Spain Tackles Corruption With Blockchain AI and Amendments to Its Anti-Corruption Laws: Expert Take

By | June 15, 2018

Spain Tackles Corruption With Blockchain AI and Amendments to Its Anti-Corruption Laws: Expert Take

According to TI’s Corruption Perceptions Index for 2017, Spain slid eight points to be one of the EU’s lowest ranked countries due to a spate of high-profile corruption scandals over the last decade — with public procurement being particularly vulnerable. Albeit, Spain has been actively combating corruption by amending its anti-corruption laws and by developing blockchain and artificial intelligence (AI) solutions.

Spain amends its Anti-Corruption laws in accordance with OECD standards

“Integrity, transparency and the fight against corruption have to be part of the culture. They have to be taught as fundamental values” declared Angel Gurría, Organization for Economic Co-operation and Development (OECD) secretary general.  

After adopting new OECD-approved legislative measures to fight corruption and to promote transparency in political activities and institutions in 2015, Spanish law enforcement officials have been struggling to keep up with the overwhelming caseload. Between July 2015 and September 2016, 1378 officials were prosecuted for corruption, with another 29 convicted by Spain’s high court on May 24, involving the Gürtel corruption scandal, which is one of the country’s biggest corruption scandals in modern history. The court, in its 1687-page opinion, said Popular Party (PP) politicians participated in “an authentic and efficient system of institutional corruption via mechanisms to manipulate public tenders at the national, regional and local level,” most of it while Mariano Rajoy himself held key positions in both the government and the party. The convicted were collectively sentenced to a total of 351 years in prison for money laundering, bribery, tax evasion, fraud and other related offences.

In the aftermath of the high court’s ruling on June 1, Spain’s Prime Minister Mariano Rajoy of PP stepped down from office following a no-confidence vote in parliament, brought on by the Gürtel corruption scandal. The unprecedented vote to remove Rajoy from power was 180 to 169, with one abstention. It needed 176 votes to pass.  

But the Gürtel corruption scandal is not the only high-level corruption case that has been deliberated by Spain’s high court. Since March 21, five justices from the Supreme Court have been debating whether to ratify the six-year, three-month prison sentence against Iñaki Urdangarin, the brother-in-law of King Felipe VI of Spain, on corruption, fraud, embezzlement and charges related to tax evasion. On June 12, the high court ruled that Mr. Urdangarin must serve five years and 10 months, five months less than the sentence imposed last year, sending a member of the country’s royal family to prison for the first time in modern history.

OECD’s Anti-Bribery Convention & cryptocurrency taxation

The first transnational anti-bribery legislation for the criminalization of bribery was established in the U.S. with the Foreign Corrupt Practices Act (FCPA) of 1977.

The FCPA was amended by the International Anti-Bribery and Fair Competition Act of 1998 to achieve symmetry with the OECD Convention on Combating Bribery of Foreign Officials in International Business Transactions. This expanded the FCPA’s worldwide reach to within the OECD-Convention’s network of 43 countries — including Spain. Parties to the Anti-Bribery Convention, agreed to put in place measures that will reinforce efforts to prevent, detect and investigate foreign bribery, impose civil and criminal penalties on violators and ban tax deductibility of bribes.

Spain does not allow deductions for bribes paid to foreign public officials. Bribes paid in cryptocurrencies are treated as an electronic payment — in the same fashion as forex or binary options — under the Spanish Tax Law and are not declared on Form 720 ‘Declaration of Foreign Asset’ reporting requirements, because the categories of assets that should be included on this form do not specifically name cryptocurrencies. Taxpayers who hold their cryptocurrencies in an offline wallet do not need to declare them on this form either, as they are not be deemed to be located outside of Spain. The American Institute of Certified Public Accountants (AICPA) has recently proposed that the Internal Revenue Service (IRS) adopt a similar reporting requirement for disclosing wallets holding cryptocurrencies for tax purposes in the U.S.

Accordingly, the non-disclosure of foreign- or wallet-held cryptocurrencies for Spanish tax purposes could facilitate FCPA tax evasion, as well as money laundering violations, which are major public policy concerns addressed in the EU’s TAX3 Investigation.

Spain develops blockchain & artificial intelligence technologies used in combating corruption

The OECD estimates procurement corruption to be $2 trillion of world public/taxpayer funds.    According to an OECD paper, blockchain technology — by bringing transparency to the public procurement funding process — can be used as a preventative measure against corruption that may distort the fairness of awarding public procurement contracts, reduce the quality of basic public services, limit opportunities to develop a competitive private sector and undermine trust in public institutions.  

The EU, in February, launched the EU Blockchain Observatory and Forum and has already invested more than 80 million euro in various related projects.  As a member of the European Blockchain Partnership, Spain is committed to building EU-wide blockchain and AI applications that can be used in the fight against corruption across the Digital Single Market for the benefit of the public and private sectors.   

The more promising blockchain applications relate to the registration and tracking of transferred crypto-asset transactions. With the support of the European Regional Development Fund, a Spanish blockchain company is developing an Ethereum-based blockchain solution that will allow parties to legally/contractually transfer ownership of crypto assets by reducing the possibilities of manipulation and fraud, by adding verifiability and auditability to digital transactions, and by tracking information and digitized assets without the need for intermediaries. The system will incorporate a public-key infrastructure, such as electronic time stamps and certified electronic delivery services, for such contracts.

But what if a crypto asset is being legally transferred to another in a corrupt, cross-border transaction?

Example: A public company bribes a foreign official with a ZTE phone that serves as a cryptocurrency miner as well as a cryptocurrency wallet. This allows the foreign official to mine Ethereum (ETH) on a need-be basis, to sell the mined ETH on a crypto exchange, and to submit to the company a very large electricity bill for reimbursement for mining activities, in exchange for pursuing business in the foreign country. This so-called “new bribe” eliminates the need for bankers, accountants, lawyers, consultants and other middlemen — thereby making the tracking and identification of the “new bribe” very difficult, especially given that Spanish tax laws do not require foreign- or wallet-held cryptocurrencies to be reported for tax purposes.  The “new bribe” (something of value) nevertheless creates the apparent basis for an FCPA violation. And if it is deducted for tax purposes, it could subject the bribe-payer company to numerous fines and penalties.

For effective corruption and tax evasion detection, researchers from the University of Valladolid have developed an AI application. Because the first step in combating foreign bribery and related offences, is the detection of it. Their computer model is based on neural networks and  calculates the probability of corruption in Spanish provinces, as well as conditions that favor it. This early warning system analyzes data from a variety of sources: Spanish provinces in which actual cases of corruption were reported by the media or went to court between 2000 and 2012; real estate price increases; taxes; economic growth; the growing number of deposit institutions and non-financial firms; and the same political party remaining in power for long periods — to predict public corruption based on economic and political factors. The point is to detect it as soon as possible, so that corrective and preventive measures may be promptly taken.

Selva Ozelli, Esq., CPA is an international tax attorney and CPA who frequently writes about tax, legal and accounting issues for Tax Notes, Bloomberg BNA, other publications and the OECD.

Published at Fri, 15 Jun 2018 02:01:54 -0400