordinary citizens at the centre of public affairs. HOW SOCIAL MOVEMENTS TRANSFORM PUBLIC TOLERANCE OF CORRUPTION: AN AUTOPSY OF THE SPANISH INDIGNADOS MOVEMENT ELISA ELLIOTT ALONSO
  3. 3. IS THERE A ROLE FOR BLOCKCHAIN TO ENHANCE PUBLIC PROCUREMENT INTEGRITY? CHAN YANG Is there a role for blockchain to enhance public procurement integrity? Chan Yang Call for bid •Tender docs •Evaluation criteria Context and problems Public procurement is one of government activities most prone to corruption. All steps of the process can be targeted, potentially implicating any party involved. Incompetence or lack of training further increases the risk of corruption. Some common forms of corruption Document tampering & fraud Biased tender specification Biased bid evaluation Blockchain’s key attributes may mitigate certain integrity risks in public procurement Strengthen record integrity 1 Prevent document tampering better than regular e-procurement systems Provide aggregate traceability 2 De-silo fragmented e-procurement systems, combine with big data analytics for more accurate pricing estimate and tender specification development Reduce the need for a trusted central entity 3 Open up bid evaluation to reduce risk of biased decision-making However, there is no free lunch Record integrity is not absolute & depends on the choice of consensus model + system architecture “Security-scalability-decentralisation trilemma”: the most secure & “honest” blockchain may be the slowest, and probably quite costly Digital trust does not replace physical trust (dishonest data) Institutional barriers to adoption may be high if the new system dilutes the state’s decision-making power Conclusions & recommendations Given blockchain’s current technical trade-offs, its role for integrity may be desirable if decision-makers are willing to end procurement corruption at the cost of relinquishing some efficiency & decision-making power Blockchain is, however, powerless if users do not first comply with proper procurement practices Combatting corruption needs a holistic approach; human agency is always needed to proactively inspect, audit & enforce accountability Procurement steps Digital flows Blockchain records (hashed data) Open data portal (full document with hash displayed) Market analysis Budget & procurement planning Standard tender documents (incl. terms & conditions, tech requirements, evaluation criteria) Bid proposal1 Bid proposal2 Bid proposaln (Confidential) Results1 Results2 Resultsn (Confidential) Contract with winning bid Purchase orders & invoices Demand planning Call for bids Bidding Bid evaluation Contract award Order & payment Tender doc Evaluation Contract results & Inspection Audits Budget planning
  4. 4. INTERNATIONAL SLAPPS AGAINST POLICE POWERS: HOW INVESTMENT ARBITRATION IMPOSES A RISK ON FOREIGN BRIBERY INVESTIGATIONS DAVID CHRIKI International SLAPPs Against Police Powers: How Investment Arbitration Imposes a Risk on Foreign Bribery Investigations David Chriki Investment arbitration: Possible Implications on the Regulatory Space of Countries Strategic Lawsuits Against Public Participation (SLAPPs) Introducing “STRAPPs”: Strategic Arbitrations against Police Powers International investment agreements (IIAs) are treaties between two or more countries, designed to protect foreign investors. Almost all IIAs include obligations to refrain from discriminating foreign investors; prohibition on the expropriation of property of foreign investors for an improper purpose without proper compensation; and granting foreign investors fair and equitable treatment. Finally, almost all IIAs include investor-state dispute settlement (ISDS) mechanisms. These mechanisms allow foreign investors of one party to the agreement to submit arbitration claims against the other party, due to potential violations of the IIA. One of the most pressing issues regarding the international investment legal regime is the concern for a regulatory chill: governments might refrain from adopting regulations that serve public interests out of fear that such regulations would trigger costly and unpredictable investment arbitration disputes SLAPPs are unfounded tort claims filed in order to prevent public criticism against the claimants, and not in order to provide any remedy to compensate for the direct damage caused to them. These claims are usually filed against social activists who led social protests against the activities that hinder public interests, usually carried by wealthy corporations. Lengthy and expensive legal proceedings often exhaust inexperienced social activists who enjoy limited resources and cannot afford adequate legal representation. Eventually parties tend to reach a settlement and agree to cancel the claim in exchange for a cessation of public activity directed against the Plaintiffs' actions. The main concern that arises from SLAPPs is of a chilling effect on public participation as a result of a claim filed against them, or out of fear that a claim would be submitted against them in the future if they act in the public sphere Though investment arbitration targets governments, and not individuals, several investment arbitration claims strikingly resemble “conventional” SLAPPs. Arbitration claims targeting policies that are in the core of the doctrine of "police powers" are rarely successful. Still, IIAs often contain standards of treatment that create uncertainties about how an arbitration panel would interpret and apply them. Moreover, arbitration proceedings are timely and costly. Thus, inexperienced and poor governments may wish to avoid arbitration by terminating the initiatives that triggered the arbitration claim in the first place. Arbitration claims of this kind targeting bribery investigations could impose a significant setback on the combat against foreign bribery. Developing countries with limited resources, who are arguably in greater danger of becoming a victim of foreign bribery, might rather drop bribery investigations once the investor threatens with arbitration. “STRAPPing down” bribery investigations using investment arbitration Social activists address government decision-makers about some public concern and call for change of policy Lawsuit against the social activists Settlement: Termination of proceedings in in return for halting public criticism “Conventional” SLAPPs (Pring & Canan, 1996) Government introduces a measure exercising legitimate “police powers” Arbitration threats against the host State Settlement: : Termination of proceedings in return for cancelation of measures – causing a REGULATORY CHILL STRAPPs using investment arbitration Arbitration threats Possible Solutions for STRAPPs Adopting anti-SLAPP procedural rules allowing a swift dismissal of certain (bribery investigation) claims Supporting governments through an international insurance fund Bribery investigations + forfeiture of property / arrests Settlement: Termination of proceedings in return for cancelation of investigations
  5. 5. ANALYZING THE CORRUPTION ON A PROCUREMENT NETWORK USING GRAPH THEORY IOANNIS FOUNTOUKIDIS, DEPARTMENT OF ECONOMICS AT ARISTOTLE UNIVERSITY OF THESSALONIKI (AUTH) GREECE DR ELENI DAFLI, SCHOOL OF MEDICINE AT ARISTOTLE UNIVERSITY OF THESSALONIKI (AUTH) GREECE ANALYZING THE CORRUPTION ON A PROCUREMENT NETWORK USING GRAPH THEORY Ioannis Fountoukidis, Department of Economics at Aristotle University of Thessaloniki (AUTH) Greece Dr Eleni Dafli, School of Medicine at Aristotle University of Thessaloniki (AUTH) Greece Corruption is impossible to be identified in public procurement procedures! Yeah!!! You are absolutely right. Use a declaration form. Have you ever heard of graph analytics? No!!! Tell us! Graph analytics are analytic tools that use graph theory in order to analyze data which are stored as nodes and relationships. What is the connection of graph analytics and corruption? Corruption includes: - Conflict of interest - Bribery - Bid rigging So, corruption behavior could be translated as relationships between the nodes of the network which should not exist. Ιn which area is it applied? In order to evaluate the results of the method, the public procurement procedures for health goods were selected. A virtual scenario of Greek Hospitals’ public contracts for the year 2018 was created. The scenario was based on open data and it included the awards at: cpv:33111730-7 and cpv:33111710-1 A graph database was created using neo4j. A network of 43722 nodes (33 labels) and 44196 relationships (12 rel. types) was created, so as the contracts of 23 Hospitals with 33 Companies (at only 2 cpv) to be analyzed. Everything looks ok! - No conflict of interest between the boards of the companies and the boards of the hospitals. - Nobody complained for money transfer. - Market analysis looks impossible. Let’s have a better look! Using Cypher many Queries were run in the database. Furthermore, the database was connected with Gephi, the “Graph Photoshop”. The analysis of the network has shown that the functioning of the market can be studied. Additional cases of conflict of interest and bank transactions have been identified
  6. 6. BRIDGING THE GAP BETWEEN SFO AND DOJ PRACTICE IN REMEDIATING THE VICTIMS OF FOREIGN BRIBERY SAMUEL HICKEY Bridging the gap between SFO and DOJ practice in remediating the victims of foreign bribery 
 SAMUEL HICKEY • These principles are too broad and lack the specificity necessary to provide effective guidance or to function as a normative framework. • Nonetheless, the United Kingdom has, both before and after the adoption of the compensation principles, ordered that corrupt actors remediate foreign governments directly. For example, the foreign bribery case against Standard Bank in 2015 resulted in a deferred prosecution agreement mandating that Standard Bank pay $US7 million to the Tanzanian Government (see here). Similarly, in 2018 a court order was issued against Alstom Power Ltd which provided that £10,963,000 in compensation be paid to the Lithuanian government (see here). • Remediation has also been achieved for the benefit of the citizens of developing nations. For example, the SFO reached a settlement agreement with BAE Systems in 2010 for an accounting offence which required it to pay £30 million for the purpose of buying educational materials in Tanzania (see here). In 2014, the proceeds of a confiscation order made over the course of the Smith and Ouzman foreign bribery case were used to purchase a fleet of ambulances in Kenya (see here regarding the foreign bribery case and here regarding the purchase of ambulances), and most recently, a £4 million civil forfeiture order against Griffiths Energy for foreign bribery was put toward development projects in Chad in 2018 (see here). LOGS • This paper considers issues that arise in attempting to argue that the United States should follow the United Kingdom in adopting a policy of compensation. • Policy issues: • To what extent does current U.S anti-corruption policy align with a policy of remediation? • Does an unwritten policy of rent- seeking drive FCPA enforcement? • Practical issues: • How to identify the victims of foreign bribery? • How to ascertain the loss caused by foreign bribery? • How to ensure that money given back to foreign governments and citizens is not used in future corrupt schemes? • Should the United States practice of insisting upon a nexus between harm and remediation that is e m p l o y e d i n e n v i r o n m e n t a l regulation carry over into anti- bribery enforcement? • In 2014, the Left Out of the Bargain Report by the Stolen Asset Recovery Initiative indicated that only 3% monies extracted through foreign bribery settlements were returned to the victim state in which the initial act of bribery occurred. • Demand-side enforcement has proved largely ineffective at remedying the harm caused by foreign bribery. • The supply-side of bribery is policed to a far greater extent and provides a more promising platform for remediating the victims of foreign bribery. • There is a growing sentiment in the literature which urges countries such as the United States to pursue remediation for the benefit of those harmed by acts of foreign bribery. • However, there are numerous practical issues that need to be addressed before national enforcement agencies like the DOJ will be able to confidently adopt a policy of remediation and put that policy into practise on a consistent basis. • In June 2018, the United Kingdom government formally adopted its ‘compensation principles’, which are geared toward providing a guiding framework that can be used to indicate whether compensation will be appropriate on a given set of facts. 
 
 Current SFO Practice Feasibility of U.S. adopting SFO practiceThe victims of foreign bribery are in most cases left without remedy
  7. 7. CRYPTOCURRENCIES – OPPORTUNITIES, RISKS AND CHALLENGES FOR ANTI-CORRUPTION COMPLIANCE SYSTEMS KATARZYNA CIUPA, WARSAW SCHOOL OF ECONOMICS CRYPTOCURRENCIES – OPPORTUNITIES, RISKS ANDCHALLENGES FOR ANTI-CORRUPTIONCOMPLIANCE SYSTEMS KATARZYNA CIUPA, WARSAW SCHOOL OF ECONOMICS LACK OF UNIFIED DEFINITION SCAM AND MARKET ABUSE COMPLEX ECOSYSTEM THEFT AND BRIBERY DARK MARKETS MONEY LAUNDERING TAX AND ACCOUNTING POTENTIAL AGENDA NEW OPPORTUNITY EXTERNAL INFRASTRUCTURE CRYPTOCURRENCIES+BLOCKCHAIN MINERS INVENTORS USER/INVESTOR EXCHANGES TRADING PLACE WALLETS VS DIGITAL CURRENCY (BIS, WB) VIRTUAL CURRENCY (IMF, ESMA, ECB,EBA) CRYPTOCURRENCY IS: ? 78% USD 8,27 B 2017: 78% projects (USD 1,34 billion) ended up being scams1 1) https://research.bloomberg.com/pub/res/d28giW28tf6G7T_Wr77aU0gDgFQ; 2) https://ciphertrace.com/wp-content/uploads/2019/01/crypto_aml_report_ 2018q4.p df, 3) https://www.economist.com/finance-and-economics/2018/04/26/crypto-money-laundering, 4) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3102645 ; 5) https://www.loc.gov/law/help/cryptocurrency/index.php 15% USD 1,34 B In 2018 USD 950 million worth of cryptocurencies was stolen from exchanges (3,6 more than in 2017)2 LAYERING INTEGRATION Crypto-Laundering: around 3-4 % of the continent’s annual criminal takings making USD 4.2-5.6 billion (Europol)3 ~25% of all BTC users and ~44% of BTC TRX are associated with illegal activity ~USD 72 billion of illegal activity p.a. involves BTC4 • No harmonized tax approach5 • No clear accounting rules • Not many systems ableto investigate various blockchains • Cryptoassets – new asset class needed? • Decentralized • Distributed • Immutable • Synchronized • Transparent • Secure Blockchain is: 1. Analyse the patterns 2. Act against the initial problem 3. Reframe 4. Have a holistic approach 5. Disrupt the disrupter 6. Not over-regulate 7. Set international boards 8. Use blockchain to your advantage
  8. 8. CORRUPTION TRAP: THE CASE OF THE COLOMBIAN STATES CAROLINA ISAZA, LAURA URIBE, DANIELA FRANCO, PATRICIA GARCÍA-MÁRQUEZ, LAURA SARMIENTO CORRUPTION TRAP: THE CASE OF THE COLOMBIAN STATES Carolina Isaza, Laura Uribe, Daniela Franco, Patricia García-Márquez, Laura Sarmiento. Acknowledgements: Universidad Externado de Colombia for its support Juan Manuel Pedraza, for his invaluable technical support with the data analysis John Moreno, for useful discussions and ideas on data analysis Since the 1990s, corruption has been increasingly studied from various disciplines and diverse theoretical approaches and perspectives all around the world. Nevertheless, until now, few are the studies that take regional or local views into consideration for understanding the behaviour of this phenomenon within countries. This study addresses corruption in the regions of Colombia in relation to their levels of development. Literature points out that there are different ways in which corruption and development are related. Some authors conclude that corruption increases income inequality and poverty by distorting the level and effectiveness of social spending. However, in these vicious cycles the causes and consequences are not yet clear. Considering the above, this paper analyses the relationship between corruption and development in Colombia from a subnational perspective. We claim that there is a corruption trap that makes it difficult to establish the dependent and independent variables between corruption and development. The question that guides our paper is: What are the dynamics between corruption and development at the state level in Colombia? To answer it, we collected 22 indicators for the 32 departments that make up the administrative division of Colombia. These indicators were grouped into three dimensions: development, institutional capacity and transparency. To identify the relations between these categories we used a development proxy and we built an institutional capacity index and a corruption/transparency index. From this, a scatter plot chart was built to categorize the different departments of Colombia by their levels of corruption, institutional capacity and development. Also, the data obtained by the diagram was georeferenced to identify specific characteristics of each region. The conclusions include a categorisation of the departments of Colombia according to the existing links between corruption and development on each one of them with institutional capacity as an intervening variable. Conclusions ● 6 Colombian states are in a good place and have at least some of the necessary elements to continue improving on Development, Transparency and Institutional capacities dimensions. ● Another 13 states are in an intermediate stage but have also something to work on to avoid falling in a corruption trap. ● There are 13 states in a corruption trap. In this last group, states are on the periphery of the country, on the borders and far from the center (the capital, Bogotá), as can be seen in the maps. Some of these have high levels of violence and they have been particularly affected by the presence of illegal armed groups and drug trafficking. Additional proof of their low capacity is that it is in these states there are no complete data for development indicators such as Gini or poverty. ● The question that remains to be answered is how to break this trap. With the evidence we have, we can suggest that it would be possible to improve the situation of these states starting with the institutional capacity and the presence of the State. ● Limitations to our study: Although we managed to make a consistent analysis from a statistical point of view, it is also true that in contexts such as that of Colombia, studies at the territorial level may present limitations such as missing data and under-report by states or local authorities. Even with open data and e-government initiatives present in Colombia, access to complete and high-quality datasets for understanding local governance remains a challenge. ● There is probably a corruption trap for many countries and regions of the world. While not all of those are necessarily underdeveloped, it is clear that lower socio-economic and human development and lower institutional capacity reduce the probabilities of getting out of that trap, as the necessary resources are not present to take action on corruption, improve accountability, sanction wrongdoers and put in place more transparency and integrity tools. Capacity Index Transparency Index Development Index State Ranking First Category Second Category Third Category Corruption trap: The Case of the Colombian states
  9. 9. SHOULD ANTI-CORRUPTION LAWS APPLY TO ASTROTURFING? LUCAS DE LIMA CARVALHO, UNIVERSITY OF SÃO PAULO SHOULD ANTI-CORRUPTION LAWS APPLY TO ASTROTURFING? LUCAS DE LIMA CARVALHO, UNIVERSITY OF SÃO PAULO Threat to public integrity The very nature of anti-corruption laws is to help protect public integrity, or the integrity of public institutions or public “goods” that are relevant for society. Though astroturfing may be viewed as primarily a regulatory, antitrust or consumerist issue from a legal standpoint, it begins to affect public integrity when it produces tangible results in public discourse. Why anti-corruption? • Astroturfing creates an atmosphere of misinformation that contaminates public discourse • It violates public integrity as a principle of Public Administration • It offends international commitments undertaken by modern democracies (such as the ACHR) Challenges We live in times of fake news and mass usage of social media by people everywhere, a practice that has reduced the scope of influence of traditional news outlets over select “audiences”. There are many ways of creating astroturfing movements today using Twitter bots, fake Facebook or YouTube user accounts, and carefully crafted TV ads, which would go a long way in convincing voters of the “urgency” and “relevance” of their claims. To successfully implement anti-corruption policies against astroturfing, jurisdictions should: What is Astroturfing? Astroturfing is the practice of hiding a vested sponsorship of an idea or a claim behind the veneer of “grassroots supporters”. The first incidents of astroturfing date back to the early 1900s, but the advances of instant communication and social networking have arguably enhanced its effects on the political arena and on relevant social issues nowadays. Cases of Astroturfing • Americans against Food Taxes (soda tax, sponsored by food and beverage companies) • Coalition for Medicare Choices (sponsored by healthcare companies) • #EuSoudaLapa (residential real estate sales campaign in Rio de Janeiro) Distinguish between cases of genuine astroturfing and cases of improper identification of funders/supporters Identify the link between astroturfing and the “damage” caused to public policy Establish a link between the astroturfing campaign and the appropriate penalty
  10. 10. THE IMPACT OF CORRUPTION ON PROCUREMENT PERFORMANCE. AN ASSESSMENT OF ITALIAN PUBLIC WORK CONTRACTS AND SUPPLIERS RICCARDO MILANI (UNIVERSITÉ DE LAUSANNE, ECOLE DES SCIENCES CRIMINELLES) Open procurement data N: 4960 public work contracts Develop a new corruption risk indicator at the contract level THE IMPACT OF CORRUPTION ON PROCUREMENT PERFORMANCE. AN ASSESSMENT OF ITALIAN PUBLIC WORK CONTRACTS AND SUPPLIERS RICCARDO MILANI (UNIVERSITÀ CATTOLICA DEL SACRO CUORE) Explore firm-level corruption red flags Estimate contract inefficiency though Time Delay and Cost Overrun Explain inefficiency scores by means of factors that only denote the presence of “pure inefficiency” Transform residuals into corruption risk indicators Profile suppliers to identify corruption-related red flags at the firm-level + INEFFICIENCY • Contracts managed by municipalities • Complex contracts • Extreme savings in contract awarding - INEFFICIENCY • Quality of Institutions • EU contracts • Contracts managed by State-owned firms • More profit margins • Less debts over total assets • Less days to receive payments • More days to pay customers • More Connection with opaque jurisdictions Firm Financial data Firm Ownership data Corruption Risk Indicators
  11. 11. FIGHTING CORRUPTION IN COMMODITY TRADING THROUGH BLOCKCHAIN TECHNOLOGY SHAN “HELEN” JIANG Fighting Corruption in Commodity Trading Through Blockchain Technology Shan “Helen” Jiang Problem Identified: Corruption in Commodity Trading Basics of Commodity Trading Commodities are naturally grown products; they can be either “hard” – such as oil, gold, minerals – or “soft” – like cotton, wheat, sugar. Commodity trading takes place in both primary and secondary commodity markets. In the primary markets, commodities are extracted from nature and are prepared for transportation at the production site, where they then would be delivered to refineries or smelters for processing and then sold to energy users or manufacturers in the secondary markets. Through trading, commodities are transported often across continents from its production site to the destination where they are going to be consumed – this is the most obvious effect of commodity trading. It also balances supply and demand of commodities in the global market, as both supply and demand can fluctuate for a variety of reasons including seasons, production capacity, politics, among others. Revolutionary Role of Blockchain and Smart Contracts: How they fit in? Blockchain is most fit in scenarios where: • There are multiple players in the system • Establishing trust in the system is rather difficult • The system is susceptible to contamination or is easily corruptible • Eliminating information asymmetry and improving transparency is conducive to the well- function of the system • Preventing record from being tampered with is a crucial goal Applying those standards to commodity trading, it seems it ticks all the box. Commodity trading is a dispersed system with multiple stakeholders who do not know or trust one another; the sector is extremely opaque where corruption can happen between any two ends of a relationship and monitoring corruption in the sector would incur formidable cost, and such efforts may still turn out to be futile Application of Blockchain in Commodity Trading I. Streamlining Verification Process A Blockchain-based platform would ask every party to upload the proof of completing their job and share this information simultaneously with the rest of the parties. This may include seller initiating the transaction by confirming the goods are transferred to a shipping company, bank confirming issuance of a Letter of Credit to the seller, and the shipping company confirming that goods have been loaded. Every single action of parties on the Blockchain would be recorded and formed a block to be added upon the previous block. Meanwhile smart contract would only release the funds when all conditions – including shipping companies’ proof of delivery and presentation of Bill of Lading, confirmation of delivery from the buyer – are satisfied. II. Inter-entity Account Verification Blockchain will also come in handy for reconciling accounts among different entities, targeting the special corruption schemes such as flipping and swap deals. Inter-entity account reconciliation is about making sure records in different entities – meaning all balances owed to and from entities – are in agreement. The Commodity Trading Companies Commodity trading companies (CTCs) provides vital support for the business model of trading. They conduct arbitrage across globe, acting upon price signals and mainly operate as middlemen in the global value chain. CTCs possess some unique features: First, CTCs serve to build relationships among counterparties in the trading. They act as intermediaries with comprehensive protocols and provide logistics for trading parties across the globe, administering the delivery chain for primary economic products from the extraction site to the ultimate buyers. Second, it is common that CTCs primarily adopt a business model called “transit trade,” where they rarely have physical possession of the commodities, or register with customs authority of a country as such trade only qualifies as an export of services. This model of transit trade has major implication for corruption detection and monitoring. Third, CTCs typically help build connections between buyers and foreign officials and politicians, interacting with political exposed persons (PEPs). In particular, through loans pledged on future commodity deliveries, CTCs also pre-finance extraction activities by indebted governments, who otherwise would not be able to get loans from banks or other financial institutions. Emerging economies, for example, particularly find such commodity pre-payment via CTCs is a useful substitute for bank loans. The way for CTCs to do it is to present such pre- payment deals as security to negotiate a syndicated lending agreement with international banks. Corruption in the Commodity Trading Sector The reality for the commodity market is, perhaps unsurprisingly, highly opaque: particularly in the markets for “hard” commodities like oil, gas, or minerals, where CTCs would frequently interact with foreign governments and state-owned enterprises, the risk of corruption is alarming. PEPs would also take advantages of the opacity of commodity trading to launder illicit proceeds derived from corruption, which is termed trade-based money laundering. A few recent cases have put the issue of corruption in commodity trading under the spotlight. 3 Features of Blockchain I. Traceability and Identity Proof: Cryptographic Keys Blockchain has a solution to the identity authentication issues among multiple players through the use of cryptographic keys. Moreover, the proved and recorded identity can help stakeholders to trace and capture data along the supply chain. In a Blockchain platform, identity can be created, verified and distinguished through a digital signature matched to a specific wallet, which contains pair of a public key and a private key. The signature – or the public-private key pair – is associated with an address that can, for example, receive funds. The signature proves ownership of one’s assets and allow one to control the funds. The private key is used for encryption of transactions, while the public key is used for decryption and is shared with third parties in the platform. A typical scenario is that the sender of the funds encrypts the transaction with a private key and the recipient decrypts it with a public key. If the transaction fails to go through, it can only mean that this transaction is not from that particular wallet, i.e. the identity is false or is impersonated, and some party is trying to defraud the others. II. Tampering-resistance: Hash Function, Proof of Work (PoW) and Consensus Hashes are used together with digital signature to ensure the integrity of data on Blockchain. Hash is a one-way cryptographic function, a method of transforming large quantities of data input into numbers and codes that are hard to decipher. Bitcoin network normally uses Secure Hash Algorithm (SHA). An important feature of hashes is that a tiny change of input data would alter the output in a significant way. The relationship between public and private keys is determined by hash function: the public key is mathematically derived from the private key, but to reverse the process would take supercomputers trillions of years to crack, making it impossible in reality. This feature ensures that the digital signatures and Bitcoin address would be resistant to any tampering. Proof-of-Work (PoW) is yet another function to ensure the integrity of information on the Blockchain. PoW is used to confirm transactions and add new blocks to the chain, where miners compete to get rewards by generating valid blocks of transactions, including collecting all relevant transactions, verifying them through running all data via the SHA algorithm, and arranging blocks. This is the process of mining. The hash of each block contains the hash of the previous block; changing the data in the block means regenerating all successor blocks and redoing all the computing work done through previous mining – this is practically infeasible to achieve. III. Space for Regulatory Agencies such as the Commodity Futures Trading Commission (CFTC) to oversee regulatory reporting from the entities and ensure compliance One node on the Blockchain can be connected to CFTC’s reporting system, providing CFTC a real-time window into market activities. Moreover, reporting can also be designed as a condition in a smart contract, and compliance will automatically trigger the events followed. Blockchain can also be used in a more sophisticated way for CFTC to detect trade-based money laundering. A reporting requirement on the Blockchain as a prerequisite for the execution of transaction would effectively alert CFTC about irregular trading activities through a self-generated Suspicious Activities Report (SAR), and record all the information the agency may need to find out the identity of the fraudsters. I. Flipping This scheme works like this: A small private CTC arranges for the initial purchase of commodities from governments or national oil companies (NOCs) at a low purchase price, and then immediately resells these commodities to a larger and better-known CTC at a higher price. In this regime, the small CTC would claim to provide logistics services or other expertise to parties of the trade, in fact, the true owner of the small CTC is a government official or that official’s close associates, and the profits earned from the “flip” are, in effect, bribe payments orchestrated by the large CTC. Moreover, these small CTCs act as buffers that dissociate the bigger CTCs from fishy deals, so these larger, more reputation-conscious firms need not disclose in their filings transactions with corrupt governments or high-risk regions. II. Swap deals In a swap deal, rather than conducting a monetary transaction, the CTC swaps refined products (such as gasoline) for a primary product (such as crude oil) of equivalent value with the producing country, or the CTC lifts a certain amount of crude oil from the country, refines it offshore, and delivers the final products back to the country. In-kind payments such as in swap deals are highly context-specific, with the terms negotiated by the parties, and there is no benchmark estimate or other objective standards against which to measure their value. NOCs can only publish high-level figures for the products supplied by the CTCs or the crude oil that has been lifted; therefore, without getting access to information from the CTCs, there is no way to compare NOCs’ figures with the value of the refined products. Any discrepancy between revenue remitted to the country and the actual value of the crude indicates a loss of national oil wealth, from which many CTCs are profiting.This lost wealth, unsurprisingly, often finds its way into the pockets of kleptocrats who are the true beneficial owners of the CTCs. Smart Contract a smart contract is a piece of computer code with pre-defined set of rules that describes a transaction step by step. It sets the conditions under which all parties to the smart contract agree to interact with each other. It can connect to multiple Blockchains and track multiple assets, hence it can swap those assets as needed to execute the transaction. Smart contracts would unlock the cryptographic keys as long as the conditions are met. Such automatic execution of agreements eliminates the needs for intermediaries, who are often brought into the picture to build trusted relationships. • Eliminating Intermediaries: Automatic Execution The transaction conditions are formed by simple opt-in actions from the parties, then digitalized and become readable by computers. Hence a transaction can be automatically executed as long as the conditions are met. • Standardizing Record-keeping and Verification: Oracle An Oracle is part of the Blockchain, and links the outside world with the Blockchain. It brings in external data and triggers smart contract executions. It fills in the blanks in the pre-defined conditions where external information is needed and maintain objectivity through various ways. III. Transparency: Distributed Ledger Technology (DLT) and Single Source of Truth Once a transaction is validated, it is synchronized among all nodes and all ledgers in the network, in other words, it becomes public record. Since there is no single control in the network and parties are dispersed, consensus provides protocol for its operation. This results in a transparent and open platform nearly tailored for global trade. For example, solutions such as the Blockchain-based shipping and logistics platform TradeLens enables all players in the supply chain to benefit from a shared ledger that updates and validate instantaneously with each network participant. Consensus of nodes ensures the integrity of the system by isolating and eliminating those who tries to defraud the rest. For example, if one party denied having received the payment, he will not be trusted as every party in the network has a proof of such transaction, and under the consensus algorithm, the data is still reliable and trusted by parties in the network – this is how a single source of truth is maintained in Blockchain. Essentially, Blockchain acts as a global notary to verify authenticity of credentials and transactions.
  12. 12. IDENTIFYING POLITICALLY CONNECTED FIRMS: A MACHINE LEARNING APPROACH DENI MAZREKAJ, FRITZ SCHILTZ AND VITEZSLAV TITL IDENTIFYING POLITICALLY CONNECTED FIRMS: A MACHINE LEARNING APPROACH DENI MAZREKAJ, FRITZ SCHILTZ AND VITEZSLAV TITL Methodology ML models more naturally accommodate discontinuous and nonlinear interactions (Varian, 2014). Thus, we are able to capture complex patterns in firm and industry data in our prediction. We apply and compare 3 methodologies: 1. Logistic regression 2. Random forest 3. Boosting The last two methods can be seen as building a set of trees, and applying the set of learned rules when making predictions. To evaluate the relative performance of each model, predictions are made using the exact same set of variables and the same data for all three methods. Data Our data include all firms registered in the Czech Republic supplying public procurement contracts to all levels of government in 2011. We match them with financial and industry indicators from Magnus database to obtain standardized annual accounts, financial ratios, sectoral activities, and ownership data. The information on political connections is compiled from three sources. 1. Firm donations: obtained from the annual reports of political parties provided by EconLab (www.politickefinance.cz). 2. Donating board members: obtained from exact matching of individual persons who donated with the lists of board members of all Czech companies. 3. Personal connections: obtained by matching elections’ candidate lists (www.volby.cz) and the lists of board members of all companies. The final dataset includes 83,125 firms, with each record containing financial and industry information as well as whether the firm was politically connected in 2011. Predictor Variables Results Results To compare methods, we report out-of-sample prediction accuracy. Both classification tree ensemble methods (random forest and boosting) display a very strong ability to predict which firms are politically connected. Furthermore, the machine learning techniques also exhibit lower variance in the prediction accuracy. Conclusion Our simulations suggest that boosting could identify political connections with about 75% accuracy. This level of accuracy is 36% higher compared to the accuracy of the logistic regression model used to predict binary outcome variables. We propose that our approach could be used by public institutions to identify potential political connections of firms. The identified firms can be then audited and/or controlled by public authorities. As such, this approach would allow for more targeted control of companies with conflicts of interest. Motivation Politically connected firms may generate substantial economic and welfare costs for the society: • Higher product prices, poorly executed public works, erosion in employment standards (Fisman, Schulz, & Vikrant, 2014; Fisman & Wang, 2015). • Misallocation of public funds (Cingano & Pinotti, 2013; Goldman, Rocholl, & So, 2013; Titl & Geys, 2019), • Lower economic growth (Olson, Sarna, & Swamy, 2000). A proper control of connected firms is important as it can bring large economic savings. Goal We introduce machine learning (ML) to predict which firms are politically connected. Main advantage: ML methods add flexibility by capturing nonlinearities and complex interactions (Breiman, 2001). In Figure 1, you can see an illustration of a fictional decision tree, similar trees are grown and together they are used to predict whether a firm is politically connected. Using a unique dataset of all Czech contracting firms, we show that politically connected firms can be identified with a high degree of precision using only information from their annual accounts. TABLE 1: DESCRIPTIVE STATISTICS OF PREDICTOR VARIABLES Predictor Variable Mean S.D. Min. Max. Number of employees (FTE) 28.65 225.05 1 31742 Registered capital (million euros) 22.21 598.84 0 120909 Assets (million euros) 140.48 5463.483 -68.49 825497 Operating assets (million euros) 85.07 4816.30 -68.49 780238 Operating profit (million euros) 5.73 198.40 -15983.32 36850 Financial profit (million euros) 6.09 227.57 -16280.51 36850 Equity (million euros) 47.93 1110.65 -20871.61 192600 Age of the firm (years) 16.21 6.34 0.11 78.07 TABLE 2: OUT-OF-SAMPLE ACCURACY OF PREDICTIONS (%) Outcome Logistic regression Random Forest Boosting All connections 63.12 71.30 72.29 (95% CI) (62.53-63.74) (71.16-71.44) (72.14-72.43) Donations 63.57 70.49 71.22 (95% CI) (63.15-63.99) (70.27-70.70) (71.01-71.43) Pers. connections 65.54 73.99 74.58 (95% CI) (65.40-66.08) (73.83-74.15) (73.90-74.40) Figure 1: Illustration of a fictional decision tree. Figure 2: Model construction and validation, using training and test set.
  13. 13. LOGOS, MYTHOS AND ETHOS OF BLOCKCHAIN: AN INTEGRATIVE FRAMEWORK FOR ANTI-CORRUPTION IGBAL SAFAROV, PHD, UTRECHT UNIVERSITY ZIYA ALIYEV, PHD, ERASMUS UNIVERSITY ROTTERDAM LOGOS, MYTHOS AND ETHOS OF BLOCKCHAIN: AN INTEGRATIVE FRAMEWORK FOR ANTI-CORRUPTION IGBAL SAFAROV, PHD, UTRECHT UNIVERSITY ZIYA ALIYEV, PHD, ERASMUS UNIVERSITY ROTTERDAM METHODOLOGY & DATA 0 10 20 30 40 50 60 70 80 90 CONFLICT OF INTEREST MERIT-BASED RECRUITMENT FAIR ELECTIONS FINANCIAL REPORTING AND ACCOUNTABILITY JUDICIARY INDEPENDENCEACCESS TO INFORMATION FREEDOM OF SPEECH RECORDS MANAGEMENT COMPETITION POLICY INCL. PUBLIC PROCUREMENT ANTI-CORRUPTION VS BLOCKCHAIN RELEVANCE OF BLOCKCHAIN FEATURES CHALLENGES OF BLOCKCHAIN IN ANTI-CORRUPTION 0 20 40 60 80 Privacy issues Maturity of blockchain technology Cross-border nature Financial resources Use for corruption 0 50 100 Smart contracts Non-reversibility Decentralisation Public blockchain Private (permissioned) blockchain INTERACTIVE FINDINGS CONCLUSION LOGOS. Several blockchain features can be considered as a strong facilitator for anti-corruption activities. Blockchain can clearly provide more transparency with disintermediation, immutable accountability, distribution of power and peer-to-peer solution. MYTHOS. Blockchain cannot be considered as a solution for all anti-corruption situations. After the second round of Delphi study, only 3 out of 9 anti-corruption subjects were found significant consensus. ETHOS. Before considering the implementation of the blockchain, several ethical questions and technical challenges need to be addressed. Blockchain regulation and self-governance mechanisms need to be matured. STUDY DESIGN TEST STAGE FIRST ROUND EXPERT SELECTION SECOND ROUND PARTICIPATE IN THE STUDY OPEN ROUND

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