Russia’s ongoing war of aggression against Ukraine has intensified existing geopolitical tensions throughout 2022 and into 2023, exposing persistent rule of law deficiencies and other governance gaps in Southeast Europe (SEE-91). This in turn has spurred efforts to renew the stalled EU integration and consolidation process, which serves as the main driver of good governance reforms in the region. The current report builds upon international and EU measures2 to strengthen the rule of law, and highlights the critical areas of impact that could be achieved through public-private partnerships. This second SEE Good Governance Report focuses on the big data tools necessary to identify the existence of ill-gained assets hidden by politically exposed persons (PEPs)3. These tools could help counter state and media capture practices in the region, preventing authoritarian tendencies, including foreign malign influence, from threatening the Euro-Atlantic democratization of Southeast Europe.4
Asset declarations as corruption prevention and risk assessment instrument
Asset declarations are a strong, yet currently under-utilised instrument for preventing corruption and illicit finance among civil servants, and in particular among PEPs in SEE-9. The media and civil society in the region, along with international organisations, continuously investigate and report on the many evident gaps between the living standards of politicians and their families, and what they officially declare to the public as assets and income. All SEE-9 counties have in place a legal framework regulating asset declarations as part of their anti-corruption toolboxes. However, these regulations are rarely enforced in a consistent manner, and instead mostly result in short- lived annual scandals or occasional repression campaigns against political opponents. In order for this tool to become an effective instrument for tackling state capture and corruption in SEE-9, the current report analyses the legal and institutional framework of asset declarations and proposes policy solutions for overcoming the tool’s shortcomings.
Verification and checking of asset declarations
Some PEPs, as well as other categories of civil servants in SEE-9, are not obliged to declare their assets, and as a result, their wealth remains hidden from state institutions and the general public. This problem is most pronounced with regard to senior managers, directors, and board members of state-owned companies. These individuals are not obliged to declare their assets to any extent in Serbia (unless they are appointed by the government) and in Bosnia and Herzegovina (BiH). In addition, despite the continuing legal efforts, the information that individuals are obliged to declare is rarely all-encompassing, which hinders proper prevention and enforcement. Legal loopholes allowing disclosure avoidance are prevalent across the region. For example, loans from private individuals do not always have to be declared in Hungary, and presents to close family members are not made public at all.5 In Bulgaria and Croatia spouses and cohabitants are not legally obliged to inform their partners of the assets they own, providing an escape route for non-declaration. In both Hungary and North Macedonia, PEPs are required to declare ownership of shares in companies but not the assets held by these companies. Thus, personal assets can be written off as corporate property.
Common forms of hiding assets from disclosure include PEPs transferring them to family members or close relatives, and/or facilitating the “generation” of illicit wealth by ensuring preferential treatment or another form of competitive advantage for the extended family. However, only assets owned by spouses, cohabitants, and sometimes children need to be declared and are consequently checked by the responsible bodies in a majority of the analysed countries. In Romania, children of PEPs are not included in asset declarations after reaching adulthood, making it harder to identify conflicts of interest or potential hidden asset ownership. Parents of PEPs are only checked in about half of the countries.
Most SEE-9 states have procedures for timely submission of asset declarations and for performing an initial basic check for discrepancies between income and declared assets (e.g., the “arithmetic-logical” initial check in Albania). However, none of the nine analysed countries have a system of comprehensive lifestyle audits. This is largely due to the lack of sufficient human resources able to perform in-depth checks, including cross-checks in multiple registers at the national level and abroad, where illicit wealth is often parked. This issue is exacerbated by the large number of persons obliged to submit declarations in some of the SEE-9 countries e.g., about 300 000 in Romania6 as of 2022. Ideally, checks should also be triggered by anonymous tips regarding illicit enrichment from third parties (whistle-blowers, civil society organizations – CSOs, media articles, etc.). However, according to national laws, anonymous tips are not accepted in Bulgaria, North Macedonia, and Romania. In BiH, such checks are expected by law, but not always performed in practice. In Hungary, only tips backed by strong evidence are inspected.
A common type of violation concerns the discrepancy between assets’ real market value and their acquisition price, as recorded on the official purchase/ownership documents. In some cases, two-story villas were declared as “wine cellars” in Hungary.7 In Bulgaria, what became widely known as the “Apartment-Gate” scandal brought down a number of senior political and government figures who had declared the acquisition of assets at strongly deflated values.8 Checking, comparing, and proving a discrepancy between market and book values of assets is a complicated procedure, for which the authorities rarely possess adequate knowledge and capacity. Investigative journalists and civil society thus remain crucial for uncovering and warning against such irregularities.
Another issue of concern is how long asset declarations remain public. In Croatia and Hungary, asset declarations are removed from public registers one year after the end of the relevant PEP’s term in office, and in Serbia – after three years. In North Macedonia, asset declarations are removed immediately after a PEP leaves office.9 This further restricts public memory and could hamper the investigative work of media and civil society.
Performing cross-checks in multiple public registers and exchanging information with other public institutions both at the national level and abroad is vital for enhancing the beneficial and preventative effects of asset declarations. These mechanisms exist at various stages of development across the SEE-9. Still, despite multiple attempts to interconnect national public registers across the analysed countries, ad hoc cross-checks continue to be performed manually in most cases. In Croatia, the Conflict of Interest Commission (CIC) performs checks in other registers for assets that are missing from the declaration. The Agency for Prevention of Corruption of Montenegro has the technical ability to compare data in official databases through direct online access, including the databases of the Ministry of Interior, the Tax Administration, the Real Estate Administration, the Securities Commission, the Central Register of Companies, the Central Bank of Montenegro, and commercial banks (provided there is a consent for lifting bank secrecy rules). In North Macedonia, the introduction of a software solution for interconnecting multiple public bodies’ registers was planned for the end of 2019, but has not yet been reported as officially functioning as of 2022.10
It is highly recommended that a unified checking procedure is introduced across all public bodies, based on a predetermined set of red flags. The current report provides an example of a comprehensive list of risk indicators for checking asset declarations, which could help national authorities to focus their scrutiny on a smaller number of persons and related companies, aiding the work of national anti-corruption bodies and internal integrity units.
Example of a comprehensive list of risk indicators for checking asset declarations
Sources: CSD, based on The World Bank, Automated Risk Analysis of Asset and Interest Declarations of Public Officials: A Technical Guide, 2021; Council of Europe, Practitioner Manual on Processing and Analysing Income and Asset Declarations of Public Officials, 2014; Poltoratskaia, V., Use of Asset Declarations and Procurement Data to Identify Risk, Presentation at the workshop “Developing Risk Indicators for Assets Declaration and Public Procurement Data”, Government Transparency Institute / Central European University, Armenia, Yerevan, 15-16 June 2022; OECD, Verifying Asset Declarations in Greece: Guidelines for Standard Procedures and Oversight Bodies, 2017.
Several longstanding loopholes are present in the legislation and procedures for checking asset declarations. Some of these gaps seem to be recurrent across the region over many years.
Long-standing loopholes in the verification and checking procedures of asset declarations
Source: Center for the Study of Democracy
Limited capacity of the checking authorities
The lack of comparable data hinders analysis among all SEE-9 countries with regard to the workload of the checking institutions, in addition to other relevant indicators, which could explain the low detection and sanctioning rates. Still, some basic conclusions for the region could be drawn based on the available data:
- The total number of employees at the checking institution varies between 20 and 300 people.
- The officials directly responsible for checking asset declarations vary between 4 and 45.
- The number of persons obliged to submit declarations is the greatest in Romania and the smallest in North Macedonia and Croatia11.
- On average, around 12% of the legally obliged persons submitted their asset declarations with a delay or failed to submit at all.
- The share of persons who have been checked by the relevant authority through a secondary/detailed check varies between 8% and 20%, except in Montenegro (0.32%), Romania (0.44%)12 and Croatia (1.19%).
- Between 6 and 30 persons are checked in detail by one inspector.
Imposing sanctions through cooperation with other authorities
The SEE-9 countries’ authorities directly responsible for collecting asset declarations submit information regarding any identified irregularities to other relevant authorities (e.g. tax and revenue), and to the prosecution. However, the size and severity of sanctions, especially the ones imposed by the checking institution, are low in all SEE-9 countries and do not deter PEPs from violating the rules. The fine for late or no-submission of asset declarations usually ranges between EUR 200 and EUR 1,000. Some PEPs prefer to pay the fine and still not submit a declaration. Another issue of concern is the arbitrary approach for determining who to investigate and punish. The more potent sanctions are imposed by the courts (e.g., imprisonment), and in some cases – by tax authorities, when they uncover tax violations in the process of checking asset declaration. Information about imposed sanctions is published in most of the countries, except in Albania and Hungary13. In BiH, the information about imposed sanctions is stated within the Central Election Commission’s report, yet only as a number of sanctioned officials without disclosure of their identity.
There are four methods, most often observed in the SEE-9 countries, for avoiding punishment or at least reducing its severity. These include:
- Omitting to declare assets, or under-valuating the declared assets;
- Influencing the public authorities through political pressure to drop the investigation/prosecution and/or to replace a more severe penalty (e.g. imprisonment) with a looser sanction (e.g. a fine);
- Retroactively changing asset declaration texts, to remove irregularities;
- Changing the legislation so that certain types of public officials (or their relatives) are left out of the circle of officials obliged to declare assets, company or family relations.
Long-standing loopholes in the sanctioning of irregularities in asset declarations
Source: Center for the Study of Democracy
None of the SEE-9 countries provide a machine-readable and downloadable-in-bulk open database, containing all asset declarations received. The analysed countries could be split into the following categories:
- No database. The outlier in this respect is Albania, as the High Inspectorate of Declaration and Control of Assets and Conflict of Interest (HIDAACI) does not provide any access to a public database. There is only a register of Requests and Answers of the High Inspectorate where answers to official requests are published.
- Hand-written photocopies. In Hungary, the asset declarations are included in a searchable database; however, the documents are hand filled photo-copies, and hence – not machine-readable. In Romania many declarations had been submitted in hand-written format up to 2021, before the obligation to submit machine-readable PDFs entered into force in 2022. From 2023 onwards, only declarations with digital signatures will be accepted, except for candidates during the elections.
- XML format (available only on case-by-case basis). This format is used by the majority of the countries – Bulgaria, Bosnia and Herzegovina, Montenegro, North Macedonia, and Serbia. However, despite being machine-readable, the information cannot be downloaded in bulk as a full database. Thus, any big data analysis will require the information to be scraped or copied directly from the webpage. Croatia provides a hybrid case, as the declarations are available in both XML, JSON, and PDF formats.
On the positive side, it should be noted that the State Commission for Prevention of Corruption (SCPC) of North Macedonia plans to introduce a tool for electronic submission of machine-readable assets and interest declarations in 2023. HIDAACI in Albania also plans to improve the system and create full and free access to the declarations for the general public in 2023.14 In Romania, the e-DAI electronic submission platform was introduced on 1 January 2022.15 From this date on, the National Integrity Agency no longer accepts declarations of assets and interests in paper format.16
Good practice examples for efficient checks of asset declarations
There are some good practices in SEE-9, that could serve as an inspiration and example to the rest of the countries from the region and beyond. These include: the use of electronic platforms which provide automatic integrity warnings in Romania; the gathering of information on the ultimate beneficial owners in Albania; the cross-checks in multiple registers, increasing the scope of the people obliged to declare assets, and awareness raising practices in Croatia; and expanding the authority and the role of other public bodies in checking suspicious circumstances and filing criminal charges as well as setting procedures for lifting immunities in Serbia.While the procedural and legal gaps differ across the countries, several key prerequisites for efficient checks of asset declarations stand out.
Prerequisites for efficient checks of asset declarations
Source: Center for the Study of Democracy
Public procurement irregularities among politically exposed companies
Public procurement has always been considered one of the key corruption and fraud avenues for public position holders. More worryingly, it has been closely associated with state and media capture practices in the region, which have continuously undermined democratic and market economy transition, holding off EU enlargement and preventing international aid from achieving its aims.17 The current report brings together big data on public procurement and politically-exposed persons to analyse the effect of political connections on corruption risks in public procurement. The study covers SEE regional trends and presents examples from Bulgaria, Croatia, Hungary, Romania, North Macedonia, and Serbia. The applied methodology is based on individual red flags that can further be aggregated into a cumulative integrity score.
Most of the countries in the region show a higher contract value share than contract volume share of politically connected firms. At the same time, there is an observable difference between the average value share of connected firms within their own market division and the aggregated annual share of the same connected firms on all markets (not calculated by CPV18 divisions):
in the majority of cases, the average within market share is higher. This indirectly proves that politically connected firms are quite frequently concentrated within certain markets rather than scattered across different sectors.
In regards to buyer type (of public procurement authority), the regional trend is diverse and not straightforward. Yet, in the majority of cases there is an observable difference between buyer type of politically connected companies’ contracts versus other companies’ contracts. For example, in Romania there are significantly more national authorities among politically connected companies’ contracts than the others (40% versus 20% among non-connected companies). At the same time, in Hungary the prevailing category is regional authority (40% versus around 30% among non-connected firms).
As for procedure type, in the majority of the countries, the share of open procedures among connected firms’ contracts is either not significantly different or is opposite to the expectations (i.e., there are slightly more open procedures among connected firms). The relatively high share of open procedures among politically connected firms might mean that in most of the cases other practices are used for corruption (e.g. tailored tender specifications, short advertisement period, etc.). This finding suggests that with time, it is likely that systemically corrupt environments tend to evolve into state capture practices, in which formal rules are more of a box-ticking exercise. Such developments call for the development of dynamic systems for risk red-flagging, which should take into account constantly evolving corruption behaviour.
The aggregated integrity score in the region is always slightly lower for connected firms with some variation across countries. Depending on the quality of the data, for some countries the regression models showed more robust and expected results than for others with the majority having integrity level associated with lower scores in case of politically connected suppliers.
Post COVID corruption risks in public procurement
In most of the cases the non-healthcare market is not associated with any significant changes due to the introduction of the state of emergency, or the change in legislation allowing the use of negotiated procedures for buying COVID-related products. At the same time, it can be observed that the level of integrity either goes down for COVID market only (Romania, Hungary, Croatia), or results in a downward trend for the whole healthcare market with rapid fluctuations in the COVID market (Bulgaria and North Macedonia), in line with the European trend.
The way forwards
Enhancing the risk assessment methodologies, policy procedures and measures aimed at preventing corruption, state capture19, illicit enrichment and illicit finance20 could be achieved only through sustained cooperation between the public bodies, the civil society, the media, the private sector, and international partners. The use of big data in particular could facilitate the identification and sanctioning of the integrity breaches in the distribution of public procurement, state aid, concessions, strategic investments and EU funds. Ensuring better levels of governance in this domain in SEE-9 has become particularly imperative in view of the increased risks of economic security breaches in relation to Russia’s invasion of Ukraine and the related imposition and enforcement of sanctions. In this respect, the countries in the region have already undertaken different legislation, policies and measures. However, they need to upgrade their defences and strengthen implementation to guarantee they do not turn into the weakest links in the common EU / EEA market.
The following key policy recommendations could provide the backbone for the immediate next steps, which can close existing governance loopholes and roll back state capture practices in SEE-9:
- Coherent checking procedure of asset declarations.
- The relevant authority should check if the asset declarations are submitted on time.
- The anti-corruption authorities should set up a dedicated body or department fully focused on performing detailed checks (“lifestyle audits”) of asset declarations. It should verify not only the reported information but whether there are hidden or undeclared assets, including abroad and/or held by friends and (extended) family members. Ideally, the procedure should ascertain the origin of assets.
- This body should utilize a risk assessment and checking procedure, based on big data and a set of red flags. In the countries where more than one body performs the checks, this procedure should be unified across the whole of government.
- The body should perform three types of checks: a random sample undergoing detailed check / audit, checks of priority/risk groups, as well as such triggered by anonymous signals from third parties. This would increase the risk of detecting irregularities and decrease the sense of impunity.
- Strong cooperation among all relevant bodies (anti-corruption, tax, finance, money laundering, prosecution, etc.) should be established. The data declared in the asset declarations should be cross-checked with the data from other public registers (national and international) according to national and EU data privacy rules, and if relevant – with private sources (professional bodies, social media, etc.)
o Multiple bodies or stakeholders should have the possibility to submit the issue to the prosecution or to other relevant judicial authorities, and to initiate administrative, criminal (and if relevant-civil) procedures. The investigations should not omit the issue of how someone has obtained property before taking office.
- Improving the legal base in terms of asset disclosure. The legal base should oblige police, customs, senior managers, directors and board members of state-owned enterprises, military personnel, members of political parties (e.g., the ones outside of parliament but receiving state subsidies), and where relevant – members of religious groups – to also submit asset declarations. The legal specifications regarding the post-employment restrictions for PEPs, the receipt of gifts, as well as the allowed types of additional income for public servants, should be clarified in detail. The legal base could be improved by obliging PEPs to disclose not only their majority shares in a company, but also the assets held in that business.
- Transparency and digitalization of asset declarations and related registers. The countries from SEE-9 should only allow asset declarations to be submitted in electronic, machine-readable formats. All asset declarations should be collected in one single database and/or accessible through a single, unified website. The relevant bodies should not be allowed to retroactively change asset declarations, so that a detected irregularity no longer exists. In case of changes, both the original and the corrected declaration should be available for review. There is also a need to establish machine-readable public procurement and corporate databases, as well as databases of sanctioned legal and physical persons, which can be downloaded in bulk. The databases should include information on ultimate beneficial ownership and financial data at company level. It is also recommended that all countries establish procedures for tracing transactions with crypto currencies and harmonize their approaches towards the taxation of crypto assets, as suggested by the European Parliament.21
- Inter-connecting public registers. A core prerequisite for the efficient use of big data is for all SEE-9 countries to inter-connect all public registers. This is a two-step process – first, the primary (basic) registers should be connected with each other: physical persons register (including civil status and family members), business (legal entities) register, and the property register. Second, all remaining registers should be joined one by one.22
- Introducing data-driven analysis of public procurement and asset declarations. Use of big data for early warning and risk analysis should be developed and regularly used and updated by the relevant public bodies, jointly with the civil society, international bodies and investigative media.
In regards to asset declarations – big data could allow a set of red-flags to warn if illicit wealth has potentially been acquired and/or transferred to (distant) relatives or friends (against low or no compensation), and if it has been hidden in a complex chain of subsidiaries and mother companies (including the use of shell companies and straw persons). In regards to company behaviour – big data could reveal if the companies linked to politically exposed persons have higher turnover, market position (possible monopolization), profit per employee, etc. – compared to the companies without political ties in the same sector. In regards to public procurement integrity, red-flags could warn against large shares of single bidding, buyer dependence on supplier, company tax haven registration, too short submission or decision period, missing call for tender, use of restrictive procedure types, etc.
Based on data from all public registers, the governments from the SEE-9 countries, supported by the civil society, are recommended to elaborate electronic platforms with interactive dashboards for detecting corruption risks and patterns of abuses. Such platforms could benefit from the red- flags and indicators, tested in the framework of the R2G4P initiative and presented in the current and future reports. The next and final step would be to enforce the International Treaty on Exchange of Data for the Verification of Asset Declarations.23
- Improving competition in public procurement and reducing the use of non-competitive procedures. In parallel to the use of red-flags, the public procurement legal base should also fully revert to its pre-COVID state, abolishing all “temporary” emergency procedures (with special focus on reducing the share of single bidder contracts and the number of direct awards). Objective bid evaluation criteria and matching tender sizes to the market capacity could potentially boost the level of competitiveness in public procurement. Increasing the number of people working on procurement documents could improve the overall speed of decision period, as well as quality of the evaluation and award decisions.
- Efficient punishment. One of the most worrying issues, frequently stated by the civil society, EU-level and international bodies, is that most criminal charges against public officials get dismissed or are replaced with looser (administrative) sanctions, especially when higher political levels are concerned. At the same time the relatively small fines do not encourage the full compliance with the law. Thus, it is important for policy-makers to ensure that the size and severity of penalties is high enough (dismissal, seizure of assets, imprisonment), prosecution is more efficient, and the final penalty decisions are published online. The SEE-9 countries should further set up a mechanism for lifting immunities, especially for criminal proceedings.