Why Iran must legislate away rampant corruption

Al-Monitor – Whether it is the lavish spending of well-connected elites or the nepotism evident in state institutions, there seems to be no shortage of reasons for Iranians to be outraged at rampant corruption at a time of economic crisis. The intensity of public anger has forced the Islamic Republic to respond.

Supreme Leader Ayatollah Ali Khamenei has called for “swift and just” action against “economic corruption.” The judiciary has taken its cue, with prosecutors poised to try“dozens of businessmen” for “economic disruption.” Government officials are not immunefrom these investigations. Earlier this month, top prosecutor Mohammad Jafar Montazeri said, “Any official who needs to be summoned will be, from director generals to managers to deputies and [even] ministers.” The deputy governor of Iran’s central bank was among the first to be detained. The crusade against corruption is clearly an attempt to convince the public that existing anti-corruption laws will finally be enforced.

The legal framework to counter corruption is primarily defined in the Islamic Penal Code and the Aggravating the Punishment for Perpetrators of Bribery, Embezzlement and Fraud Act, which outlaw bribery, the trading of influence, embezzlement, money laundering and fraud, among other crimes. Iran also ratified the United Nations Convention Against Corruption in 2009. But most of these laws focus on deterring the crimes of individuals. The main challenge is the overall environment that enables corruption. In other words, to be successful, the fight against corruption cannot merely focus on punishing corrupt actors.

Indeed, the propensity of individuals to engage in corruption has been shown to be influenced by cultural factors. Fostering a different approach to leadership that emphasizes transparency and accountability — a process the state refers to as “farhangsaazi’ (‘”culture building”) — is a long-term project. To achieve tangible results in the short run, the government thus ought to focus on shutting down opportunities for rent-seeking.

In the early 1990s, political economists Timothy Frye and Andrei Shleifer surveyed entrepreneurs to understand why businesses faced less corruption in Poland than in Russia, two countries where the state remained an interventionist force in the economy at the time. They discovered that in Poland, the state was “above the law” but used its authority in ways that were generally helpful to business. In this “helping hand” model, “bureaucrats are intimately involved in promoting private economic activity: they support some firms and kill off others, pursue industrial policy, and often have close economic and family ties to entrepreneurs.”

In Russia, the situation was different. While the state was just as interventionist as in Poland and also above the law, the key difference was that state actors tended to actively prey on businesses. Russia exemplified the “grabbing hand” of corruption, where the state “consists of a large number of substantially independent bureaucrats pursuing their own agendas, including taking bribes.” Although these bureaucrats embraced “helping hand” rhetoric, “in reality they are scarcely guided by a unified public-policy stance, and they remain largely independent of radical economic reforms.”

For decades, Iran has vacillated between the helping and grabbing hand models. But it appears that corruption has recently grown more disorganized and predatory, especially as the country slides into an economic crisis exacerbated by the reimposition of US sanctions. The clench of the grabbing hand has grown stronger.

The behavior of state-owned petrochemical companies amid the ongoing currency crisis is a case in point. As the Rouhani administration struggled to meet rising demand for hard currency in connection with the US withdrawal from the nuclear deal earlier this year, the Central Bank and Oil Ministry jointly instructed petrochemical companies, some of the country’s largest exporters, to make their hard currency revenues available for sale through NIMA, the newly instituted centralized foreign exchange marketplace. But the companies largely refused, dragging their feet for months in order to profit from the accelerating devaluation. Rather than sell their foreign currency at the lower official exchange rate, reports suggest they may have sought to sell some of their hard currency revenues at the much higher rate on the open market, in a move inconsistent with the economic interests of the Islamic Republic. In a situation of organized corruption, the privileges maintained by petrochemical firms by virtue of their state-ownership would require that they act in line with the overall economic interests of the authorities and thus in accordance with defined public policy. That is clearly not what happened. The petrochemical companies “grabbed” rather than “helped.”

Earlier this week, prominent economist Hossein Raghfar described how these companies had been shown to be “accountable to no one.” In the end, Oil Minister Bijan Zanganeh reportedly threatened to dismiss the directors of petrochemical companies that did not comply. But the damage had already been done.

To push Iran’s economy back toward the helping hand model, the country’s elected institutions — the presidency and parliament — must devise an anti-corruption campaign that prioritizes legislation over a judicial crusade.

Given that the weak rule of law in Iran stems from issues including a lack of independent auditing of government accounts, poorly publicized laws and government data, a lack of complaint mechanisms and ineffective investigations, the importance of legislative reform becomes clear. Beyond laws criminalizing corrupt practices, legislative reforms ought to include a focus on strengthening financial transparency, capping the length of tenures in government, limiting the ability for public servants to enter the private sector, managing conflicts of interests, regulating government procurement channels and preventing use of insider information.

If there is sufficient political will, Iran can make improvements in these areas. In one shift, parliament recently moved to strengthen a 2016 law that banned the rehiring of retired officials to government posts, amending it to include mandates for hiring younger Iranians into higher ranks in the bureaucracy. The move comes as there is a lively debate among experts around the world as to whether long tenures in government discourage corruption by creating job security, or whether careers amounting to “life tenures” stifle the meritocracy that can help prevent corruption. In any case, to whatever extent corruption is a current feature of Iran’s bureaucracy, empowering younger officials to move up the ranks should help improve institutional cultures and increase accountability.

Hope is also offered by the still-advancing effort to pass the legal reforms required by the Financial Action Task Force (FATF) action plan, which would see Iran bring its anti-money laundering and counter-terrorist financing standards closer to international ones. In a recent interview, economist Mehdi Pazouki called the FATF reforms essential to any anti-corruption drive and noted that Iran “will eventually meet the FATF requirements, recognizing it has paid a price for non-compliance.”

Ordinary Iranians pay the price for institutional corruption every day. It remains to be seen whether their government will recognize their frustrations as the impetus for long overdue change, including a return of a helping rather than grabbing hand.