Chile's anti-corruption model raises Latin American standards

In this column, subject matter experts analyze fraud causes and remedies in regions and countries around the globe. — ed.

In 2017, Odebrecht, a Brazilian construction company, admitted to using bribery and corruption to secure more than 100 projects in 12 countries in Latin America, which generated illegal gains of about $3.3 billion. Odebrecht’s corruption reached the highest levels of government: The web of bribes implicated Latin American presidents, senators and officials. Odebrecht agreed to pay $3.5 billion in fines to Brazil, the U.S. and Switzerland — the largest corruption-related fine ever levied on a company. (See This company created the world’s biggest bribery ring, by Patrick Gillespie and Marilia Brocchetto, CNN Money, April 5, 2017, and No One Has Ever Made a Corruption Machine Like This One, by Michael Smith, Sabrina Valle and Blake Schmidt, Bloomberg Businessweek, June 8, 2017.)

The Odebrecht corruption scandal, which has halted construction projects throughout Latin America, has highlighted the prevalence of corrupt practices in the region, such as paying for access and favors — bribes, or “compadrazgos” or “sobornos.” Latin America’s reliance on corrupt practices — in this instance, paying bribes to get contracts — weakens the work that’s been done in the region by some Latin American countries, such as Chile, to combat corruption and fraud.

The history of Latin America’s socioeconomic foundations

Latin American culture historically is based on an authoritarian system that emphasizes tradition, two social strata — rich and poor — and religious absolutism (religious standards against which moral questions can be judged). Latin America also possesses significant economic inequality. Historian Craig Deare has characterized the region as the one with the most unequal distribution of wealth. (See Latin America, by Craig A. Deare, 2016.)

From the 15th to 19th century, the Spanish and Portuguese established a hierarchical caste system that utilized a person’s ancestry:

• Spanish immigrants.
• Those born in Latin America but whose parents were of Spanish descent.
• Latin American natives.

These divisions, which still exist in varying degrees, have created a dependence on “clientelism” (a political system in which goods and services are exchanged for political support) and highlighted the importance of ancestry. [See Politics and Corruption in Chilean Democracy, by Alfredo Rehren, German Institute of Global and Areas Studies (GIGA), 2014.]

Latin American colonies paid compulsory taxes on revenues to Spain. To circumnavigate having to pay Spain portions of its revenue, Latin America conducted business negotiations under the table. Some historians believe this practice paved the way for current backhanded business practices.

From country to country, and even continent to continent, we see differences between culturally accepted practices and perceptions of what constitutes fraud and/or corruption. Citizens view forms of Latin American corruption as:

• Ethically acceptable.
• Technically lawful.
• Trivial.
• Unacceptable and damaging to democracy.

(See the academic paper, Corruption and Democratic Governability in Latin America: Issues of Types, Arenas, Perceptions, and Linkages, by John Bailey, 2006.)

According to Bailey, Latin Americans, as compared to U.S. citizens, prefer democracies that provide social and economic equality in place of representation. Bailey explains that because of European colonization, Latin Americans revere insurgents, whom they credit with freeing the continent from authoritarian regimes.

According to Deare’s “Latin America,” several Latin American governments have been historically categorized as authoritarian regimes. Some of these governments lack separation of duties and don’t have balances of power. Therefore, attorneys and judges in some countries are responsible for investigating fraud and other criminal schemes and determining guilt, which shows the potential for corruption within judicial systems, according to Deare.

However, Chile is an outlier. The country’s history differs vastly from others in the region. Chile is geographically located far from the Caribbean, which was the center of colonial Latin America. Chile also was unattractive to most European explorers searching for precious metals because it was far from the Caribbean, and it doesn’t have any gold. Chile’s 1833 constitution established strong government institutions that strove to prevent the concentration of power in the hands of a few individuals. (See the academic paper, The Chilean transition from non-corrupt economic underperformer to most developed and least corrupt country in Latin America, by Patricio Navia, May 28, 2015, GIGA.)

Chile’s economic transformation

In 1956, Chile’s Santiago Universidad Catolica and the University of Chicago engaged in an educational exchange agreement to promote the study of free-market economics in the U.S. The U.S. Department of State supported this initiative to expand U.S. influence in Latin America. (See The Boys Who Got to Remake an Economy, by Tania Opazo, Jan. 12, 2016, Slate Magazine.)

According to the Slate article, 25 Chilean economics students, termed the “Chicago Boys,” returned to Chile from the University of Chicago and began creating an economics program — based on the ideas of their academic mentor, Milton Friedman — that focused on solving high inflation and reducing fiscal spending through a “neoliberalist” model. Some economists credit the Chicago Boys with shaping Chile’s successful economy and influencing how other countries formed their economies.

Chile’s economic success during its later post-Pinochet development is known as the 'third wave of democracy in Latin America.'

This new economic model eventually spread throughout Chile. However, in 1973, Augusto Pinochet, a brutal military general, became Chile’s dictator in a CIA-backed coup. Pinochet, during his 17-year rule, egregiously abused the rights of citizens. According to the Slate article, many of the Chicago Boys joined the military government during Pinochet’s 17-year dictatorship.

A freely operating private sector without government economic intervention has been the successful economic model for Chile’s economic transformation. According to Navia, Chile privatized state enterprises, repealed legislation that allowed government oversight, and actively promoted both private and foreign investment. This economic change was controversial because of its timing and the method through which the country instituted it.

Chile’s economic success during its later post-Pinochet development is known as the “third wave of democracy in Latin America.” Between 1990 and 2015, Chile — an economic success — reduced its poverty levels from 40 percent to below 7 percent, according to Navia. 
The country maintains an annual budgetary surplus of around 1 percent, which has eliminated governmental deficits. (See Politics and Corruption in Chilean Democracy, by Alfredo Rehren, GIGA, 2014.)

An anti-corruption model

According to Navia, in 1990 Chile became the exception to Latin America’s common government corruption.

Transparency International ranks Chile 26 out of 180 countries in its 2017 Corruption Perceptions Index, and the World Bank’s Ease of Doing Business report ranks Chile at 55 out of 190 countries. Chile also scores high on the Bertelsmann Stiftung’s Transformation Index, which analyzes and evaluates democratic quality and political management in developing and transitional countries.

According to Navia, Chile is one of the few Latin American countries whose police force isn’t normally bribed and in which public officials don’t demand bribes. Chile has increased governmental transparency and reduced corruption through a series of regulations that increase both integrity and transparency across many parts of its society. The country has exhibited intolerance towards corruption and has used swift mechanisms to reduce corruption.

Chile’s path to reducing fraud and corruption

Access to public information

In 2009, the Chilean Congress enacted a statute to improve government transparency and give the country’s people access to public information. To strengthen citizens’ rights to information, government ministries must publicize salaries, budgets, programs and contracts on their websites, according to Rehren.

Probity in campaign financing and asset disclosure

In 1994, Chile passed a public probity law that prevents conflicts of interest, bribery, corruption, and kickbacks and other illicit enrichment. (See Local embedding of international discourse: Chile and the international and transnational anti-corruption campaign, by Malte Gephart, GIGA, 2016.)

According to Rehren, the new law also requires senior public servants to declare their assets, activities and interests before entering public office. As a result, public officials with direct or indirect interests in a bill or an issue are required to abstain from engaging in bill-making processes.

Chile also has increased transparency through stringent regulation of political campaign financing, including sanctioning public officials that don’t fully declare their direct contacts, according to Rehren.

The country has expanded the reach of anti-corruption laws by also making them applicable to family members of public officials. Public officials now find it difficult to hide assets in family members’ names, launder money and avoid detection for conflict-of-interest issues. When potential conflicts of interest or incompatibilities arise, public officials’ family members are required to disclose assets, and direct and indirect business affiliations. (See Investment Climate Statements for 2017, U.S. Department of State.)

Contract and procurement transparency

The Chilean government has pioneered anti-corruption efforts in contract, procurement and hiring realms by instituting transparency through an electronic hiring and a procuring software system, ChileCompra, which it created in 2003 as a central computerized national system for public procurement. The government aims to implement 100 percent transparency through digitizing and publishing every step within its contracting and procurement process. (See Public Procurement System: Strategic Plan 2002-2004, Gobierno de Chile.)

According to Rehren, ChileCompra publishes all public service transactions on the government’s webpage to ensure complete transparency. It also uses anti-fraud mechanisms that assess associations between vendors and clients and their families to prevent conflict-of-interest issues in the procurement process. And according to the U.S. Department of State, the program allows the public, vendors and procurers to see information on government contracts and purchases while also allowing reporting of anomalies and red flags.

According to the ChileCompra Strategic Plan, public agencies operate in a decentralized and digitized autonomous manner within a system that controls expenditures and ensures transparency at every step. ChileCompra has reduced procedural loopholes while making corrupt behavior easier to detect.

Oversight and professionalization of public sector

In 2003, Chile created the Senior Public Sector Management System (SADP), which professionalizes public service. The system has an independent commission that hires high-level public servants and ensures applicants are hired through legitimate, merit-based means devoid of political processes and clientelism. (See Local embedding of international discourse: Chile and the international and transnational anti-corruption campaign, by Malte Gephart, GIGA, 2016.)

A free and open press also deters fraudulent acts. Publicity of frauds has increased transparency in accountability processes in private and public sectors, according to Navia.

Yes, countries can prevent and deter fraud

Chile has shown its resolve to eradicate fraud and corruption by implementing sweeping legislation and creating new programs and institutions to combat fraud and increase transparency.

Chile’s exemplary actions in combating fraud, despite its history and location — nestled among countries that have high levels of corruption — proves that a country can successfully overcome the odds by reducing opportunity, setting a strong tone at the top and increasing transparency.

Liseli Pennings, CFE, is the ACFE’s training director. She was special agent with the U.S. Treasury Inspector General’s Office for Tax Administration and career special agent and diplomat with the U.S. Department of State Diplomatic Security Service. Reach her at: lpennings@ACFE.com.