The Need for a Taxonomy of Institutional Corruption in Local Government

"The deep problem with the system was a kind of moral inertia. So long as it served the narrow self-interests of everyone inside it, no one on the inside would ever seek to change it, no matter how corrupt or sinister it became — though even to use words like 'corrupt' or 'sinister' made serious people uncomfortable, so Katsuyama avoided them. Maybe his biggest concern, when he spoke to city residents, was that he be seen as just another nut with a conspiracy theory."

This seems like a classic description of the problem citizens have when they understand institutional corruption in a city government and try to get others to understand it. But I changed one term: "city residents" was actually "investors," and this is a quote from Michael Lewis's new book, Flash Boys, which was excerpted in this week's New York Times Magazine.

Reading this excerpt, about the way high-frequency traders took "advantage of loopholes in some well-meaning regulation introduced in the mid-2000s ... simply so someone inside the financial markets would know something that the outside world did not," kept making me think of institutional corruption in local governments. The biggest difference is that it is the local officials themselves who draft loophole-ridden, rules and regulations (or fail to fill the loophones, or simply follow unwritten rules). Even when the rules were originally "well-meaning," they often become the basis for unfair advantages given to certain contractors, developers, grantees, and regulated businesses that, in turn, provide benefits to the officials, their families, their businesses, and their business associates.

Gaming the System
I consider it extremely important that lawyers, especially government lawyers, do not see ethics laws as ordinary laws with loopholes they use their cleverness to find ways to get around, for both government officials and corporate clients. Instead, lawyers should consider ethics rules to be minimum requirements, whose loopholes should be ignored, especially when legal conduct could be damaging to the client or the government.

For example, I will soon be doing a blog post about how few local ethics codes consider in-laws to be relatives for the purpose of conflict of interest and nepotism provisions. This is a loophole that allows officials to give contracts to their siblings' spouses, their spouses' parents, and their children's spouses, that is, effectively to their siblings, spouses, and children, and still be acting according to the law. But they, and the attorneys who counsel them, could choose to recognize that such conduct would lead to a serious appearance of impropriety and a scandal that could hurt their reputation and that of their family members, their body or agency, and their government.

Here's how one of the principal protagonists in Lewis's story describes what was happening in the financial world:

From the point of view of the most sophisticated traders, the stock market wasn't a mechanism for channeling capital to productive enterprise but a puzzle to be solved. "Investing shouldn't be about gaming a system," he says. "It should be about something else."

Even more so, government should be about something else than gaming the system.

It's not surprising that, to close the loopholes in the system, Lewis's protagonists turned to someone who grew up under the Soviet system, which was "horrible and complicated but riddled with loopholes" that people took advantage of in order to succeed in their endeavors. With the help of their Russian employee, the "Puzzle Masters" "created a taxonomy of predatory behavior in the stock market."

The Need for a Taxonomy of Institutional Corruption
As it turned out, the predatory strategies all depended on speed. In local government, predatory strategies depend on relationships, which cannot be solved with technological fixes, the means used by the Puzzle Masters. But there is something to be learned from their approach. In local government, there are two principal "fixes." One is the sting operation, which goes after individuals rather than institutionalized misconduct. The other is the good government group, which consists of outsiders without a deep knowledge of the strategies being used inside.

What is needed for local government is for someone to create a taxonomy of institutional corruption, a guide for ethics commissions and their staff, government attorneys, ethics reform committees, grand juries, good government groups, and potential whistleblowers who work in government or for contractors, developers, or grantees who are being given the same sort of advantages the high-frequency traders had. I have tried to do some of this in my blog and my book, but I am an outsider with a limited knowledge of the strategies and no staff. What is needed is for a foundation to put a group together to work with former insiders to draft a detailed, focused report on the "predatory strategies" employed in local government, as well as on the strategies that can best be used to prevent them from being employed. These strategies need to short-circuit the loopholes, the relationships, and the involvement of officials who have relationships that cannot be prevented, such as family, friends and, in some cases, business associates.

The Basic Issues
Lewis recognizes that the basic issues are creating fairness and transparency ("what he had discovered was just how badly the market wanted to remain in the shadows"), and ensuring that incentives remain as closely aligned as they could be with the public interest, whether it be investors or citizens. What the Puzzle Masters proved is that "to function properly, a financial market didn't need to be rigged in someone's favor. … All it needed was for investors to take responsibility for understanding it, and then to cease its controls." Replace "investors" with "citizens," and you have a perfect definition of a government ethics program, which is, after all, a citizen oversight mechanism.

Who's At Fault
Finally, at least in the excerpt, Lewis's principal protagonist realizes that high-frequency traders are really not at fault. "I think most of them have just rationalized that the market is creating the inefficiencies, and they are just capitalizing on them." This is what institutional corruption is all about:  capitalizing on the public's lack of knowledge of and participation in local government.

But there are two important differences. One is that, whereas high-frequency traders stepped into a system with new technology and new loopholes, today's local officials are working with old methods and old loopholes, and sometimes themselves creating new ones.

The second difference is that, whereas high-frequency traders may have limited fiduciary obligations, local officials, like the banks that used "black boxes" to take advantage of their investors, have serious fiduciary obligations that should prevent them from capitalizing on the weaknesses of the public.

A new local official may be right in saying that she had nothing to do with the creation of the unwritten rules and strategies employed in her government's poor ethics environment, but she does have a fiduciary obligation to tell the public what is going on and to do her best to stop the misconduct. In other words, from the first day she learns about what is going on, she is at fault unless she acts to change the ethics environment of her government, agency, department, or body.

Robert Wechsler
Director of Research-Retired, City Ethics

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