While the identities of virtual currency address owners are pseudo-anonymous, these sanctions demonstrate how law enforcement can identify the owner of a particular cryptocurrency address by analyzing the blockchain with tools such as CipherTrace.

Ultimately, after being laundered through hundreds of peel chain transactions, most of the stolen BTC was deposited into four accounts belonging to Tin and Li at two virtual currency exchanges.

Tian also had an account at a US-based exchange where he exchanged BTC for prepaid Apple iTunes gift cards—a common money laundering method.

The IRS-CI investigation found that the North Korean co-conspirators used fake IDs and manipulated photos to circumvent the KYC procedures at several exchanges.

Due to the complexity of addresses and the number of transactions that have to take place, human error could easily lead to the loss of funds.

“A ‘peel chain’ occurs when a large amount of BTC sitting at one addressIn a cryptocurrency context, an address is a cryptographic k... More is sent through a series of transactions in which a slightly smaller amount of BTC is transferred to a new address each time. In each transaction, some quantity of BTC “peel off” the chain to another address – frequently to be deposited into a virtual currency exchange – and the remaining balance is transferred to the next address in the chain.”

Tian and Li attempted to make their transactions anonymous by sending funds to several accounts at four different exchanges through hundreds of automated transactions by using a technique known as peel chains.

A single deposit of over 10,000 BTC would generate multiple red flags for the exchange that received the deposit, which could result in the assets being frozen.

The attackers had to move the funds toward fiat offramps without raising suspicions. And this is where Tian and Li come into the picture.

These emails were often optimized by plugins that would enable human editors to write and respond to email for a client, ensuring “perfect English.”

This employee was only one of many targeted by the North Korean linked phishing attacks aimed at thousands of email accounts at exchanges around the world.

In late 2018, the IRS Criminal Investigation Division (IRS-CI) learned that an exchange had been hacked for nearly US$250 million worth of several virtual currencies. Without disclosing the name of the cryptocurrency exchange, IRS-CI revealed the investigation found that in mid-2018 an employee of the exchange communicated with a “potential client” via a phishing email, which fooled the employee into unwittingly downloading malware.

“This indictment shows what can be accomplished when international law enforcement agencies work together to uncover complex cross-border crimes,”

On March 2, two Chinese nationals, Tian Yinyin and Li Jiadong, were added to the list for their involvement in laundering stolen virtual currency from a 2018 crypto exchange hack perpetrated by a collection of cyber criminals known as the Lazarus Group.

mining pools are not as regulated and scrutinized as other crypto players that are sometimes used for money laundering, such as cryptocurrency exchanges, “mixing” services designed to obfuscate the trail of users' coins, and NFT marketplaces.

threat analyst at Elliptic, says paying dirty cryptocurrency into a hashing service to mine clean crypto is a particularly troubling phenomenon.

“They're not going for a cash grab,” says Barnhart. “They're trying just to make ends meet.”

The five-figure sums Mandiant saw laundered through this mining process, the company's analysts concede, are nowhere near the size of the massive crypto heists North Korean hackers have pulled off in recent years, stealing hundreds of millions of dollars in cases like the breaches of the Harmony Bridge or Ronin Bridge services.

Mandiant says it found that the funds were nonetheless commingled with crypto in wallets it had previously identified from its years-long tracking of APT43 hacking campaigns.

Mandiant says it has also seen similar amounts flow to APT43 wallets from mining “pools,” services that allow miners to contribute their hashing resources to a group that pays out a share of any cryptocurrency the group collectively mines.

Mandiant says it first began seeing signs of APT43's mining-based laundry technique in August of 2022.

It pays that stolen cryptocurrency into “hashing services” that allow anyone to rent time on computers used to mine cryptocurrency, harvesting newly mined coins that have no apparent ties to criminal activity.

mostly with phishing campaigns designed to harvest credentials from victims and plant malware on their machines.

pay their dirty, stolen coins into services that allow them to mine innocent new ones.

One emerging area of concern in the cryptocurrency and blockchain space relates to decentralizedfinancial products and services, known as DeFi.

state actors such as North Korea have engaged in hacking operations of virtualcurrency exchanges to steal cryptocurrency.

Recentpress reporting also suggests that Iran has cracked down on bitcoin mining in the country, in partbecause the extensive energy needs of mining have led to blackouts across the country

Mining bitcoin provides a way for Iranians to earn revenue, and it is estimated that the amount ofbitcoin mined in Iran could equal approximately $1 billion annually

Iran can use Iranian energyproducts to mine bitcoin, which is an energy-intensive process

, Iran may be using bitcoin mining to circumvent sanctions.

Front companies and individuals and entities involved inthis type of scheme will also seek to mask Iranian involvement by omitting Iranian addresses andnames of companies and individuals from key documents and will use multiple exchange housesto avoid scrutin

ran also uses currency exchange houses35 in third countries and trading companies to hide theorigin of funds and to procure U.S. dollars.

The IRGC-QF is also known to use front companies to retrieve funds from foreign bank accountsheld by the CBI.

Notably, Iranhas used senior officials of the Central Bank of Iran (CBI) and regional financial institutions toacquire hard currency and to conduct transactions in support of the Islamic Revolutionary Guards

Other countries help North Korea evade U.S. and UN sanctions as well, notably Russia and China.

One example of a typical North Korean sanctions-evasion practice is the export of coal to China-based companies,25 which then send small payments to front, shell, or trading companies in Asiaor in offshore jurisdictions.

Pyongyang also relies on corporateservice providers in third countries to facilitate its sanctions evasion activities

The U.S. dollar continues to play a large role in the global economy: About half of all internationaltrade is invoiced in U.S. dollars.

This could berepresentative of a new sanctions-evasion approach and could be “one of the first instances oforchestrated manipulation in which vessels went dark for an extended period while off-ship agentsused distant computers to transmit false locations.”

Shipping has been described by a former senior U.S. government official as a “key artery to evadesanctions.”

the maritime, financial, and cryptocurrency sectors.

Second, and relatedly, it is often inexpensive and easy to set up evasion mechanisms.

In effect, thefinancial system and those trying to prevent sanctions evasion have to cover a wide range ofpossible vulnerabilities, while sanctions evaders can pick and choose how they try to infiltrate thesystem

adversaries are continually developing and implementing strategies and tactics to blunt theirimpacts.

A third key purpose of employing sanctions is deterrence.

For example, in the Russiacontext, the United States has used a combination of sectoral, list-based, comprehensivejurisdictional, and secondary sanctions to impose costs on Russian President VladimirPutin and his cronies for interfering in U.S. elections, annexing Crimea, destabilizingeastern Ukraine, supporting the Assad regime in Syria, and using chemical weapons.

mposing Economic Pain to Change Behavior.

Biden administration imposedsectoral sanctions on China when it issued Executive Order 14032, which prohibits U.S.persons from purchasing or selling securities of 59 Chinese companies as well as anyperson determined to operate in the defense or surveillance technology sectors of theChinese economy

First employed against Russia following its annexation of Crimea anddestabilizing activities in eastern Ukraine,

led by the Treasury Department’s Office ofForeign Assets Control (OFAC) – designated more than 1,000 targets per year

. Finally, I will turn to how best tocounter sanctions evasion, and what Congress, the administration, and the private sector can do todetect and disrupt evasion activity

Hamid Jalil, the aid coordinator for the Ministry of Finance, pointsout that wasting money on unnecessary projects like Tarakhil has helpedto hobble Afghanistan's progress in the last eight years. "The donorprojects undermine the legitimacy of the government and do not allow usto build capacity," he says, adding in the weary tone you often hear inKabul today, "corruption is everywhere in post-conflict countries likeours."

To add insult to injury, much of the diesel is meant for the USAID power plant at Tarakhil that has become a symbol of the sort of massive and widespreadreconstruction waste and abuse that has gone on in this country foryears.

This week, Mohammed Qasim Fahim will be sworn in as the nextvice-president of the new government of Afghanistan.

While Zahid Walid has won close to $100 million in diesel contractsfrom the Afghan government in these years, there is hard evidence thatthe money for this once-needed fuel is now essentially beingsquandered.

A number of popular accounts of that invasion, such as Bob Woodward's book Bush at War,suggest that the Central Intelligence Agency directly gave NorthernAlliance warlords like Fahim millions of dollars in cold, hard cash tohelp fight the Taliban in the run-up to the U.S. invasion.

"reconstruction" of Kabul's electricitysupply is a classic story of how foreign aid has often served to linethe pockets of both international contractors from the donor countriesand the local political elite.

Anatomy of an Afghan Culture of Corruption

Air operations were only part of it. Today, Australia is grappling with the fallout of serious allegations about a pattern of potential war crimes its special forces committed during raids in Uruzgan province that included murdering children, kicking detainees off cliffs, and planting weapons on men whom they had summarily executed. The alleged crimes echo those of U.S. special forces, including the never-prosecuted 2012 murders of 17 civilians who were detained and tortured to death in Nerkh district. Afghan victims of such crimes never saw justice – which is why the International Criminal Court has sought an investigation into crimes by all parties to the conflict, including the U.S. military and CIA, as well as the Taliban and Afghan government forces. The U.S. response has been to reject the ICC’s jurisdiction and try to shut down any investigation.

But the psychological impact of so many civilian deaths and injuries from air operations, and the terror in rural Afghanistan inspired by the constant raids and special operations, may have done far greater damage in undermining support for the Afghan government than any military advantage gained.

After that, civilian casualties from airstrikes soared as the Trump administration vastly increased air operations while removing directives prohibiting strikes on residential buildings and loosening rules on targeting.

Civilian deaths in Afghanistan from U.S. and NATO airstrikes jumped in 2007 and rose to over 500 in 2008.

A number who were released or escaped later remobilized and helped lead the Taliban resurgence.

Throughout, U.S. policy was guided by a number of myths. One was that the Afghan strongmen, warlords, and militia commanders the United States chose as allies in ousting the Taliban could help to provide security and stability, despite their records of abuses. In fact, the opposite proved to be the case.

Dostum ensured more gender equality than almost any other Afghan leader.

He was a key supporter of President Hamid Karzai’s reelection in 2009.

The United States became his new patron when he joined the CIA campaign to oust the Taliban in the last months of 2001, after the 9/11 attacks.

the communists were finished, and a new power struggle arose, between the warlords.

Afghan communist party was badly divided from its birth in 1965. The two factions of the party, the Parcham (the Banner) and the Khalq (the People), were literally at each other’s throats throughout the party’s history.

he Khalqis were violent ideologues who saw enemies on every side, and they quickly acquired them.

Dostum himself—exemplified the more typical commander on both sides: ruthless, corrupt, volatile, and violent. Dostum switched sides many times during his blood-soaked career. He has been backed over the years by the Soviet Union, Iran, Turkey, Uzbekistan, Russia, and the United States.

Since the 1980s, Shibirghan has been the stronghold of Abdul Rashid Dostum, an Uzbek Afghan warlord who has played a complex role in the wars that have wracked Afghanistan since 1978.

At the commander level, however, there was not much difference between the two sides. Most commanders were warlords and behaved like warlords.

“Our biggest single project, sadly and inadvertently of course, may have been the development of mass corruption,” he told SIGAR in 2016.

“The kleptocracy got stronger over time, to the point that the priority of the Afghan government became not good governance but sustaining this kleptocracy,

By 2006, just five years into the U.S. war, the elected government in Kabul had “self-organized into a kleptocracy,” said retired Army Col. Chris Kolenda in a 2016 SIGAR interview.

To some American officials, paying off a local strongman to guarantee safe passage seemed more reasonable than paying an American defense contractor to bomb their way across the country.

SIGAR never meant for the public to read the full, candid interviews.

But many more exploited their family ties to government officials or provincial warlords in order to secure lucrative contracts.

U.S. dollars also created the “9/11 millionaires,” a tiny class of young, ultra-wealthy Afghans who made their fortunes working as contractors for the foreign armies.

$290 million every day for 7,300 days. That’s how much money America spent on 20 years of war and nation-building in Afghanistan, according to Brown University’s Costs of War project. Yet it took just nine days for the Taliban to seize every provincial capital, dissolve the army and overthrow the U.S.-backed government in August.

The international community needs to rethink its outdated responses to these kinds of tactics, instead of relying on military strikes and sanctions, which did little to stop the Taliban.

Insurgent taxation is an overlooked yet critical part of war economies across the world, from the Houthis in Yemen to Al Shabaab in Somalia.

aliban-run government collected some US$400 million in revenue during the last quarter of 2021.

Before August 2021, some 80% of the Afghan national budget was comprised of international aid.

The Taliban’s taxes on the transport of goods are a prime example.

Many of the Afghans we spoke to felt that the Taliban’s taxes were fairer than those imposed by the government, which often involved bribery and complex bureaucracy.

My team’s recent investigation in Afghanistan found that the Taliban was arguably more effective than the former government – which had the benefit of international funding and expertise – at collecting taxes.

state-like system of taxing citizens on everyday goods like cigarettes and perfume. The money raised turned out to be an essential part of the Taliban’s military strategy, allowing them to expand territorial control, checkpoint by checkpoint, as an integral step towards victory.

But they also had another valuable and effective weapon at their disposal: taxes.

Afghanistan’s bail and guarantee code, coupled with the Afghan government’s failure to later arrest the accused, isone system that contributes to in absentia trials and impunity.

For example, Mr. Ahmad Yousuf Nuristani was accused by the Afghan government of misuse ofauthority and embezzlement, but President Ghani then appointed him to the Meshrano Jirga, or upper house ofAfghan Parliament. Nuristani then claimed legal immunity from arrest due to this appointment, despite beingconvicted in absentia and sentenced to 13 months in prison by the ACJC.

Meanwhile, members of Parliament accused of corruption crimes have used and continue to use Article 102 toevade justice.

Supreme Court responded in January 2021 that there is no legal ambiguity regarding Article 102, and statedthat “the Supreme Court does not feel the need to evaluate it according to the relevant provisions of laws.

Article 102 protectsmembers of Parliament from arrest, detention, and prosecution, and states that the “responsible [lawenforcement] official shall immediately inform the respective House and obtain its approval” when a member ofParliament is detained, and if an accusation of a member of Parliament takes place during recess, “thepermission for arrest or detention shall be obtained from the administrative board of the respective House...”

The Afghan government has made progress in curbing corruption within the Afghan National Defense and SecurityForces (ANDSF) through the enhanced use of automated systems, including the Afghan Personnel and Pay Systemand Core Inventory Management System, as well as the increased application of Inherent Law.

As reported in our 2018 and 2019 anti-corruption reports, the Afghan government has a history of creating anti-corruption institutions that are ineffective.

However, in January 2021, several Afghan civil society officials told us that the appointments did not follow the ACCselection process set forth in the March 2019 amendment to the Anti-Corruption Law. Afghan civil society officialsreported that the Civil Society Joint Working Group, the representative body for approximately 1,400 civil societyorganizations throughout Afghanistan, chose two representatives to monitor the process for corruption. However,according to Afghan civil society officials, government officials interfered in the selection process, removed the civilsociety officials because of disagreements over delays in the selection process, and then brought in other civilsociety representatives, who were not members of the Civil Society Joint Working Group, to participate in theselection of ACC commissioners.43 As such, some Afghan civil society organizations believe that the current ACClacks independence and legitimacy, and was not staffed in accordance with established processes.

The limited understanding of the Access to Information Law among government officials and subsequent failure tocomply with requests for information, mean that the AIC, media, and Afghan citizens do not always receiveinformation that should be made public, such as public procurement information. Indeed, the UNCAC stresses theimportance of access to information for preventing corruption, stating that access to information “promote[s] theactive participation of individuals and groups outside the public sector, such as civil society, non-governmentalorganizations and community-based organizations, in the prevention of and the fight against corruption” and“raise[s] public awareness regarding the existence, causes and gravity of and the threat posed by corruption

many senior leaders in the Afghan government believe that they own the data andinformation relevant to their ministries and that all materials in their possession are “confidential,” and some maydesignate information as “confidential” in order to cover up corruption at their respective ministries

Although the AIC has a clear mandate to ensure the right of Afghan citizens to access government data andinformation, the organization reportedly struggles with receiving information from Afghan government officials.

this report notedthat the U.S. government’s approach to fighting corruption in Afghanistan has focused on technical fixes andbureaucratic improvements, rather than the political roots of corruption, Afghanistan’s culture of impunity, orconcrete systemic reforms

DOD, State, and USAID could have tied specific security anddevelopment assistance to “tangible, measurable progress” in combating corruption.

U.S. government has also not consistently demonstrated the political will to push fortangible and lasting anti-corruption reforms in its reconstruction activities.

The completion of these 2 benchmarks facilitated the enhanced recovery of funds stolen from the Kabul Bank,and increased accountability for corrupt actors and debtors.

Afghan government has accomplishedall of the benchmarks associated with three of them, as of July 2021. The three matters for consideration that theAfghan government completed were (1) increase efforts to recover assets stolen from Kabul Bank and return thefunds to the Afghan Central Bank, (2) take actions that allow for the distribution of criminally derived assets togovernment organizations, and (3) continue to implement the CMS and ensure its systematic use among Afghanlaw enforcement organizations.

Of the 26 benchmarks from 2019, the Afghan government completed 19, butonly 5 of these represent concrete actions to tangibly reduce corruption; the other 14 completed benchmarks areintangible regulatory reforms that require further action to decrease corruption. The Afghan government has yet tocomplete the remaining 7 benchmarks, but 6 of them would have produced tangible anti-corruption reforms hadthey been completed.

demonstrated varying levels of commitment,political will, and resourcing to complete each of the self-imposed benchmarks

fghan government has consistently lacked the resources and political willto directly address systemic corruption.

We noted in our September2016 Corruption in Conflict report that a 2009 Organization for Economic Co-operation and Development reportfound that anti-corruption efforts “had succeeded in establishing some consensus around the corruption problemand setting specific benchmarks, but in terms of concrete impact, had amounted to little more than window-dressing.

This problem is not new in Afghanistan.

s efforts sometimes constituted “box-checking exercise[s].”31 Consequently, the Afghangovernment made limited progress in tangibly reducing corruption.

DOD has not undertaken any new anti-corruption programs since the publication of our last anti-corruptionassessment. However, it continues to provide assistance to the Afghan government by advising the MOD and theMOI, including by advising the MCTF and the MOD Inspector General.

State, DOD, and USAID provide assistance to the Afghan government to fight corruption. State provides assistancethrough the Justice Sector Support Program, which maintains the CMS, an electronic database used acrossvarious Afghan government institutions to track cases. State’s Bureau of International Narcotics and LawEnforcement Affairs (INL) also maintains an inter-agency agreement with DOJ to provide training and mentoring tojustice sector actors

four main entities responsible for anti-corruption-related policymaking, prevention, and enforcement activities: (1) the HCLAC; (2) the MCTF, which is part of theMOI; (3) the AGO; and (4) the ACJC, whose prosecutors also fall under the AGO.

Vulnerability to Corruption assessments, and which is intended toprovide independent oversight of Afghan government entities.

oint Monitoring and Evaluation Committee on Anti-Corruption, ahybrid organization consisting of Afghan and international officials that conducts oversight of governmentinstitutions and programs

The Afghan government concurred with all eight matters for consideration and provided 26 specific actions itwould take to implement them.

Continue to implement the Case Management System (CMS) and ensure its systematic use amongAfghan law enforcement organizations.

Increase the resources provided to anti-corruption law enforcement organizations such as the AGO, ACJC,and MCTF, to provide them with the ability to increase the number of arrests and prosecutions of corruptindividuals;2. Take action to reduce the legal and de facto immunity of powerful individuals;3. Continue to polygraph personnel at the ACJC and the MCTF on a regular basis and increase efforts toeliminate lost productivity from the dismissal of personnel who fail the polygraph examinations;4. Make public all anti-corruption court decisions in accordance with Afghan law;5. Increase coordination and cooperation between Afghan law enforcement organizations and internationallaw enforcement organizations;6. Increase efforts to recover assets stolen from Kabul Bank and return the funds to the Afghan Central Bank;7. Take actions that allow for the distribution of criminally derived assets to government organizations; a

he way in which the Afghan government implemented its revised anti-corruption strategy caused concernamong international donors and Afghan civil society organizations.2. The Afghan government did not always achieve intended outcomes of anti-corruption strategybenchmarks, although it technically met many of them.3. The Afghan government only met some of the anti-corruption benchmarks contained in the U.S.–Afghanistan Bilateral Compact (Afghanistan Compact) between June 2018 and March 2019.154. The Afghan government made progress toward addressing SIGAR’s 2018 Matters for Consideration, butconcerns found in SIGAR’s 2018 audit report, such as the impunity of powerful Afghans, remained.5. The Afghan government made additional anti-corruption reforms, but challenges continued; for example,warrant execution did not increase despite increased coordination between Afghan agencies.

. In 2018, Congress asked us to update our May 2018report and determine whether the Afghan government was making progress toward achieving its anti-corruptionobjectives

On October 12, 2017, the Afghan government released the “Afghanistan National Strategy for CombattingCorruption,” an English language version of its anti-corruption strategy

After President Ghani’s election in 2014, the Afghan government showed renewed interest in completingAfghanistan’s anti-corruption commitments under the UNCAC.

Afghanistan attempted to develop its first national anti-corruption strategy in compliance with the UNCAC inFebruary 2008. The Afghan government released that anti-corruption strategy in July 2008 as part of the AfghanNational Development Strategy, followed by its ratification of the UNCAC in August 2008. In 2014 the UnitedNations Development Programme criticized the July 2008 anti-corruption strategy, calling it a “wish list” andstating that the strategy did not prioritize actions well

Our November 2019 report noted that the Afghangovernment developed action plans, focused on outputs, and performed “box-checking exercise[s].”7 However,paper progress may not result in tangible outcomes for anti- and counter-corruption efforts.

Since our first report, the Afghan government has repeatedly assured international donors that it is committed tocombatting corruption.

There have been a lot of calls for action. Now it is a waiting game to see if changes will be implemented.

Namely, Delaware, Nevada, Wyoming, Montana, South Dakota, and New York are all tax-friendly for keeping financial assets, even when compared to the more iconically known tax havens like the Bahamas or Panama.

As James Henry, a senior adviser to the Tax Justice Network, wrote in a 2012 report, first reported by the Washington Post, offshore can also mean right at home for Americans looking to protect their assets: "The term offshore refers not so much to the actual physical location of private assets or liabilities, but to nominal, hyper-portable, multi-jurisdictional, often quite temporary locations of networks of legal and quasi-legal entities and arrangements that manage and control private wealth," Henry wrote.

Putin's theory is that the US leaked the documents as part of a larger scheme to "destabilize" Russia, adding that the entire motive behind leaking the documents was to smear him as president.

We don't actually know.

In fact, countries can use trade deals to put checks on tax havens.

multinational corporations that have powerful lobbyists.

In 2015, Sen. Sheldon Whitehouse (D-RI) introduced the Stop Tax Haven Abuse Act. The bill, supported by many tax-justice oriented organizations, would tighten reporting requirements on offshore companies and treat certain offshore companies owned by Americans as taxable domestic corporations. It was referred to House committees the day it was introduced and has not moved since.

simplest way to approach this is that tax havens benefit the very wealthy and the very wealthy have a lot of political clout. Elites have largely allowed tax havens to exist because elites themselves benefit from their existence.

If so many people think tax havens are bad, why are they still around? Isn't someone trying to do something about this?

chief purpose of shell companies is to maintain the anonymity of the real owne

Gabriel Zucman, an economist at the University of California-Berkeley, estimates that nearly $8 trillion — 8 percent of all the financial wealth in the world — is stashed in tax havens, and that illegal tax evasion costs governments around the world $200 billion per year in taxes

Big multinational companies take advantage of tax havens to minimize their corporate income tax bill by internally shifting profit-making assets to subsidiaries located in low-tax countries. For example, Apple's global sales go through its subsidiary company in Ireland, which has lower corporate income tax.

There is a multimillion-dollar network of offshore companies surrounding Vladimir Putin and his closest friends that, although not directly linked to Putin by name, connects the Russian president to secret and questionable loans and investments in Russian monopolies.

The papers named 140 politicians from more than 50 countries linked to offshore financial dealings in more than 20 tax havens.

The papers were initially released to German newspaper Süddeutsche Zeitung. The newspaper then partnered with the International Consortium of Investigative Journalists. For more than a year, 300 journalists reviewed the 2.6 terabytes of data before releasing their findings, now called the Panama Papers.

But they also raised a lot of questions, from the complex to the simple: Who leaked the documents? How did we get into this situation in the first place? And what the hell is a shell company to begin with?

how pervasive tax avoidance is among the world's most powerful and wealthy

nearly 100 times more data than when Wikileaks released nearly 3 million US diplomatic cables.

Institutional reform is a necessity and must take into account theinsights of institutional economic analysis.

An understanding of the incidence and effect of corrupt payoffs andprivate networks requires one to understand how institutions work – bothformal structures and informal networks

Policy must address the underlying conditions that cre-ate corrupt incentives, or it will have no long-lasting effects.

But itis also essential to examine the institutional structure of particular systems orsectors.

example shows how institutions interact to produce or to stymie re-form

Much of the improvement can beexplained by a newspaper campaign that allowed parents to know how muchmoney their children’s school was supposed to obtain

Reinikka and Svensson (2004) carried out a detailed study of the connec-tion between accountability and corruption in the delivery of public servicesbased on primary school financing in Uganda.

important to studyhow the institutional environment creates incentives for corruption in the de-livery of particular public services, such as education, health, highways, ornational defense

Corruption is sometimes discussed as if it were a broad generic concept. Inpractice, however, it operates at the sector level.

One way to study the impact of institutional arrangements on behavior isto construct experiments where the institutional environment can be manipu-lated to study behavioral responses

when corruption becomes part of the in-stitutionalized business environment, it has serious feedback effects on theoperation of private markets.

Thus, corruption is not a route to a secure relationship with thestate but opens up possibilities for extortion.

One institution that is particularly important is the security of propertyrights

Surveys demonstrate how firms manage to cope when legal institutionsare weak.

or example, World Bank surveys in Central and EasternEurope document the specific ways that corrupt officials and intrusive rules af-fect businesses and show how corrupt environments impose costs

best survey work is based on households’ experience with public of-ficials, not just individual attitudes.

Experiments permit a more controlled assessment of human behavior,but they may miss the nuance of real world situations where subtle inter-personal cues may operate to encourage or discourage payoffs

ocal kleptocracy may be especially difficult tocontrol in rural areas in poor countries where wealthy landlords exercise po-litical power and ordinary people have no realistic exit options

However, some work finds thatfederal states are more corrupt than unitary ones

BarryWeingast’s notion of market-preserving federalism, this view holds that de-centralization will limit corruption both

Federalism and decentralization add another dimension

Their results confirm Persson and Tabellini’s(2003) finding that proportional representation system are more corrupt thanfirst-past-the-post systems but contradict their more favorable results forpresidential systems (see also Peters, this volume).

Kunicová and Rose-Ackerman (2005) study the links between constitu-tional structures and voting rules, on the one hand, and perceptions of cor-ruption on the other.

These studies ask whether the specific na-ture of corrupt deals can help explain their impact and whether a country'sconstitutional structure is a determinant of the levels and types of corruption

This diversity in the middle counsels an em-phasis on research at the sector and country level.

However, there are distinct limits to cross-country research. It assumesenough regularity in the phenomenon so that a single statistical model cancover the world.

Even if there is a feedback mechanism from low growthto high corruption and from high growth to low corruption, the growth proc-ess cannot begin without reasonably well-functioning institutions.

the consequences of corruption are difficult to distinguishfrom the causes; the causal arrow appears to go both ways

Thus in corrupt governments, the individual projects areexcessively expensive and unproductive, but the overall size of the govern-ment is relatively small.

In circumstances of low government legitimacy, citizens try to avoidpaying taxes, and firms go underground to hide from the burden of bureauc-racy, including attempts to solicit bribes.

Firms with close connec-tions with the government did better than other firms, but countries wheresuch connections were seen as important for business success did worseoverall than those where political influence was less closely tied to economicsuccess

Corrupt governments lack political legitimacy (Anderson/Tverdova 2003)although the political supporters of corrupt incumbent governments, not sur-prisingly, express more positive views.

For example, Olken (2006) shows how corruptionand theft undermined a rice distribution program in Indonesia. Corruptionand theft apparently turned a welfare-improving program to one that waswelfare-reducing

Highly corrupt countries tend to under-invest in human capital by spend-ing less on education, to over-invest in public infrastructure relative to privateinvestment, and to have lower levels of environmental quality

Corruption lowersproductivity, reduces the effectiveness of industrial policies, and encouragesbusiness to operate in the unofficial sector in violation of tax and regulatorylaws

These indices have spawned a large number of studies demonstrating thatcorruption is associated with harmful outcomes and that institutions matterfor growth

Thus, the indices do not represent hard measures of corruption

Cross-country research is mostly based on two similar indices of corruptiondeveloped by Transparency International (TI) and by the World Bank Insti-tute.

I describe research based on cross-country indices, studies that con-centrate on institutional structures, results from surveys and experiments, andindividual sector studies

As Rothstein (2010) argues, one advantage of universal benefitsis that the state avoids having to decide who qualifies.

Research in anthropology and sociology stresses that cultural and socialfactors determine the level of corruption and explain why behavior is seen ascorrupt in some societies but not in others (see de Zwart, this volume). Heretoo, the important issue from a policy perspective is whether these factors areexogenous or whether people react to others’ behavior.

Some claim that deep historical factors are the fundamental determinantsof corruption and also can explain the impact of corruption on economicgrowth and other variables

. In Mancur Olson’s term (1993), a‘stationary bandit’ is better than a large number of ‘roving bandits’. The evi-dence suggests, however, that most kleptocrats do not act like efficient mo-nopolists.

Most problematic is bilateral monopoly,

For example, they regularly contract for major construction projectssuch as highways and port improvements, allocate natural resource conces-sions, and privatize state-owned firms. High-level politicians may organizestate institutions so that they can use their influence to collect kickbacks fromprivate firms in all of these areas.

Third, governments engage in large projects can transfer assets in waysthat have a significant effect on the wealth of domestic and foreign busi-nesses.

Second, a nominal democracy may have a corrupt electoral system, withmoney determining the outcome.

The princi-pal/agent model still applies, but the proximate principal inside the bureauc-racy becomes a pure rent-extracting body. Reform cannot occur without athoroughgoing restructuring of the corrupt body that will require replacingpersonnel, changing its tasks, and introducing outside oversight, perhapsfrom civil society

First, a branch of the public sector may be organized as a rent extractionmachine.

In somecases, however, even if the damage done by corruption can be documented,no one may have the power or the political will to make systemic changes.

The analysis of grandcorruption must account for the possibility that top officials and politicianswill create institutional environments that facilitate their illicit enrichment.

The bribes may be paid atthe lowest level in the hierarchy, but they may be part of an organized systemthat is used to favor political allies and to build campaign war chests, and notonly to obtain individual cash benefits. At that point low-level corruptionmerges with high-level corruption.

Fisman and Miguel’s (2007) study of violations oftraffic laws in New York City by United Nations diplomats. During a periodwhen the law was not enforced against them, the level of violations wasroughly correlated with Transparency International’s Corruption PerceptionsIndex. However, the overall level of violations fell dramatically after achange in policy that gave the embassies an incentive to pay. Both financialpenalties and ‘culture’ mattered.

economics predicts that institutional changes that increase financial benefitsand reduce costs will increase the incidence of corruption.