Anti-Corruption Policy Failure: The Case of Moldova’s Billion Dollar Scandal

Ever since its independence from the Soviet Union in 1991, Moldova has been struggling with both nation and state building, albeit with limited success. A quarter century has passed and the country is nowhere near a civic nation or a successful democratic state. The crisis of identity is tearing the poorest country in Europe apart. On the one hand, part of the country would like to reunite with Moldova’s kin state Romania, while on the other hand an even larger part, longing still for the fall of the USSR, would prefer a rapprochement with Russia. In this context, building effective state institutions and implementing sound public policy has been a challenge. Corruption has become endemic, despite commitments by the government to mitigate it. The recent ‘billion dollar scandal’ is a clear indication of anti-corruption policy failure.

Hence, this paper analyses Moldova’s experience in fighting corruption through the prism of New Public Management (NPM) reforms. While acknowledging the merits of NPM and its further potential in the Moldovan policy landscape, particularly through the ongoing process public policy pluralisation in the context of European integration, the author will critically examine the role policy pluralisation and how this process impacts policy making and delivery in the field of anti-corruption. The paper relies on the principle agent theory (PAT) in order to analyse the failure of anti-corruption policy in Moldova. It looks into the underlying reasons of policy failure and suggests a number of relevant solutions.

By employing the PAT model, the paper presents a case of anti-corruption policy failure and argues that, in the Moldovan example, the implementation of New Public Management and the pluralisation of policy, not only failed to preclude, but may have, inadvertently, contributed to regulatory capture. There are multiple reasons for these adverse effects, stemming from the country’s Ottoman and Communist legacies, underdevelopment, low human capacity and limited political will for quality implementation of reforms. The paper focuses on what is often referred to as one of the major causes of anti-corruption policy failure – lack of agent independence (regulatory and law enforcement bodies) from the principle (government/parliament/public) as well as constant reshuffling of prerogatives and lines of accountability and control (Sappington, 1991:63). Hence, an acrimonious blame game ensues, not only between institutions but also among political parties both within and beyond the ruling coalition, which makes both policy making and policy delivery more difficult.

Moldova has witnessed several rounds of NPM reforms. Current stage can be viewed as the deepening of NPM reforms across all sectors in line with Moldova’s aspiration of joining the European Union. There is increasing emphasises on decentralization, transparency and accountability, while at the same time performance indicators are being introduced as part of the larger public sector reforms. Education system underwent a shock therapy under reform minded Minister Maia Sandu, a World Bank economist, who embarked on a highly unpopular, but necessary school optimization process, shutting down small underperforming schools to save costs and improve delivery of educational services. School directors became school managers appointed as a result of a public contest, contributing to a more competitive organisational culture, something that has been discussed in local academic circles for years (Chicu, 2004:39). The reforms also tackled one of the major problems of the education system – corruption. However, corruption remains, indeed, a key issue for the entire public as well as private sectors in the country, undermining reform efforts, leaving Moldova in a catch-22. The country ranks 103rd out of 168 countries, declining continuously form 2010, indicating a widespread problem with perceptions of public sector corruption (Transparency International, 2012), defined by Transparency International as abuse of power for private gain.

In the past few years, the country has been rocked by major political scandals, including the most prominent – the so-called billion-dollar scandal, which “unveiled the frightening magnitude of Moldovan high-level corruption and state capture” (Tudoroiu, 2015:660). On his recent visit to Moldova, General Philip Breedlove, NATO’s Supreme Allied Commander Europe stated that corruption is the biggest threat to Moldova’s national security (Deschide, 2016).  It is all the more astounding, as there is little evidence to suggest that ruling political elites are willing to enforce meaningful reforms, even in the face of pluralisation of policy making and a robust public pressure for change.

   The Billion-Dollar Scandal

Throughout 2012-2014, three Moldovan banks: Banca de Economii [Savings Bank], Banca Sociala [Social Bank] and Unibank have issued loans to entities that never intended to pay the money back, as it later turned out, forcing the state to bail the banks out before withdrawing their licences in the wake of their bankruptcy, which would have otherwise led to a catastrophic contagion of the entire system.  The damage amounted to almost one billion US dollars, which is about 15% of Moldova’s GDP (Whewell, 2015; Eglitis, 2014; Eglitis 2016). The failure to enforce the law on the part of regulatory authority, mainly the National Bank and the National Financial Market Commission was manifest, as later indicated in an independent report by Kroll Inc. – an American corporate investigations and risk consulting firm commissioned to investigate the case (Kroll Report, 2015).

Ironically, it was a subsidiary of an American accounting giant Grant Thornton that carried out regular audits of the embattled banks, issuing a series of positive opinions when the banks were already going under (Rosca, 2015). To add insult to injury, director of Grant Thornton’s Moldova office, Stéphane Bridé, was soon after promoted to a cabinet position –Deputy Prime Minister, Minister of Economy. However, even if private stakeholders were negligent or complicit, it was state institutions that untimely failed to enforce the law and serve the public interest.

Law enforcement, primarily the National Anti-Corruption Commission as well as the Office of the  Prosecutor General have clearly failed to act, even though they had received all the information about the ongoing suspicious financial activity in the three banks, as confirmed by the heads of the abovementioned institutions during Parliamentary hearings (Infotag, 2015). The case is still pending, but no one has been convicted so far. The former Prime Minister Vlad Filat is under arrest for allegedly having benefited from about $250 million of the mission billion, but his trial can also be viewed as politically motivated selective justice, particularly as no one else is being charged regarding the remaining three quarters of the billion missing or regarding the inaction on the part of regulatory and law enforcement authorities who let it slip.

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Vlad Filat

In fact, the second most prominent figure in the case, majority shareholder in the three troubled banks and chairman of the board of the largest bank of those three – Savings Banks, a 29 year old businessman, Ilan Shor, escaped prosecution by running for mayor of one of the largest towns in Moldova. More importantly, Shor entered an agreement with the prosecution, becoming the main witness against the ex-Prime Minister Vlad Filat, who is currently in pre-trial detention for allegedly having received about $250 million in bribes and kickbacks from Shor (Infotag, 2015). However, there have been numerous media reports suggesting that Ilan Shor agreed to provide incriminatory depositions against Filat not just to save himself, but also to do the bidding of Filat’s main political rival, ex-deputy Speaker, Vlad Plahotniuc. The latter is considered to be the wealthiest person in the country, with immense influence over the ruling majority in parliament as well as the cabinet, but also on state institutions that are supposed to be independent, such as   prosecution service, courts, National Anti-Corruption Center etc. (Infotag, 2015; Shupac, 2015; Socor, 2016).  Lack of institutional independence both regulatory and law enforcement, inevitably leads to major difficulties in fighting and combating corruption. Hence, it constitutes one of the major causes of anti-corruption policy failure.

Theoretical and Practical Implications 

A decade into Moldova’s independence, Professor Lucan Way painted a persuasive image of the country as it muddled through transition. Yet, his assessment is being increasingly challenged by realities on the ground today. According to Way, “Moldova is best understood not as a struggling or unconsolidated democracy, but instead as a case of failed authoritarianism or ‘pluralism by default’ (2003: 454). This was indeed an accurate account of Moldova’s condition at the time; however, the country appears to be moving towards a more centralised, less democratic and less pluralistic system, in which one prominent oligarch is building a power vertical emulating the Russian and Central Asian models (Chirila, 2016).

It is all the more puzzling as this centralisation of power has been accompanied by a pluralisation of policy making, which has, indeed, preceded the anti-democratic drive. Moldova started off from a rather closed policy-making process environment after communism, and opened up gradually throughout the 1990’s under the normative pressure from the overarching neo-liberal paradigm. Also, Moldova’s development partners (donor countries and international organisations) have supported the growth of local civil society, which led to increased citizen participation and, therefore, a less hierarchical governing process. It indicated the beginning of a slow shift from a government type approach to one based on governance.

By the late 2000’s, bureaucrats and politicians renounced their monopoly on policy making as think-tanks and citizens’ groups became more resourceful and engaged. Policy decisions were slowly becoming less politicised and increasingly based on evidence. Closer relations with and policy transfer from the European Union, including via twining project and high level European advisers also contributed to a more open policy making process.

However, after Communists were defeated and a pro-European coalition took charge in 2009, the drive to democratisation, openness and genuine policy pluralisation was short lived (Popescu, 2012:37; Roman, 2014:65). Coalition parties soon succumbed to infighting and corruption, culminating in the infamous billion dollars scandal. Initially, party competition, independent media and active civil society did prevent a single party/personal interest from dominating. However, the growing influence of one businessman turned politician – Vlad Plahotniuc, who entered the public space in 2010 and quickly succeeded in eliminating his main rival ex-Prime Minister Vlad Filat from public life, ultimately led to increased concentration of power (Kostanyan, 2016:2). Plahotniuc managed to build a powerful media empire and a lenient expert community which, at this point, create the illusion of policy pluralisation, that, in turn, represents a legitimation devise for the public and the international donor community alike (Gogu, 2016).

Hence, unfortunately, pluralisation of policy making only reinforces existing flaws of the local political and administrative systems, rather than mitigating them. The fact that one individual has so much influence that he can effectively serve as a gatekeeper of the pluralisation process, deciding which individuals and groups get access, ends up defeating the purpose of  policy pluralisation. Lines of accountability are, therefore, blurred as actors (heads of state institutions) report to this informal centre of power, leading researchers to describe Moldova as a captured state (Tudoroiu, 2014; Calus, 2015). These lines of accountability are also shifting as an agency is transferred from one principle to another (from Parliament to Government control, or vice versa), often based on political expediency. A drive towards central control motivated by better policy implementation akin to the UK Prime Minister’s Delivery Unit (Richards and Smith, 2006) is yet to occur. In effect, policy making remains highly centralised as state institutions are autonomous in name only, which undermines their effectiveness.

The National Anti-Corruption Centre (CNA) is a case in point. It was established in 2002 under the name Centre for Combating Economic Crimes and Corruption (CCCEC). It has been reformed several times since then. Its prerogatives haves been increased and then reduced depending on political expediency at the time,  but also in line with policy delivery specialisation aimed at effectiveness and avoidance of mega-structures. Currently, the institution’s mandate only covers corruption, as the power to investigate economic crimes has been transferred to police and tax authorities. The institution is well funded, for Moldovan standards, and has received considerable support from the European Union, as evidenced by the 2011-2015 National Anti-Corruption Strategy approved by Parliament in light of Moldova’s visa liberalisation agreement with the EU.

In spite of that, one major problem that undermines all efforts for meaningful change has not yet been addressed effectively. The current anti-corruption chief, head of CNA, Chetraru Viorel, appointed as a result of a public contest in 2012 is a controversial figure. He first became director of the anti-corruption body, then CCCEC, in 2009. His father was a prominent local politician in the Democratic Party, which nominated Chetraru for the job in 2009, prompting media speculation about political control of the institution. Indeed, Chetraru himself acknowledged publicly that he had encountered political pressure while carrying out his duties (Unimedia, 2013), but he reassured the public that once he had been put in charge as a result of a public contest he would be able to better withstand that kind of pressure (Unimedia, 2015), despite the fact that his ties to the Democratic Party remain. Later scandals, including the billion dollar heist, prompted numerous accusation and even attempts to dismiss Chetraru, but he remains shielded by the Democratic Party’s faction in Parliament and cabinet.

The problem with nominally independent state institutions being politically controlled is so pervasive that even the Parliament Speaker Andrian Candu, a leading member of the Democratic Party, stated in a TV appearance that, “When we talk about the Prosecution Office, about the Anti-Corruption Centre, Tax Authority  or Customs Office etc all of them encounter some sort of political influence” (Botnari, 2015). In theoretical terms, it means that the agent is not independent from the principle, which on the one hand does not allow the agent to act based on its legal provisions, but rather play in accordance to the way the strings are being pulled, while on the other hand it leads to continuous ‘blame games’ (Hood, 2002) between the agent (anti-corruption body) and the principle (either Government or Parliament, deepening on the legal framework at any particular time).

CNA was initially put under Parliament control, but then moved under Government’s oversight, only to now end up back under legislative scrutiny. In rationalist terms, principals are interested in minimizing costs related to policy implementation (corruption prevention, control) as well as policy failure costs, while agents are interested in their power maximization relying on information asymmetry (Groenendijk, 1997:227; Waterman and Meier, 1998:175).  This creates major concerns about ‘agency costs’ associated with avoiding ‘agency drift’, yet, ironically, political control over agents, as indicated in the case of Moldova, appears to be addressing these issues quite effectively. In the sense that the agents hardly ever go against the principle, hence, there are minimal institutional ‘agency costs’. This is, of course, at the expense of agent independence, and, as a result, at the expense of meaningful anti-corruption policy implementation that would serve the public interest.

The problem is further exacerbated by the concentration of power within the executive branch, populated by proxies of the one oligarch, reinforcing power asymmetries, undermining political pluralism as well as the prospects of genuine policy pluralisation. It is largely because of these negative tendencies that the European Union had to step out of its traditional role of benign observer and issue a stern warning to the Moldovan political class in the latest Council conclusions on Moldova of  February 15, 2016. The EU foreign ministers insisted that the government “prioritise reforms aimed at addressing the politicisation of state institutions, systemic corruption, public administration reform aimed inter alia at enhancing the effectiveness of regulatory bodies, transparency and accountability in the management of public finances as well as with regard to policy making” (Council Conclusion, February 2016).  Finally, it is becoming apparent even to Moldova’s developments partners that one cannot continue with the sort of reform implementation the country has been witnessing for some time. However, one still needs to move beyond the principal agent model and also look at collective action problems, which also play a crucial role in Moldova’s endemic corruption, similar to other developing nations, particularly in African  (Persson et al., 2010:21). Thus, it presents an important avenue for further research.

Conclusion

New Public Management reforms implementation in the field of anti-corruption in Moldova, viewed through the prism of principal agent model, leads us to conclude that reforms were improperly implemented, leading to policy failure. Secondly, the ongoing policy pluralisation process, similarly to the NPM reforms, should have contributed to improvements in the quality of public services as well as having brought more legitimacy and transparency to the process, but the one oligarch that casts excessive influence over the country’s political and economic institutions  has been able to use this pluralisation to his own and his party’s benefit via control over media, affiliated think tanks, commentators and analysts on the payroll (RISE Moldova, 2015; Socor, 2016).

While acknowledging the NPM potential if implemented professionally and in good will, Moldova still needs to address its problem of lacking a strong and independent, apolitical, technocratic, Weberian type bureaucracy. Otherwise, if transferred to circumstances like Moldova’s, NPM as well as policy pluralisation can largely augment the existing weaknesses of the system. In the case of Moldova, increasingly described as typical regulatory/state capture, NPM reforms offer a legitimising brand name front, which can obfuscate the chronic problems of the country’s political and administrative systems. However, just as it is often said about democracy, NMP is the worst kind of public management, except for all the others, particularly in places like Moldova, where it is the only game in town.

The most feasible solution to Moldova’s stringent corruption problem could come from closer policy approximation with the European Union. Ideally, Moldovan political leaders need to capitalise on socialisation and lesson learning opportunities offered by the EU, including in the field of anti-corruption policy making and delivery. However, if previous experience is any indication, only strong EU conditionality has any chances of getting the ball rolling. Unfortunately, Moldova is still far away from membership driven conditionality, even if there is talk about submitting an application in 2019 (Realitatea, 2016). Yet, ironically, in light of recent corruption scandals and the meagre response from authorities, it seems that Moldova will have to do its homework first, before it can have any hope for EU membership, no matter how many policy failures that ensues. A more radical solution would be to outsource anti-corruption policy implementation to a UN or EU agency or special mission as in the case of Guatemala (Luhnow, 2015). This would be in line with NPM school of thought, yet it does not make it any more likely to occur. Finally, until Moldovans acknowledge that corruption, both high level and petty, are two faces of the same coin, and act to reject both phenomena with equal strength, even the most sophisticated policy instruments will remain futile.

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Note: This is part of my term paper in Public Management and Delivery.

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