Systemic Corruption and the Oligarchic Threat to National Security

Attempts to tackle corruption have tended to work with a narrow, legalistic definition of the phenomenon, which leaves much that should concern us either out of focus or altogether invisible. In this guest blog, cross-posted from our recent edition of Tax Justice Focus on national security, Camila Vergara draws on a long-neglected strand in the history of political thought to provide an account of corruption that is equal to needs of democratic reformers.

Camila Vergara

Corruption seems to be everywhere, despite multiple laws, rules, guidelines, and institutions aimed at increasing government transparency and punishing undue influence. This is because corruption is seen as an individual crime rather than a systemic tendency. We need to move away from the ‘bad apples’ approach, in which corruption exists only because there are corrupt people in office, and look at the structure in which these corrupt elites are embedded. What I call systemic corruption refers to the inner functioning of the state order, independent of who occupies the places of power in it. Since democracy is a political regime in which an electoral majority is supposed to rule, it makes sense to think that ‘good’ democratic government would benefit (or at least not hurt) the interests of the majority. When the social wealth that is collectively created is consistently and increasingly accumulated by a small minority against the material interests of the majority, then it means that the rules of the game and how they are being used and abused are benefiting the powerful few instead of the many. This trend of oligarchization of power within a general respect for the rule of law provides convincing evidence for the systemic corruption of representative democracy—even if we are still unable to measure it properly.

According to Transparency International’s Corruption Perceptions Index, two thirds of countries suffer from ‘endemic corruption,’ a kind of ‘systemic grand corruption that violates human rights, prevents sustainable development and fuels social exclusion.’ But while Transparency International claims corruption is enabling the violation of human rights across the globe, it also acknowledges that corruption cannot be properly measured given the diversity of legal systems (what is considered corrupt in one country is not necessarily illegal in another) and the disparities in the enforcement of norms on the ground. Consequently, the index relies on individuals’ perception of corruption to track long-term variations—even if individual perceptions cannot be disentangled from the existing local culture of corruption. This methodological deficiency makes evident that the actual levels of corruption are much worse than those currently being recorded.

The current approach to measuring corruption does not consider an independent standard to judge the law itself, and thus makes it difficult to push back against the introduction, normalization, and legalization of vehicles for corruption. The regulation of lobbying, for example, demonstrates that having paid peddlers for special interests can become perfectly legal—even if it clearly strengthens the undue influence of the superrich and their corporations in politics. Given the complex relation between corruption and the law, conceiving and measuring corruption by focusing only on the agents of corruption and their exchanges, is not only ineffective for combating individual acts of corruption —tax havens and shelters make quid pro quo corruption extremely difficult to trace and thus prosecute— but they also leave us unable to track systemic corruption, the degree to which the rules of the game are designed to benefit disproportionally and systematically those at the very top of the wealth distribution to the detriment of the majority of citizens.

We have tended to rationalize and downplay the oligarchization of power in society by using indexes that miss important aspects of the process. For example, the Gini Index underestimates inequality at its most politically significant point, among the superrich, since they tend to stash their wealth in offshore accounts, where it disappears from view. Much like the Corruption Perceptions Index, which is unable to accurately measure corruption, the Gini Index is unable to capture the real degree of inequality because of the massive amounts of wealth that oligarchs from all around the world have been shielding from taxation and scrutiny for decades.

While for most of the 20^th century systemic corruption waxed and waned, and its increase meant national oligarchs and their corporations were able to temporally control parts of government and obtain favourable policies, laws, and verdicts with impunity, today the oligarchic class, as well as part of its wealth, is transnational—corporate profits being constantly shifted around, following liability-reduction strategies. Therefore, the threat of oligarchic power is today not only against democratic governance but also compromises national security since there is no easy way to know if the oligarchs indirectly funding parties, politicians, lawmakers, and judges are domestic or foreign. How can the state protect the population from external threats that are operating within existing legality? ‘Following the money’ to unveil a corruption scheme or a terrorist network is extremely difficult given that oligarchs have access to a global league of corporate lawyers, who are experts in protecting assets from taxation and burdensome regulations, and in hiding identities behind legal code.

Tax havens and the legal provisions shielding assets from taxation and scrutiny are both a symptom of systemic corruption and an accelerator of the oligarchic takeover of the political power structures. The establishment of legal loopholes beneficial to the superrich has historically been the result of the pressure exerted by already powerful corporate interests. The first tax havens were created in the late 19^th century in the states of Delaware and New Jersey, where incorporation rules were relaxed to attract non-resident companies. Paired with the hegemonic laissez faire ideology of the turn of the century, lower corporate tax rates allowed for the already rich and powerful to accumulate wealth to an unprecedented degree in the United States. Part of the tax-free profits of corporations was then used to influence government to further mould regulations according to their interests, fuelling corruption. The Tillman Act of 1907 came to prohibit corporations from directly financing political campaigns, but lacked enforcement mechanisms and allowed for loopholes. Today Delaware gives tax shelter to about half of all publicly-traded U.S. corporations, among them Apple and Wal-Mart, and corporate donors are legally allowed to bypass campaign finance prohibitions and pour millions of dollars into Political Action Committees (PACs), which they then donate to political candidates.

 Across the ocean, England also innovated early to favor the wealthy. In a 1929 court case[1] non-resident corporations —British companies with no actual business in England— were freed from taxation. This judicial verdict effectively allowed for a tax-free exploitation of the colonies by British companies incorporated in Jersey, Bermuda, or the Cayman Islands. This privileged non-resident status was then extended to financial operations when in 1957 the Bank of England declared non-resident transactions off limits to regulation and taxation.

The tax evasion by the superrich that originated in the first half of the 20^th century reached a turning point in 1983 when U.S. courts allowed the first multinational to move to a tax haven to avoid paying taxes. This judicial authorization of profit shifting strategies meant that the windfall of corporate profits resulting from the deregulation plan of the Reagan administration were moved abroad. This not only decreased state revenue and social spending but also increased inequality and the rate of wealth accumulation at the very top. According to the Gini Index, inequality in the U.S. has increased sharply in the last four decades and today has the highest rate of the G-7 countries. This jump in inequality in the U.S. is of course much worse, considering that the superrich stash away a big chunk of their wealth offshore, which is not included in the measurements. According to recent estimates, around 40% of multinational profits are shifted to the more than 90 financial secrecy jurisdictions around the world, which now hold as much as $36 trillion dollars of untaxed and anonymous private wealth.[2] How can any State make sure that part of this untraceable money does not end up being used against the interests and safety of their populations?

The progressive takeover of political power by an oligarchic class that shapes policy, law, and judicial adjudication for their own benefit, from behind the scenes, is an intensifying threat to national security. Since it is currently legal for corporations to exploit loopholes and wrap their assets in legal secrecy to avoid scrutiny, domestic terrorist cells funded with corporate offshore money could remain undetected until it is too late. A regulatory framework that is ill-equipped for taxing the superrich and for keeping tabs on their money, cannot fare much better when trying to discover if this untaxed, untraceable money is being used by foreign powers planning to attack the State. The privileges of the superrich—which allow them to bypass the rules meant to curtail their economic power and undue influence—have left states powerless to effectively curtail corruption and protect their populations against foreign attacks. National security cannot be realistically assured if states keep allowing corporations to profit without limits and to shift their profits to avoid taxation, regulations, and oversight.

Camila Vergara is a critical theorist, historian, and journalist from Chile writing on the relation between inequality, corruption, and domination. She is a Postdoctoral Research Scholar at the Eric H. Holder Jr. Initiative for Civil and Political Rights at Columbia University Law School, and author of Systemic Corruption. Constitutional Ideas for an Anti-Oligarchic Republic (Princeton University Press 2020).

[1] Egyptian Delta Land and Investment Co. Ltd. v. Todd

[2] James S. Henry, “Taxing Tax Havens. How to Respond to the Panama Papers” Foreign Affairs, April 12, 2016.

<https://www.foreignaffairs.com/articles/panama/2016-04-12/taxing-tax-havens>