Edsel Tupaz

Does The Philippines Deserve Its Investment Grade?

2013-05-07T17:42:12-04:00

Over the past decade the Philippines' sovereign credit rating oscillated between "negative" and "stable", reflecting concern about the ability of the government to collect sufficient tax revenue, manage its budget, and sustain a high rate of GDP growth. Three years ago, President Aquino embarked on a long overdue path to correct what had become endemic deficiencies in the Philippine economy. Over the past 10 weeks, the country has been rewarded for its efforts, with Fitch, the Japan Credit Rating Agency, and S&P all categorizing the Philippines as "investment" grade. Does it really deserve that designation?

Moody's retains its rating at a notch below investment grade, but will undoubtedly follow the others in due course, reflecting a rising chorus of voices in the investment community expressing confidence in the country's future. The external position of the Philippine economy -- its current account balance, external payments position, and foreign exchange reserves -- has been solid under President Aquino's fiscal management. The public deficit (2 percent of GDP) and debt-to-GDP ratio continue to fall, inflation remains at 3 percent, and the country's GDP in 2012 grew at 6.6 percent -- higher than Indonesia (6.2 percent) and Malaysia (6 percent), and not far behind Asia's perpetual economic leader, China (7.6 percent). Year to date, the Philippine peso and stock market (ranked fifth best globally) are among the best performers in the world.

Clearly, much of the credit must go to the president, and his willingness to tackle some long simmering issues. Since taking office in 2010, President Aquino managed to pass the 'sin tax' law covering such items as alcohol and cigarettes, increased tax collection rates, and successfully impeached the now former Supreme Court chief justice of former President Arroyo, on grounds of undeclared wealth. Because of Aquino's "straight path" platform, the Philippines ranked 105th (out of 174) in Transparency International's Corruptions Perceptions Index in 2012, on par with such countries as Algeria and Mexico. When he assumed power, the country was ranked 134th, on par with countries such as Nigeria and Zimbabwe. Clearly, the country is making good progress in that regard.

But what progress has been made in terms of simply doing business in the Philippines? Despite its newly minted investment grade credentials, the World Bank's 2013 'Doing Business' indicators continue to give the Philippines a low grade. Out of 185 countries in its index, the Philippines ranks just 138th, sandwiched between Ecuador and Ukraine. In six of the ten categories, the country ranks in the lowest third, and particularly poorly in terms of both starting a business and resolving insolvency (at 161st and 165th, respectively). Also, the Philippine rankings actually fell in seven of the 10 categories since last year. This stands in stark contrast to what is implied by its investment grade ranking.

Beyond the ease in doing business, regulatory risk remains a challenge, and the country's judiciary remains notoriously corrupt. While the political risk associated with attempted coups over the past several decades has notably diminished in recent years, election-related killings and violence remain a problem. And the country's rising level of net foreign direct investment remains a fraction of that of its neighbors, or other investment grade countries throughout the world. Given all this, what explains the relative haste with which the three ratings agencies upgraded the Philippines?

Apart from perhaps wanting to maintain a sense of consistency, given that Indonesia was also recently upgraded to investment grade by Fitch and Moody's -- even though its currency has not performed as well and it incurred its first current account deficit in 15 years last year -- one explanation might be a tendency to overemphasize a country's external profile while under-emphasizing development indices such as the inclusivity of economic growth, per capita development across social strata, the Gini coefficient, and absolute poverty.

Recently, the Philippine National Statistical Coordination Board reported that despite the series of consecutive credit rating upgrades made by various agencies over the past three years, poverty levels in the Philippines remain unchanged. As of 2012, about 22 percent of Filipino households were considered poor by absolute standards, compared to 23 percent in 2009. A 2008 Asian Development Bank study stated that the Philippines has the largest number of higher education institutions in Southeast Asia, and the number of examinees in professional licensure exams continues to rise, yet passing rates continue to drop. In addition, the Philippine underemployment rate increased from 19 percent in 2011 to 22.7 percent in 2012. In other words, some important, under-appreciated indicators are going in the wrong direction.

The Aquino administration has been quick to focus on how long the "trickle down" process can take, but it did not dispute the findings of the report. To date, President Aquino's technocrats are struggling to reconcile high credit scores, on one hand, and inclusive growth, on the other. So far, there has been no adequate reason cited -- other than Kuznet's inverted-U curve (circa the 1950s), where income inequality should eventually decrease, but only after sustained growth in the long term. On that basis, the Philippines must have high sustained growth for many decades to make a real difference in the absolute poverty rate.

So this appears to be a "Tale of Two Countries" -- one with significantly improving economic indicators and an activist president determined to smash through some of the unfortunate legacies of the Post-Marcos era, and the other -- an unbroken legacy of poverty, regulatory ineffectiveness, and judicial corruption. The ratings agencies appear to have focused primarily on the former, presumably under the assumption that it will take time to address the latter.

Much will depend on what happens after President Aquino leaves office in three years time. Will his reformist legacy continue, or will the country slide back into its old ways? At least three ratings agencies appear to be saying that there is a better chance that meaningful reform will continue in the longer-term. Clearly, the Philippines has a great deal of untapped potential. Nouriel Roubini, a perennial pessimist, forecasted that should the Philippines continue to defy the global recession, and if it were to consistently register GDP growth rates between 7 percent and 9 percent annually, as one HSBC study claimed, the Philippine economy may be among the largest economies by 2050. This assumes an uninterrupted path to nirvana, however, which is rather unlikely to occur, particularly given the vicissitudes of the global economy and the plethora of challenges facing the Philippines.

More likely is that the country will encounter its share of obstacles along the way, some of which will be externally derived, but many of which will undoubtedly be self-imposed. To truly deserve its investment grade rating, the Philippines needs to achieve much outside the realm of economic indicators. Being rated, as it is, one notch above junk status, it wouldn't take much for the country to fall back below an investment grade rating. Rather than beating its chest too much about what it has just achieved it, the government would be wise to focus on how best to avoid losing it.

Edsel Tupaz is owner of Tupaz and Associates and a professor of international and comparative law, based in Manila, Philippines. He is a graduate of Harvard Law School and Ateneo Law School. Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consulting firm based in Connecticut (USA), and author of the book "Managing Country Risk."

Does The Philippines Deserve Its Investment Grade?

2013-05-07T15:00:11-04:00

Over the past decade the Philippines' sovereign credit rating oscillated between "negative" and "stable," reflecting concern about the ability of the government to collect sufficient tax revenue, manage its budget, and sustain a high rate of GDP growth. Three years ago, President Aquino embarked on a long overdue path to correct what had become endemic deficiencies in the Philippine economy. Over the past 10 weeks, the country has been rewarded for its efforts, with Fitch, the Japan Credit Rating Agency, and S&P all categorizing the Philippines as "investment" grade. Does it really deserve that designation?

Moody's retains its rating at a notch below investment grade, but will undoubtedly follow the others in due course, reflecting a rising chorus of voices in the investment community expressing confidence in the country's future. The external position of the Philippine economy -- its current account balance, external payments position, and foreign exchange reserves -- has been solid under President Aquino's fiscal management. The public deficit (2 percent of GDP) and debt-to-GDP ratio continue to fall, inflation remains at 3 percent, and the country's GDP in 2012 grew at 6.6 percent -- higher than Indonesia (6.2 percent) and Malaysia (6.0 percent), and not far behind Asia's perpetual economic leader, China (7.6 percent). Year to date, the Philippine peso and stock market (ranked 5th best globally) are among the best performers in the world.

Cleary, much of the credit must go to the President, and his willingness to tackle some long simmering issues. Since taking office in 2010, President Aquino managed to pass the 'sin tax' law covering such items as alcohol and cigarettes, increased tax collection rates, and successfully impeached the now former Supreme Court chief justice of former President Arroyo, on grounds of undeclared wealth. Because of Aquino's "straight path" platform, the Philippines ranked 105th (out of 174) in Transparency International's Corruptions Perceptions Index in 2012, on par with such countries as Algeria and Mexico. When he assumed power, the country was ranked 134th, on par with countries such as Nigeria and Zimbabwe. Clearly, the country is making good progress in that regard.

But what progress has been made in terms of simply doing business in the Philippines? Despite its newly minted investment grade credentials, the World Bank's 2013 'Doing Business' indicators continue to give the Philippines a low grade. Out of 185 countries in its index, the Philippines ranks just 138th, sandwiched between Ecuador and the Ukraine. In six of the ten categories, the country ranks in the lowest third, and particularly poorly in terms of both starting a business and resolving insolvency (at 161st and 165th, respectively). Also, the Philippine rankings actually fell in 7 of the 10 categories since last year. This stands in stark contrast to what is implied by its investment grade ranking.

Beyond the ease in doing business, regulatory risk remains a challenge, and the country's judiciary remains notoriously corrupt. While the political risk associated with attempted coups over the past several decades has notably diminished in recent years, election-related killings and violence remain a problem. And the country's rising level of net foreign direct investment remains a fraction of that of its neighbors, or other investment grade countries throughout the world. Given all this, what explains the relative haste with which the three ratings agencies upgraded the Philippines?

Apart from perhaps wanting to maintain a sense of consistency, given that Indonesia was also recently upgraded to investment grade by Fitch and Moody's -- even though its currency has not performed as well and it incurred its first current account deficit in 15 years last year -- one explanation might be a tendency to overemphasize a country's external profile while underemphasizing development indices such as the inclusivity of economic growth, per capita development across social strata, the Gini coefficient, and absolute poverty.

Recently, the Philippine National Statistical Coordination Board reported that despite the series of consecutive credit rating upgrades made by various agencies over the past 3 years, poverty levels in the Philippines remain unchanged. As of 2012, about 22 percent of Filipino households were considered poor by absolute standards, compared to 23 percent in 2009. A 2008 Asian Development Bank study stated that the Philippines has the largest number of higher education institutions in Southeast Asia, and the number of examinees in professional licensure exams continues to rise, yet passing rates continue to drop. In addition, the Philippine underemployment rate increased from 19 percent in 2011 to 22.7 percent in 2012. In other words, some important, underappreciated indicators are going in the wrong direction.

The Aquino administration has been quick to focus on how long the "trickle down" process can take, but it did not dispute the findings of the report. To date, President Aquino's technocrats are struggling to reconcile high credit scores, on one hand, and inclusive growth, on the other. So far, there has been no adequate reason cited -- other than Kuznet's inverted-U curve (circa the 1950s), where income inequality should eventually decrease, but only after sustained growth in the long term. On that basis, the Philippines must have high sustained growth for many decades to make a real difference in the absolute poverty rate.

So this appears to be a "Tale of Two Countries" -- one with significantly improving economic indicators and an activist President determined to smash through some of the unfortunate legacies of the Post-Marcos era, and the other -- an unbroken legacy of poverty, regulatory ineffectiveness, and judicial corruption. The ratings agencies appear to have focused primarily on the former, presumably under the assumption that it will take time to address the latter.

Much will depend on what happens after President Aquino leaves office in three years time. Will his reformist legacy continue, or will the country slide back into its old ways? At least three ratings agencies appear to be saying that there is a better chance that meaningful reform will continue in the longer-term. Clearly, the Philippines has a great deal of untapped potential. Nouriel Roubini, a perennial pessimist, forecasted that should the Philippines continue to defy the global recession, and if it were to consistently register GDP growth rates between 7 percent and 9 percent annually, as one HSBC study claimed, the Philippine economy may be among the largest economies by 2050. This assumes an uninterrupted path to nirvana, however, which is rather unlikely to occur, particularly given the vicissitudes of the global economy and the plethora of challenges facing the Philippines.

More likely is that the country will encounter its share of obstacles along the way, some of which will be externally derived, but many of which will undoubtedly be self-imposed. To truly deserve its investment grade rating, the Philippines needs to achieve much outside the realm of economic indicators. Being rated, as it is, one notch above junk status, it wouldn't take much for the country to fall back below an investment grade rating. Rather than beating its chest too much about what it has just achieved it, the government would be wise to focus on how best to avoid losing it.

Edsel Tupaz is owner of Tupaz and Associates and a professor of international and comparative law, based in Manila, Philippines. He is a graduate of Harvard Law School and Ateneo Law School.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consulting firm based in Connecticut (USA), and author of the book "Managing Country Risk".

Follow Edsel Tupaz on Twitter at: www.twitter.com/edseltupaz

Follow Daniel Wagner on Twitter at: www.twitter.com/countryriskmgmt

China, the Philippines and the Rule of Law

2013-01-23T10:57:45-05:00

As a rising global power, and being the largest and most important economy and military power in Asia, the People's Republic of China (PRC) has had the luxury of being able to do more or less whatever it wants in challenging its neighbors over disputed land and oil and gas claims -- knowing that in all likelihood, it would not be challenged. That dynamic is now changing, with Japan vigorously contesting the PRC's claim over the Senkaku Islands and the Philippines taking its claim over the Spratly Islands to court.

Earlier this week, the Philippines notified the Chinese Ambassador in Manila that it was pursuing "compulsory process" under Article 287 of the United Nations Convention on the Law of the Sea (UNCLOS). According to Foreign Affairs Secretary del Rosario, the "Notification and Statement of Claim" will initiate arbitral proceedings under UNCLOS over the merits of the PRC's claim to much of the South China Sea (known as the West Philippine Sea to Filipinos). The suit was immediately recognized as the first "legal case" against the PRC over a number of territorial and maritime disputes with its neighbors, many of them members of the ASEAN. In initiating arbitration, Del Rosario stressed that the Philippines has exhausted virtually all political and diplomatic avenues for a peaceful negotiated settlement since 1995, thus requiring the commencement of the arbitral suit.

The threshold question really is whether the PRC can be bound by UNCLOS courts and tribunals, including its arbitral panels. The PRC ratified UNCLOS in 1996, but in 2006 the Chinese government filed a statement with UNCLOS saying that it "does not accept any of the procedures provided for in Section 2 of Part XV of the Convention with respect to all the categories of disputes referred to in paragraph 1 (a), (b), and (c) of Article 298 of the Convention." These provisions of the Convention refer to "Compulsory Procedures Entailing Binding Decisions" issued by at least four venues: the International Tribunal on the Law of the Sea, the International Court of Justice, an "arbitral tribunal" which may refer to the Permanent Court of Arbitration (PCA), and a "special arbitral tribunal."

While there are venues available for the resolutions of disputes under the UNCLOS regime, the PRC does not wish to be bound by its compulsory processes -- the ICJ and PCA included. In essence, it wants to be able to pick and choose which statutes of the treaties it has voluntarily signed it wishes to adhere to, and be free to ignore those that it finds 'inconvenient.' Can a state remain a party to a treaty or convention without being bound by its rules? Can contracting states adhere to an international legal regime and simultaneously opt out of any binding force required or to be required by that regime?

The PRC knew this day would come. Its 2006 statement effectively served as a "reservation" against any binding outcome of UNCLOS's grievance procedure in the future. It is worth pointing out that international law does accord states the freedom to disclaim whole corpuses of treaty rules through irreducible principles of self-determination, state independence, and state sovereignty. In short, the PRC can decide to opt out of treaty rules which it considers to be inconsistent with national or domestic policy, and it did so in the manner required by the treaty.

Del Rosario actually concedes the PRC's 2006 reservation, and did not attempt to take any exceptions, at least at the time the Chinese Ambassador was served with notice. Del Rosario said: "... The Philippines is conscious of the PRC's Declaration of August 25, 2006 under Article 298 of UNCLOS (regarding optional exceptions to the compulsory proceedings), and has avoided raising subjects or making claims that the PRC has, by virtue of that Declaration, excluded from arbitral jurisdiction."

The Philippines' attempt to haul the PRC to an international tribunal is a problem because it is invoking the very compulsory jurisdiction which the PRC has disavowed since 2006. But even if the Philippine attempt to arbitrate fails, any marshaled argument can subsist, and that case may be fielded in other venues. If military activity were to flare up, the same case can be brought to the United Nations Security Council -- the principal repository of enforcement powers under the UN system. A state can be found to be in violation of a substantive legal norm even without a coercive or compulsory judgment in a given venue, provided of course that there is truth to the argument supporting a violation and is appreciated by the alternative venue.

While the PRC disavows UNCLOS against the Philippines, it is expressly invoking UNCLOS provisions in its claims against Japan -- so it wants to have its cake and eat it, too. In 2009, the PRC submitted a claim over the Senkaku Islands (which, like Scarborough Shoal and the Spratlys, are believed to be fuel rich) and turned to UNCLOS rules in defining and delineating its continental shelf beyond the 200 nautical mile exclusive economic zone, again within the meaning of UNCLOS. There is some international legal doctrine supporting the view that a state's acts in one place can be used as an admission and adversely bind that State in another set of circumstances.

The larger point is that the PRC has not personified the Rule of Law in this case, or in others related to maritime borders, and wants to be able to 'cherry pick' which provisions of international treaties it will willingly comply with, and which it will not. That is behavior unbecoming of a rising global power and will make states which are signatories to treaties with the PRC wonder if its signature is worth the paper it is printed on. This cannot be in the PRC's long-term interest. While it is too early to say whether the Philippine arbitration claim will prevail in court, the PRC will certainly not prevail in the court of international public opinion.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consulting firm based in Connecticut (USA), and author of the book "Managing Country Risk".

Edsel Tupaz is owner of Tupaz and Associates and a professor of international and comparative law, based in Manila, Philippines. He is a graduate of Harvard Law School and Ateneo Law School.

Follow Edsel Tupaz on Twitter: www.twitter.com/edseltupaz

With Russia, America Should Embrace the 21st Century

2012-11-16T09:30:07-05:00

The U.S. Congress has had the option of waiving the restrictions placed on trade relations with Russia as a result of the Jackson-Vanik Amendment since 1989. Each year since that time, U.S. lawmakers have chosen to waive the trade restrictions. But earlier this year, the U.S. House of Representatives voted to abolish the Amendment and replace it with Permanent Normal Trade Relations (PNTR) with Russia.

Throughout the year, American businesses lobbied Congress to repeal Jackson-Vanik not in sympathy with Russia's government, but rather in the hope of reaping commercial benefits by virtue of Russia's entry into the World Trade Organization. After Russia's accession to the WTO on August 22nd, the repeal of the Amendment seemed a logical step, to harmonize domestic law with treaty law. There was really no doubt that Jackson-Vanik impeded free trade with Russia's growing market and severely restricted full access by American companies. In short, repealing the amendment, economists argue, will increase U.S. exports to Russia without seeing any significantly corresponding increase in the volume of imports from Russia. Freer trade leads to export growth -- a pillar of President Obama's economic policy -- growth in the US economy and job creation.

But the repeal of Jackson-Vanik at the House was not without cost. U.S. law makers made adoption of the Magnitsky Act a pre-condition of the abolition of trade restrictions with Russia. Many argue that the adoption of the Act may in fact be a more targeted law, now couched in increasingly human rights vernacular, and aimed at sanctioning Russian officials, security forces and civil servants who were involved in the death of Sergei Magnitsky. Mr. Magnitsky, a lawyer for Hermitage Capital, was a key whistleblower who revealed a deeply entrenched system of embezzlement and fraud implicating billions of rubles from previously untouchable bureaucrats. Magnitsky died in a jail cell and his trial is proceeding posthumously.

While proponents of the Magnitsky Act say that it targets only those implicated in the Magnitsky affair, a review of the draft bill may lead some to conclude that its provisions go overboard, and authorizes the U.S. State and Treasury Departments to impose visa and financial sanctions against anyone in Russia accused of human rights violations, without qualification. Its provisions state that the U.S. Secretary of State may place a person on a visa black list in the name of "national interest" and, at the same time, allows the U.S. Treasury secretary to freeze assets of any Russian individual. While Jackson-Vanik was seen as a punishment against Russia, Magnitsky is supposed to be a punishment against individuals.

H.R. 6156 is likely to be adopted by the Senate, and President Obama will likely sign the bill into law just before New Year's Eve. While the Obama administration has repeatedly expressed its opinion that Jackson-Vanik should be repealed without reference to the Magnitsky Act, some lawmakers believe that because the U.S. had already granted Russia PNTR status, anything more would be an unwarranted concession.

In any event, PNTR status should be adopted as a matter of course, given Russia's accession, as it would for any other new member of the WTO. Any human rights argument in favor of the Magnitsky Act appear to be a pretense for political capital being spent to appease the conservative republicans. Regardless of however one chooses to couch "Whereas" clauses, the adoption of the Magnitsky Act will be seen by Moscow for what it is -- the result of political horse trading in Washington.

The original Senate version of the Act included within its scope not only Russian individuals but any individual accused of human rights violations around the world, but it was subsequently made to apply only to Russian individuals. The lingering issue remains whether amendment of the terminology used in the draft bill will be meaningful enough to include other countries, such as China. Many conservative republicans would like to see that.

If America hopes to 'reset the reset' with Russia, it will need to send more accommodating messages to Mr. Putin. While America must be true to itself and its values in opposing human rights violations, it should not be the 'centerpiece' of U.S. foreign policy. Jackson-Vanik is rightly being repealed because it is a relic of a bygone era. We are no longer living in the 1970s and are no longer fighting a battle between capitalism and communism around the globe. Today, the battle is between states competing commercially. Particularly while the U.S. struggles to find its economic footing, American lawmakers would be wise to keep that in mind.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consulting firm based in Connecticut (USA), and author of the book "Managing Country Risk".

Edsel Tupaz is owner of Tupaz and Associates and a professor of international and comparative law, based in Manila, Philippines. He is a graduate of Harvard Law School and Ateneo Law School.

Kambiz Behi is a consultant in foreign affairs at EnterInvest in Minsk, Belarus and Russia. He holds a Ph.D in Social Anthropology and Masters in Regional Studies from Harvard University, and a Master of Laws from University of Pennsylvania Law School.

Follow Edsel Tupaz on Twitter: www.twitter.com/edseltupaz

Monkey Business as Usual in the Philippines

2012-10-15T15:30:00-04:00

In July we pondered whether and to what degree former Philippine President Arroyo's release on bail would be indicative of the eventual verdict in the electoral sabotage and plunder charges against her. We also wondered to what extent public perception of the prosecution's evidence in both cases will ultimately stand or be torn apart by a combination of evidentiary weakness, a corrupt judiciary, or both. In a country where the legal and judicial culture is allergic to pre-trial discovery and habitually backslides into court-enforced fishing expeditions or the marshaling of evidence during trial, it may still be that the element of surprise is the rule in the Philippines, and transparency the exception.

Following eight months of hospital arrest, the regional trial court -- a court of plenary jurisdiction -- released Arroyo on bail in July, on the ground that the evidence in the electoral sabotage case against her was "weak." But on Oct. 4, the Sandiganbayan -- the specialized anti-graft court where her plunder case is pending -- issued an order again placing her under arrest. Arroyo's defense attorneys immediately moved for a bail hearing, and to place her, as before, under hospital arrest, instead of in a regular detention facility. This bail hearing is slated for Thursday this week.

While media circles are quick to point out that Arroyo was "rearrested," this can be misconstrued to mean that the same judge simply changed his mind, which isn't the case. "Plunder" and "electoral sabotage" are distinct offenses under Philippine criminal statutes which require different venues and courts. If one were to stay close to the law-in-the-books, one criminal case ought to have no bearing upon the other. But the two cases have naturally become politicized -- so much so that black letter statutes and fine print criminal procedure may be bent, depending on a judge's own political persuasion and/or inclination toward self-promotion.

A conviction in just one of the charges will carry years (if not decades of imprisonment) for Arroyo, but a disaggregated judicial system such as that of the Philippines may bode well for the prosecution for the simple reason that the cases are severable: If the government were to fail in knocking down the accused in one charge in one court, it may still resort to case building for another charge under a different judge. In Arroyo's electoral sabotage case, where she has been on bail since July, the discretion of only one ordinary trial court judge was at stake, whereas the plunder cases are under the Sandiganbayan (roughly translated as the "People's Advocate" under the local vernacular). Unlike ordinary trial courts, the Sandiganbayan is a specialized collegial court, equivalent to an appeals court, and consists of 14 associate "justices" and one "presiding justice." One can thus make a case that the recent arrest order had gone through greater deliberative scrutiny than the July bail order, with the latter issued by a lone judge.

On the count of plunder, Arroyo was charged with plundering the national treasury by diverting Php 316 million (approximately $7.5 million) from the funds of the Philippine Charity Sweepstakes Office. Arroyo is also facing a second plunder charge which alleges that she unduly intervened in a state contract with the Chinese firm ZTE Corporation -- a contract involving the national broadband network. Whereas in the electoral sabotage case pending before the ordinary courts, Arroyo is accused of conspiring with officials in Mindanao, the southern region of the country, of rigging the 2004 and 2007 national elections.

With the element of surprise as the rule in criminal trials, we think it is too early to tell whether an eventual conviction will follow. On its face, the fact that a former president is facing a string of charges operating in several criminal courts under a disaggregated judicial system will certainly allow prosecutors to play several hands of several cards. But in highly politicized cases such as this, public perceptions and expectations can bear upon judicial findings across the board -- one charge in one court, if lacking in evidence, being eventually dropped, can affect another judge's mind elsewhere.

Indeed this may have been the case in the impeachment trial of former Philippine Chief Justice Corona, an Arroyo appointee accused of taking up a "midnight appointment." In the impeachment trial, the House prosecution panel dropped five of the eight Articles of Impeachment, with just three formally submitted to the Senate impeachment court for judgment. In May, the Senate, voting 20-3, convicting Corona under Article II, which charged him of failing to disclose an accurate statement of his assets, liabilities, and net worth -- a requirement that arguably rises to the level of a constitutional obligation for Philippine public officials great and small.

The other impeachment charges, while dropped, accused Corona of unduly influencing the other members of the Supreme Court and of distorting the decisional process occurring between the genuine result of the deliberation and the formal promulgation of judgment -- all to favor Arroyo and her husband. Corona was, in fact, the chief of staff and spokesperson of Arroyo prior to her rise to the presidency. While charges were dropped, the media and the public mind however had been shaped in no small part by the associations and insinuations those very charges made. Certainly a Senate, sitting as an impeachment court, is no judicial court in the strict sense, but Arroyo's trial can showcase whether meaningful change in Philippine society is indeed taking place, or whether Filipinos are backsliding into the same monkey business that has occurred since the days of Marcos's Martial Law.

Looking at the machinations occurring -- which had Arroyo under 'hospital' arrest for what was a previously undisclosed condition prior to charges having been made (she had no neck brace or 'ailment' as president) rather than in a jail cell, and which have her sprung from her private hospital room on bail, while her lawyers and supporters presumably attempt to work their 'magic' behind the scenes in making it all disappear -- one has to wonder if justice can truly stand a chance of being served in this case, and just how much progress has truly been made, or can be made, in such a judicial system. We have our doubts.

The authors acknowledge a forthcoming article on the topic under JURIST.org.

Edsel Tupaz was a private prosecutor of the House prosecution panel in the recently concluded impeachment trial of Philippine Chief Justice Renato Corona.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), and author of the new book 'Managing Country Risk.'

Arroyo's Release on Bail: A Bad Omen for the Philippines

2012-07-25T15:14:24-04:00

After nearly eight months under hospital arrest, a trial court judge this week ordered former Philippine President Gloria Macapagal-Arroyo released on bail, on the grounds that the evidence against her was 'weak.' Having been charged with electoral sabotage and plundering of the national treasury, Arroyo and her husband were arrested in November of last year. The former First Gentleman appeared headed toward a guilty verdict -- until her release.

Given this development, and its rather curious timing, we cannot help but wonder whether the judge's bail order does in fact indicate that the case-in-chief against her is weak, or whether this is evidence that the judicial system in the Philippines remains tainted. Did Arroyo really deserve bail after all this time, or is this yet another instance of a corrupt judge intervening on behalf of a high profile, powerful, and wealthy defendant? Beyond possible legal or evidentiary merit, the granting of Arroyo's motion for bail raises serious question about whether President Aquino's fight against corruption is swimming against an inexorable tide.

The cases pending before the judge who ordered Arroyo's bail were filed by the Commission on Elections, which accused Arroyo of conspiring with officials in Mindanao of rigging the 2004 and 2007 national elections. In addition, a case accusing Arroyo of plunder is now pending with the Sandiganbayan, the nation's main anti-graft and corruption court -- a wholly different venue from the ordinary trial courts.

Framed as a strictly legal question, bail motions typically come early on in a case and are unrelated to the eventual verdict. Given the propensity of local lawyers and judges to avoid all forms of pre-trial discovery, the Philippine legal system is weighted -- rightly or wrongly -- towards court-enforced fishing expeditions, or the gathering of evidence during the trial and as the trial unfolds.

This means that the element of surprise is the rule; pre-trial transparency is the exception. Thus it is not uncommon for verdicts of conviction to be issued even as the accused remains at large. In fact, Philippine courts -- including its Supreme Court -- are consistent in ruling that because the evidentiary test for purposes of bail is distinct from the test of proof beyond reasonable doubt, any determination in bail hearings and bail motions do not bear upon the substance of the case, or the case-in-chief. On the other hand, one can argue that because the prosecution failed to meet a lower threshold of evidence this early, the case against Arroyo may indeed be 'weak.'

That the Philippine legal system (or system failure, depending on one's vantage point) trumps the right to bail even in life imprisonment cases (capital punishment is banned in Philippine statute books) may be attributed in large part to the fact that the right to bail is constitutionally entrenched in the bill of rights. Section 13 of the Philippine Bill of Rights states: "All persons, except those charged with offenses punishable by reclusion perpetua (life imprisonment) when evidence of guilt is strong, shall, before conviction, be bailable... ." (Section 13 even declares that "[t]he right to bail shall not be impaired even when the privilege of the writ of habeas corpus is suspended). This makes any judicial balancing act implicated in bail hearings (compared with other states and jurisdictions) systemically skewed in favor of the accused in all cases.

Despite the fact that Arroyo and her lawyers did win the bail motion, and while the judge's order granting her bail effectively ended her detention pending trial (at least for now), the hold departure order issued by the justice secretary remains effective. This means that Arroyo and her husband, while out on bail, cannot leave the country. In fact, Philippine law assumes that persons admitted to bail do not necessarily have the right to leave the country, and, if the prosecution can make a successful argument for a "change in circumstances" indicating a flight risk, the trial judge can legitimately change his mind.

Arroyo was, and remains, a flight risk. Her much publicized attempts to flee the Philippines for medical treatment for a previously undisclosed 'ailment' last year are all the evidence any judge should need to indicate as much. The hold departure orders relate to the plunder cases which are under the control of the Ombudsman, and not the electoral sabotage cases where Arroyo is on bail.

On strictly on legal terms, therefore, it is too early to tell whether Arroyo deserves an acquittal. But in a country whose judicial system allows for the element of surprise as the rule, and pre-trial transparency and discovery as the exception, the sanctity of the greater "rule of law" issue is questionable. Institutionally, the state's witness protection program remains weak, and the incidence of extra-legal killings and enforced disappearances remain high.

In the ongoing Maguindanao massacre cases, which involve the murder of 57 people (31 of whom were journalists) in 2009, a number of witnesses for the prosecution have been, in similar vein, extra-legally murdered, or have disappeared. Ironically, but not unexpectedly, the Maguindanao massacre -- the worst politically driven mass murder in recent times -- is tied to the electoral sabotage case against Arroyo, who is accused of conspiring with Maguindanao high officials in the 2007 elections.

Several questions arise from these developments. First, whether and to what degree, Arroyo's bail can be considered an outcome determinative of the eventual verdict in the electoral sabotage case. Second, what impact, if any, the fact that bail was granted in the electoral sabotage case could impact the government's case against Arroyo on the plunder issue. Third, to what extent public perception of the government's evidence in both cases will ultimately stand, or be torn apart by a combination of genuine evidentiary weakness, a corrupt judiciary, or both.

That Arroyo was granted bail after eight months in detention even though she remains a flight risk, and so close to a verdict on her husband's complicity in her alleged crimes, does not bode well for President Aquino's efforts to clean up the Philippine judiciary. After seven consecutive sovereign upgrades, and a string of favorable economic data pointing to the Philippines as a rising 'Asian Tiger,' Arroyo's release should indeed be seen as a wake-up call for sovereign analysts and prospective investors alike.

Can a leopard (the Philippines) really change its spots? If so, can it be achieved meaningfully in such a short period of time? It seems the same old shenanigans are occurring, even while President Aquino is in power. We wonder what will happen when he leaves the scene, and whether the country will quickly settle into its unfortunate 'business as usual' ways.

Edsel Tupaz was a private prosecutor of the House prosecution panel in the recently concluded impeachment trial of Philippine Chief Justice Renato Corona. He is a graduate of Harvard Law School and Ateneo Law School, owner of Tupaz and Associates, and a professor of international and comparative law, based in Manila.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), and author of the new book Managing Country Risk (www.managingcountryrisk.com).

How Not to Achieve Foreign Policy Objectives With Russia

2012-07-05T13:01:39-04:00

In December 2011, the World Trade Organization approved Russia's membership, which had been sought since 1993. In April of this year, just three weeks after then-President Medvedev submitted a new draft Civil Code to Parliament, the Duma adopted in its first reading, and virtually verbatim, a new Draft Law which will amend portions of the Russian Civil Code. The Draft Law is slated to be enacted by the fall of 2012.

Recognizing the need to update the country's entire private law system, the new Russian Civil Code can be seen as something more than domestic legal reform. Not only will it showcase Russia's best attempt at improving corporate governance on the eve of its WTO accession, the new Code marks the greatest shift in Russia's legislative and economic transformation since the fall of the Soviet Union -- and it is occurring under the tutelage of President Putin, who has been widely criticized in the West for the manner in which he governs, and his approach to economic relations with the West.

The Draft Law is a significant improvement of the existing post-Soviet Civil Code, designed to introduce fundamental changes to the existing system in a wide range of issues, including property rights, contracts, obligations, security instruments and intellectual property. The Russian government recognizes that it needs to encourage Russia's full integration into the global economy, and promote foreign direct investment, in order to counter the commonly-held perception that Russia can be a risky place in which to do business. Emphasis has been placed upon improving corporate governance and transparency, introducing new legal forms and corporate vehicles, and expanding commercial diversity and transactional space.

This should bode well for Russia, and for President Putin, at a time of heightened criticism from the West, particularly on the question of whether Russia can live up to the rule of law and widely accepted norms for human rights -- now framed as essential "pillars" of the WTO framework. Russia's accession to the WTO should be an area of focus for western policy makers, as it has indeed elicited a very favorable legislative response and is evidence of Mr. Putin's intention to steer the Russian juggernaut of an economy in a western direction.

So it is ironic that the U.S. Congress is in the process of implementing the Sergei Magnitsky Rule of Law Accountability Act, a piece of legislation designed to replace the Soviet-era Jackson-Vanik Amendment, and intended to penalize Russia for perceived human rights violations. We wonder whether the U.S. Congress is focused on the right sets of issues at the right time vis-à-vis Russia. Rather than use a carrot to try to obtain Russia's assistance on a host of foreign policy-related issues, the U.S. Congress appears to prefer to use a well worn Cold War stick to scold Russia for its imperfections.

This is unlikely to elicit a favorable response from Mr. Putin, at a time when the U.S. needs Russia more than Russia needs the U.S. to achieve its foreign policy objectives. Adoption of the Magnitsky Law is particularly ill timed, given what the U.S. would like to achieve in Iran and Syria. Russia has a pivotal role to play in achieving the desired outcome in both places. Scolding Russia has never resulted in warmer relations between the two countries; it is certainly not going to do so now. Rather, Russia will more likely prove to be an impediment on both subjects, at least in part in response to adoption of the Magnitsky Law.

Russia should be applauded for taking such a responsible approach to the adoption of a WTO-friendly private law system in such a swift manner. It should also be held to task for ensuring that the new Code is more than just words on paper, but actually results in substantive favorable change in how foreign trade and investment is conducted in Russia. Likewise, the U.S. should treat Russia with respect, not only as a new member of the WTO, but also as a critical component to arriving at a peaceful resolution regarding Iran and a more timely resolution in Syria. Lecturing Russia on human rights while seeking its collaboration on these and other highly important issues are incompatible goals.

Kambiz Behi is a partner at Mostafavi & Associates who teaches law and social sciences at universities in the U.S., Russia and Belarus. Edsel Tupaz is managing partners of Tupaz and Associates, and teaches at law schools in the U.S. and the Philippines. Daniel Wagner is CEO of Country Risk Solutions and author of the new book Managing Country Risk.

The Magnitsky Act and Implications for Russia-U.S. Relations

2012-06-17T17:38:13-04:00

Throughout the Cold War the U.S. Congress sought to penalize the Soviet Union for its human rights record. Legislation such as the Jackson-Vanik amendment became a long-term influence on bilateral trade between the two countries. That tradition was reinvigorated this past week, when the House Foreign Affairs Committee unanimously approved the Sergei Magnitsky Rule of Law Accountability Act, in a rare example of bipartisanship. This has potentially important implications for future of bilateral trade with Russia, which is expected to join the World Trade Organization later this year. Passage of the Act just prior to President Obama's meeting with President Putin in Mexico this coming week adds greater complexity to the cooling bilateral relationship between Russia and the U.S., and enhances the prospect of further deterioration.

The Act is named after Sergei Magnitsky, a lawyer representing Hermitage Capital Management, an investment fund and asset management company that was dismantled by Russian authorities after it was accused of tax evasion. Magnitsky implicated top officials in a $230 million tax refund fraud against the Russian government. In 2008 he was arrested and died in prison after spending a year in pretrial detention; the case against him is ongoing posthumously. The U.S. State Department issued visa bans on several dozen Russian officials in connection to the Magnitsky case in 2011. Russia imposed travel bans on several U.S. officials in response.

After the House Foreign Affairs Committee's approval of the bill, two additional committees (most likely the finance and judiciary committees since it deals with financial sanctions and criminal prosecution) must approve the bill or waive jurisdiction. Once passed in the House, the Senate is expected to introduce its own version of the bill for review.

The Obama administration has been opposed to the Act for two reasons, arguing that it will put U.S. businesses at a disadvantage in Russia, making it harder for them to compete, and possibly prompting the Russian government to favor non-U.S. suppliers or freeze U.S. corporate assets in the country. Adoption of the Act may also be inconsistent, if not oppositional, to another bill, which would grant Russia Permanent Normal Trade Relations (PNTR) as required under WTO rules.

The National Foreign Trade Council, and its sister organization -- USA Engage -- released a statement against the Magnitsky Act, arguing that the legislation would harm Russia-U.S. relations and jeopardize significant potential benefits arising from Russia's WTO accession. Similarly, representatives of the American Chamber of Commerce in Russia are worried that passage of the Act would hurt U.S. competitiveness in Russia.

The White House also worries that the Act will complicate its efforts to 'reset' relations with Russia, though many would argue the 'reset' is heading in exactly the opposite direction intended. While Russia's accession to the WTO is considered a key achievement in that regard, the increasingly bellicose rhetoric being adopted by elements in both governments -- and by Republican presidential nominee Mitt Romney -- has changed the dynamic. Fundamental conflicts on high profile foreign policy issues -- such as Iran and Syria -- have also contributed to a climate of confrontation between Russia and the U.S.

Russia has promised a retaliatory response to the Act, calling it "anti-Russian" and intrusive in the country's internal affairs. A few hours after his inauguration, President Putin signed a decree aimed at "preventing the introduction of unilateral extraterritorial sanctions by the United States against Russian legal entities and individuals." There can be little doubt that he was referring to the Act.

The House motion on the Magnitsky Act may be an opening salvo in what is a potentially stickier congressional debate over human rights and trade relations with the Russian Federation. While meant to replace the nearly 40-year-old Jackson-Vanik Amendment, the Act would allow U.S. companies to actively pursue their trade interests while highlighting America's long-term commitment to the rule of law and human rights. The Act's language suggests that it may establish a strong precedent for a reassertion of U.S. priorities on international human rights, while at the same time accommodating the granting of Russia PNTP status.

At this point in time, Russia and the U.S. seem destined to spar with each other along increasingly historical lines. The rhetoric coming from both sides sounds more Cold War-esque than oriented toward a reset, and makes us wonder just how far they have come in the more than 20 years since the Soviet Union collapsed. The U.S. is not about to stop preaching about human rights, and Russia is not about to stop trying to demonstrate it will not be pushed around. Now that that is settled, hopefully Messrs. Putin and Obama can get down to business in Los Cabos.

Kambiz Behi is a partner of Mostafavi & Associates. Dr. Behi's interests and expertise lie in comparative law, comparative constitutional law, international law and legal anthropology, teaching law and social sciences at universities in the US, Russia and Belarus. He holds a PhD in Social Anthropology and Masters in Regional Studies from Harvard University, and a Master of Laws (LL.M.) from University of Pennsylvania Law School.

Edsel Tupaz was a private prosecutor of the House prosecution panel in the recently concluded impeachment trial of Philippine Chief Justice Renato Corona. He is a graduate of Harvard Law School and Ateneo Law School, owner of Tupaz and Associates, and a professor of international and comparative law, based in Manila.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), and author of the new book Managing Country Risk (www.managingcountryrisk.com).

Follow Edsel Tupaz on Twitter: http://www.twitter.com/edseltupaz

A Long Awaited Day of Justice in the Philippines

2012-05-30T13:17:50-04:00

The Philippines experienced a judicial milestone on Tuesday with the conviction of Renato Corona, Chief Justice of the Supreme Court of the Philippines, for failure to declare several high value assets -- including US$2.4 million in foreign currency deposits -- on his Statement of Assets, Liabilities and Net Worth (SALN). The Senate, sitting as the Impeachment Court, voted 20 to convict and 3 to acquit, easily surpassing the 16-vote threshold for conviction. Following the conviction under Article II of the complaint, Senate President Enrile decided to forgo voting on the two other articles of impeachment that were covered in the trial. Corona is the first impeachable official to be successfully impeached and convicted in Philippine history.

Corona had been impeached in the House of Representatives in December. Tuesday's verdict paves the way for him to be removed from office and to be permanently disqualified to hold "any" public office. Under Philippine law, only after removal and disqualification can an impeached (and convicted) official be subject to prosecution, trial, and punishment through ordinary courts. In fact, Ombudsman Conchita Carpio-Morales admitted before Senator-jurors that her office was undertaking a "fact-finding investigation" -- a stage prior to preliminary investigation that could lead to a finding of probable cause for a string of criminal cases against Corona. It seems likely that Tuesday's conviction will only be a first step in prosecuting Corona -- and possibly his family and close associates -- for alleged graft and corruption.

Eight articles of impeachment were originally brought against Corona by the lower House, which included culpable violation of the Constitution, graft and corruption, and betrayal of public trust -- citing specifically his "undue closeness" to former President Gloria Macapagal-Arroyo (who is under hospital arrest for electoral sabotage and plunder while in office) and his suspected affinity for siding with her administration in politically-significant cases. As weeks drew out into months, the prosecution made the controversial decision to drop five out of the eight articles in order to focus on Articles II, III, and VII.

It was clear from the outset that the prosecution's best bet for a conviction was under Article II. The articles of impeachment that stressed Corona's partiality and flip-flopping decisions listed several Supreme Court cases -- decisions which were collegially rendered, at times by a clear majority. The task for the prosecution under these articles had been always uphill and would have required sufficient extrinsic evidence that Corona had a clear bias in favor of Arroyo, and having exerted undue influence over the other Justices, leading to partial voting patterns. In presenting its case, managing the tension between collegiality and personal accountability was clearly a difficult task for the prosecution.

Following the Supreme Court's February "Valentine Resolution" which effectively prohibited high court justices from testifying against each other, the witness list of the prosecution -- which included Justice Maria Lourdes Sereno, a consistently strong dissenter in the Corona Court -- was virtually scrapped. Whereas under Article II -- where Corona was accused (and, on Tuesday, convicted) of non-disclosure of wealth in his SALNs, the prosecution was able to present 17 witnesses and 166 documents. Although the prosecution had been heavily criticized for bungling its case -- at times drawing accusations from different camps of presenting documents that were fabricated or of unreliable origin -- and with half its witness list lost to a controversial court ruling, the House prosecution prevailed by showing that Corona had indeed betrayed the public trust and committed culpable violations of the constitution by continuously omitting to report high value assets.

In the Philippines, public officials are constitutionally required to file a SALN each year to verify that they are not funneling money to themselves from their government positions. In a bold move, the defense presented the Chief Justice himself as witness during the final weeks. While attempting to refute many of the accusations against him that centered on his finances and properties, Corona insisted that he was not required to declare PhP 80.7 million (US$1.8 million) in bank deposits, because these were co-mingled funds, nor his US$2.4 million in foreign currency deposits, because the Foreign Currency Deposit Act (Republic Act 6426) provides for absolute confidentiality. But the defense's decision to call Corona to the stand was in no small part driven by Ombudsman Morales's own testimony before the Senate, which aimed to show that Corona had 82 dollar-denominated bank accounts between 2003 and 2011 (coinciding with the reign of former President Gloria Arroyo) with total "inflow" of $28 million and "outflow," at $30 million. At least $12 million of this was described as "fresh deposits" that were untouched.

Prior to reading the verdict, all 23 Senators were each given a chance to explain their vote. Senator Ralph Recto, in particular, effectively articulated the sentiments of many of the senators regarding Corona's failure to properly disclose his assets by saying:

...There is no such thing as an SALN so statistically perfect that it is precise to the last decimal point. If a government employee is asked to catalogue what he owes and what he owns, some information may fall into the crack, not as an act of deliberate concealment, but as an unwitting omission done in good faith.

So this boils down to the degree of the unintentional miscalculation, and logic dictates that we accept slight inaccuracies because if we leave no room for those, then, believe me, no government official will be left behind his desk.

In the case of the Chief Justice's SALN, the undeclared assets are so huge, 50 times more than what he declared in cash - 2.4 million in U.S. dollar deposits, 80 million in peso deposits - that they cannot be brushed aside as innocent exclusions....

In uniquely Filipino fashion, the impeachment trial had become its own daytime soap opera, with Sen. Miriam Defensor Santiago giving lengthy tirades about the ineptitude of the prosecution, Corona weeping during his testimony (on cue), and Senator Enrile calling a lock down in the Senate after Corona apparently attempted to walk out of the court room without having been excused as a witness, among an array of other circus-like acts. However, in a country that has grown used to removing high-ranking public officials through mass mobilization and street protests, the conviction of a sitting chief justice can be seen not only as a sign of political maturity for the Philippines, but also as a right step towards an effective anti-corruption and good governance campaign heralded by the Aquino administration.

Or so it seems. The early emphasis of the impeachment trial of Corona on partiality and subservience to Arroyo was clearly eclipsed by Article II and Corona's SALNs -- in short, his conviction seems unrelated to the greater question of partiality. What would this mean for President Aquino and his insistence that what Filipinos have today is an Arroyo court? Following Corona's conviction and removal, the president might well choose to pursue impeachment efforts against the other justices, but this seems too strenuous an effort for too little potential reward, and it is unclear if revving up another impeachment train will accomplish the very objectives of Aquino's anti corruption campaign; if Aquino wants to go after other high ranking officials in the judiciary or elsewhere, it may be best for the Ombudsman to act first. This way, anyone who happens to be in the House's prosecution panel will have in her hands a strong, well-founded case in the event that an impeachment will be necessary.

There was no question that the House prosecution was lackluster. With congressmen accused of not knowing how to be lawyers, and the defense panel accused of not knowing how to be politicians, the Senate halls can be a marketplace. In the end it may have been Corona's own admission that indeed he had multimillion dollar and peso accounts which led to an adverse judgment. As the Philippines closes this chapter on impeaching high government officials, Mr. Aquino should focus on fighting endemic corruption and, in turn, get to the root of the problem of widespread poverty. Tuesday's conviction is certainly a step in the right direction. If Mr. Aquino stays focused on grassroots reform and avoids the temptation to revert to flashy moments of soap opera, which many have come to expect (and perhaps even look forward to), the Philippines can finally cast off its image as corrupt to the core and beyond help.

The audacity of the defense to say that President Aquino was embarking on a witch hunt, and that the pursuit of Corona and Arroyo are nothing more than political vendettas, speaks loudly to its presumption that the end result of the trial would be 'business as usual'. Indeed, if President Aquino and the Senate were cut from a different cloth -- the same old cloth -- a mistrial would have been declared for some ridiculous reason, or Corona's and Arroyo's vain attempt to feign illness would have succeeded in securing their release. This time, it is different. The world is watching. Now, it is imperative that an appropriate sentence be dispensed -- both on Corona and Arroyo -- and that both serve their entire duration of that sentence. Otherwise, the President and the country open themselves up to living up to now dated expectations about how justice is served in the Philippines.

The authors thank Joan Martinez for her comments.

Edsel Tupaz is a private prosecutor of the House prosecution panel in the impeachment trial of Philippine Chief Justice Renato Corona. He is a graduate of Harvard Law School and Ateneo Law School, founder of Tupaz and Associates, and a professor of international and comparative law, based in Manila.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), and author of the new book Managing Country Risk (www.managingcountryrisk.com).

China, the Philippines, and the Scarborough Shoal

2012-05-20T18:46:03-04:00

Last week, the USS North Carolina -- a Virginia class fast attack submarine -- took Chinese and Philippine authorities alike by surprise after resurfacing in Philippine waters and docking in Subic Bay -- the economic free port zone in the Philippine province of Zambales. Subic was once the largest U.S. naval base in the Pacific, closed down in 1991 after the Philippine Senate refused -- shortsightedly, many would argue -- to extend the U.S.-Philippines Military Bases Agreement of 1947. The unannounced arrival of the USS North Carolina came at a time of heightened tension between China and the Philippines over a maritime and territorial dispute over Scarborough Shoal, a triangular-shaped island group of 150 square kilometers located 124 nautical miles off Zambales.

The arrival of the North Carolina is filled with symbolism about the history and strength that once lay behind the military relationship that once defined the bilateral relationship between the Philippines and the U.S. Just 20 years ago, the Philippines was the centerpiece of U.S. military strategy in the Asia Pacific. The Philippine Senate's decision to jettison U.S. forces from the country altered the geostrategic military calculus for the U.S., and dramatically impacted the perceived importance of the Philippines for the U.S. military. Since then, Guam has become a focal point, as have military bases elsewhere in Asia.

That said, the rising tension over the Scarborough Shoal has served to raise the Philippines' profile once again -- both as a potential adversary to China over mineral resources in the region, and as a reliable ally of the U.S. Named after the ill fated East India Company trade ship Scarborough which was wrecked on the rocks of the shoal in 1784, the Shoal forms part of a larger dispute over who really "owns" the South China Sea (or the 'West Philippine Sea', as Filipinos refer to it). Scarborough Shoal is known under Filipino vernacular as 'Panatag Shoal,' and, to China, Huangyan Island. While only 124 nautical miles from Zambales, Scarborough is 550 nautical miles from Hainan Island, the closest Chinese port, which raises serious questions as to the legal validity of the Chinese claim over the territory.

Gunboat Standoff and Sanctions

The most recent tension over Scarborough began in April this year when the Philippine Navy discovered eight Chinese fishing ships in the Shoal. After having boarded the vessels, Philippine authorities uncovered large amounts of illegally collected corals, live sharks and other marine life in the hands of Chinese fishermen. Before a complete seizure of the vessels and arrest of persons could be made, two Chinese maritime surveillance ships approached and positioned themselves between the Philippine ships and the Chinese fishing vessels. Despite continued diplomacy between Beijing and Manila, more gunboats were deployed by both governments and the standoff continues to date. Fishermen from both countries have been arrested, reprimanded or forced away by opposing naval forces at one time or another. As many as 30 Chinese vessels have been reported in Scarborough, seven of which are fishing vessels, two being marine surveillance vessels, and one gunboat. Two Philippine Coast Guard vessels are in the area as well.

Philippine President Aquino made clear that the Philippines is no match for China's military, and it does not seek military conflict with China. Despite repeated assurances of a desire to avoid any form of conflict -- relations between the two countries continue to deteriorate. China has been accused of suspending tourism to the Philippines and imposing sanctions over imports of Philippine fruits. Additional sanctions could be put into place by both countries, as the conflict has the potential to spin out of control.

The dispute over Scarborough arises from conflicting territorial and maritime claims between China and the Philippines on grounds of discovery and occupation. Beijing now argues that it first discovered and mapped the entire South China Sea during the Yuan Dynasty (1271-1368 AD), and that it was again mapped in 1279 AD by Chinese astronomer Guo Shoujing in a survey of islands surrounding China. The Philippines likewise claims historical ties to the territory, the earliest being the Carta Hydrographical y Chorographics De Las Yslas Filipinas (or "Hydrographic and Chorographic Map of the Philippine Islands"). Published in 1734, Fr. Velarde's map identified the Shoal as part of Zambales. Later expeditions such as Alejandro Malaspina's 1808 survey, likewise identified the territory as part of the Philippines.

Treaty Law

Given its proximity to the Philippines, common sense dictates that the Shoal is laying within Philippine territorial waters -- not that of China -- and international law is on the side of the Philippines. The Treaty of Paris of 1898, The Treaty of Washington of 1900, and the Treaty with Great Britain of 1930 all state that the westernmost limit of Philippines territory is the 118th degree meridian of longitude east of Greenwich, arguably excluding Scarborough. But even as the 1935 Philippine Constitution (and, by definition, all subsequent constitutions) affirms the legality or legitimacy of these treaties, constitutional provisions however do assert that Philippine national territory is comprised of the "Philippine archipelago, with all the islands and waters embraced therein, and all other territories over which the Philippines has sovereignty or jurisdiction."

At present, the Philippines is building a case for unilateral submission to the International Tribunal for the Law of the Sea (ITLOS) sitting in Hamburg, one of the dispute resolution mechanisms under the 1982 United Nations Convention on the Law of the Sea (UNCLOS) of which both China and the Philippines are signatories. UNCLOS provides for a 200 nautical mile "exclusive economic zone" and "continental shelf" which effectively places Scarborough within Philippine sovereignty or jurisdiction. The Philippine claim is further strengthened, yet not without controversy, by Republic Act No. 9522, known as the Philippine Archipelagic Baselines Law. Said to be compliant with UNCLOS, this law defined Philippine territory by connecting straight lines from the outermost points of the outermost islands of the Philippine archipelago.

The Philippine Archipelagic Baselines Law was considered a "sell out" by the administration of former President Arroyo, who signed the bill into law in 2009. But the Law creates a domestic legal conflict in that its baselines allegedly contradict the 1987 Philippine Constitution by decreasing the size of the nation's territory. Oddly, today, the Philippine government is using this law as the basis for its claim on Scarborough by classifying the territory as a "regime of islands" over which it exercises sovereignty and jurisdiction.

Diplomatic Solution

Through President Aquino and Foreign Affairs Secretary Alberto del Rosario, the Philippines has constantly publicized its desire to resolve the dispute through peaceful settlements and mediation based on international law -- specifically through UNCLOS -- a position which Beijing has flatly rejected. Even after China's ratification of UNCLOS in 1996, questions remain about whether China can be bound at all by the compulsory processes and judgments made under the UNCLOS system. In a reservation made on Aug. 25, 2006, Beijing announced, in sum, that China does not accept any of the compulsory procedures with respect to all categories of territorial and maritime disputes under the Convention.

What is more, in a statement made by Hong Lei, spokesperson of the Chinese Foreign Ministry, the only way the Scarborough issue can be resolved is for the Philippines to surrender all sovereignty over it to China. In addition, China is imposing three requirements upon the Philippine government:

1. That Chinese vessels in the waters of the South China Sea near and at Panatag (Huangyan Islands) should not be disrupted from carrying out their duties;
2. That Chinese fishermen and their boats should not be interrupted in their activities; and
3. That Philippine government vessels must withdraw from the area.

While a diplomatic or legal solution remain distant objectives, both countries continue their build-up of navy and military hardware. According to unofficial Japanese reports, Japan may soon provide ten 1,000-ton patrol ships to the Philippines to boost its defense capacity. A second US Hamilton-class cutter is slated to be transferred to the Philippine government this Tuesday, following what appeared to be a credible defense posture in Scarborough in April by the first U.S.-built cutter, the BRP Gregorio del Pilar.

Discussions between Beijing and Manila have been cordial at best, and with both sides having dug in their heels on this subject, there is no resolution in sight. In our prior articles -- China's Pre-Imperial Overstretch and China and the Mosquitoes -- we argued that the South China Sea/West Philippine Sea will ultimately be a litmus test for whether China will cease to act as an unwieldy 800-pound gorilla that does as it pleases and will instead act as a responsible member of the international community, willing to engage other contestants in a rules-based regime in accordance with established norms of diplomacy and consistent with a nation of its importance and stature. With effective diplomacy and international courts seemingly out of the question on this issue, power politics are taking a front seat.

Both U.S. navy officials and Philippine authorities have maintained that the arrival of the USS North Carolina had nothing to do with Scarborough, and that it was in Subic Bay for a "courtesy visit" and "routine port call" after over five months at sea. Of course, no one really believes that, nor should they. With China maintaining an adversarial approach to its well overstretched claim to the South China Sea, the Philippines and other countries in the region have little choice but to strengthen alliances with the United States. Australia, Japan, South Korea, and Singapore have all done the same. The Philippines will in the end benefit from an enhanced military relationship with the U.S., as will other countries in the region.

The message to China is simple: The South China Sea is not China's bathtub to do as it pleases. China must decide whether it wishes to maintain an antagonistic approach to territorial claims outside its legal and territorial reach. A sensible approach would be to declare victory, and leave while it is ahead.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), and author of the new book Managing Country Risk (www.managingcountryrisk.com).

Edsel Tupaz is a private prosecutor of the House prosecution panel in the impeachment trial of Philippine Chief Justice Renato Corona. He is a graduate of Harvard Law School and Ateneo Law School, founder of Tupaz and Associates, and a professor of international and comparative law, based in Manila.

Ira Paulo Pozon graduated from De La Salle University and the Far Eastern University to earn his dual degree of MBA-Juris Doctor. His interests lie in international comparative law, foreign relations, and international business law.

The Fall of the Mighty and the Rise of Justice in the Philippines

2012-05-14T14:59:33-04:00

In bombshell testimony in a packed Senate hall today, the impeachment trial of Philippine Chief Justice Renato C. Corona took a dramatic turn. Citing a 21-page confidential report issued by the Anti-Money Laundering Council (AMLC), Ombudsman Conchita Carpio-Morales Morales -- an appointee of President Benigno Aquino III -- testified that the Chief Justice had 82 dollar-denominated bank accounts between 2003 and 2011 (coinciding with the reign of former President Gloria Arroyo) with total "inflow" of $28 million and "outflow," at $30 million. At least $12 million of this was described as "fresh deposits" that were untouched. Not bad pay for a public servant in a poor country.

The irony of the Ombudsman's revelation, however, lies in the fact that she appeared before the Senate because of a subpoena issued at the behest of the defense, and not the prosecution nor the Senate Impeachment Court itself. Corona was impeached by the House of Representatives on Dec. 12, 2011 on grounds pertaining to betrayal of public trust, violation of the Constitution, and graft and corruption, among other charges set forth under the articles of impeachment. In particular, Article 2 of the impeachment complaint alleges that Corona failed to disclose to the public his statement of assets, liabilities, and net worth as required under the Philippine Constitution and anti-graft laws.

With just weeks remaining before her nine-year tenure was to end, Arroyo bypassed seniority and appointed Corona, then a senior justice, to the office of Chief Justice. Corona was branded a "midnight appointee" of an outgoing president and was then accused of evident partiality unbecoming of a chief justice by favoring Arroyo in a number of high-profile Supreme Court cases. What triggered the defense panel to hail the Ombudsman before the impeachment court was her April letter to Corona requesting him to explain "at least" $10 million in assets -- an amount disproportionate to a supreme court justice of any developing or middle-income country, but particularly so in the Philippines, where per capita GDP is $4,100 per year and public sector employees are notoriously underpaid.

The Ombudsman cited in her letter certain "reports" and data which were both submitted to her by individual (private) complainants and gathered through her constitutionally re-posted power to request any government agency for assistance and information, and to examine, if necessary, pertinent records and documents. In particular, Morales testified that she had requested the AMLC to provide her with records of financial transactions pertaining to Corona's accounts which it deemed irregular. Tagged as "significant observations", the findings of the AMLC, as summarized by Morales, pointed to:

a. Multiple accounts created for similar purpose,

b. Multiple accounts spread over five bank branches in various branches/places,

c. Circuitous fund movements,

d. Deposits and withdrawals made on the same day, and

e. Significant movements on significant dates.

In a power point presentation lasting more than two hours -- and unfinished when the Senate adjourned today -- Morales waded through the AMLC report item-by-item. As with the defense, neither did the House prosecution panel know beforehand the content of the AMLC report, much less the fact that she had prepared a power point presentation to help explain 705 transactions, all of which -- save for two or three by a bank agent - had been executed under personal instructions and in the name of Corona over an eight-year period. Morales was also quick to point out that significant withdrawals were made during the 2004 and 2007 elections, as well as on the very day Corona was impeached and the days that followed. Lead public prosecutor Representative Niel Tupas Jr., speaking in the vernacular, himself did not imagine that Corona's undeclared and unexplained wealth amounted to this much, if one were to go by the Ombudsman's account. "It seems," said Tupas "that this is a professional money laundering pattern."

The Ombudsman's testimony was seen today as the most damaging blow yet to the defense and a big win for the prosecution. But we think it is also a big step forward in reforming the Philippines' antiquated bank secrecy laws. A useful gauge of the Philippines' comparative rankings and competitiveness comes from the Financial Secrecy Index (FSI), designed to help economists better understand global financial secrecy, corruption and illicit financial flows. The FSI compares 73 secrecy jurisdictions that have established laws and systems which provide legal and financial secrecy to others. In the 2011 FSI rankings, the Philippines ranked 33rd, sandwiched between Mauritius and Liechtenstein in terms of overall weight in importance and perceived secrecy. A primary difference, however, is that the Philippines is not generally considered to be a preferred legal tax haven.

It is reasonable to conclude then, given that the Philippines is known neither for its rule of law nor transparency, that many of the individuals and businesses who may select the Philippines do so simply to hide money from prying eyes. This cannot be to the country's advantage if it wishes to change some of the widely held perceptions about its level of corruption, lack of transparency, and integrity. If the Philippines were on a par with, say, Singapore or Switzerland in that regard, such an argument could not be legitimately made. But given the company that the Philippines keeps in all of the measures referenced herein, its current reputation as a destination for bank secrecy is more likely to be connoted with drug cartels and money launderers, than multinational corporations looking for a legitimate tax haven. On this basis, it would clearly be in the Philippines' interest to relax its bank secrecy laws in an effort to increase its perceived transparency and willingness to overtly join the global fight against money laundering and criminal syndicated financing.

In our prior articles on this subject ("Of Circuses And Sanity In The Philippines", "Of Politics and the Rule of Law in the Philippines"), we argued that President Aquino and his allies in Congress might be getting things right, but we remained skeptical, given the circus-like (if not surreal) atmosphere of Philippine politics. But the fact that former President Arroyo and her husband are under arrest and being tried on corruption charges -- accused of diverting state funds and electoral sabotage in 2004 and 2007 -- and given today's court proceedings against Mr. Corona, Aquino's anti-corruption drive is clearly yielding consistent and tangible positive outcomes.

President Aquino and his administration are certainly to be applauded for this substantial achievement, in a country which is not accustomed to toppling the high and mighty from their centuries-old privileged perches. That includes the president and his family, given the recent court ruling requiring them to distribute their 25,000 acre Hacienda Luisita estate to more than 6,000 people in Luzon. These actions say a great deal about the direction the Philippines is heading -- and it is all good. No wonder its sovereign ratings are being upgraded and investors are warming up to the idea of investing in the country after a long hiatus. The proof will be in the pudding however; for the justice system to truly be able to say that it has turned a corner, Mr. Corona and Ms. Arroyo need to be sent to prison, and stay there, rather than being able to buy their way out.

By Daniel Wagner and Edsel Tupaz

Edsel Tupaz is a private prosecutor of the House prosecution panel in the impeachment trial of Philippine Chief Justice Renato Corona. He is a graduate of Harvard Law School and Ateneo Law School, founder of Tupaz and Associates, and a professor of international and comparative law, based in Manila.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), and author of the new book Managing Country Risk (www.managingcountryrisk.com).

Follow Edsel Tupaz on Twitter: www.twitter.com/edseltupaz.

Of Saints and Hypocrites in the Philippines

2012-04-09T12:30:43-04:00

Philippine Chief Justice Renato Corona is the first high court justice to have been impeached by the Philippine House of Representatives on allegations of breach of the public trust, and is currently being tried by the Senate. Corona is the third person in high office to have been impeached by the House since 2000, and the second in 2011. Now effectively sitting as the 'Impeachment Court,' the Senate's 'trust ratings' are at an all-time high, and it is poised to accumulate political and constitutional capital at the expense of Corona's Supreme Court. A series of surveys last month show that a majority of the Filipino public will abide by the Senate's verdict.

The pursuit of Corona's impeachment by the Aquino administration is seen by former President Arroyo's supporters as a witch hunt against the President's political opponents. Aquino supporters view the trial as consistent with the clean government espoused by President Aquino. The average person on the street sees a palpable change in how the government is running the country, and the progress being made is not lost on the ratings agencies, which have given the Philippines five consecutive sovereign upgrades since Aquino came to power less than two years ago. International traders, investors and lenders seem to concur, with the country anticipating an investment grade rating in the near term - something that would have been inconceivable just two years ago.

As we argued in our December 2011 article -- Of Circuses and Sanity in the Philippines -- Aquino might actually be getting things right. Even though his Liberal Party cohorts in the House have been accused of mismanaging the prosecution's case (of the eight Articles of Impeachment, only three now stand; the rest have been withdrawn apparently to speed up the case), Corona's impeachment is a sign of tangible change. The impeachment of a sitting chief justice -- whether by saints or hypocrites -- should prove to be a game changer not just for constitutional politics, but for the entire justice system.

Consider the charges against Mr. Corona:

Partiality and subservience in cases involving the Arroyo administration from the time he was appointed as associate justice to the time of his 'midnight appointment' as chief justice.

Failure to disclose to the public his statement of assets, liabilities, and net worth as required under the constitution.

Failure to meet and observe the stringent standards under the constitution that provides that "[a] member of the judiciary must be a person of proven competence, integrity, probity, and independence" in allowing the Supreme Court to act on mere letters filed by a counsel which caused the issuance of flip-flopping decisions in final and executory cases; in creating excessive entanglement with former president Arroyo through her appointment of his wife to office; and in discussing with litigants regarding cases pending before the supreme court.

Blatantly disregarded the principle of separation of powers by issuing a status quo ante order against the House of Representatives in the case concerning the impeachment of then Ombudsman Merceditas Navarro-Gutierrez.

Wanton arbitrariness and partiality in consistently disregarding the principle of res judicata in the cases involving the 16 newly-created cities, and the promotion of Dinagat Island (sic) into a province.

Arrogating unto himself, and to a committee he created, the authority and jurisdiction to improperly investigate a justice of the Supreme Court for the purpose of exculpating him. Such authority and jurisdiction is properly reposed by the constitution in the House of Representatives via impeachment.

Partiality in granting a temporary restraining order (TRO) in favor of former president Arroyo and her husband in order to give them an opportunity to escape prosecution and to frustrate the ends of justice, and in distorting the supreme court decision on the effectiveness of the TRO in view of a clear failure to comply with the conditions of the Supreme Court's own TRO.

These are not trivial accusations; any one of them would be judged a serious crime in and of themselves. The fact that so many such allegations occur together is evidence of the gravity of the situation. That the Philippine government is pursuing the charges with vigor says a great deal about how far the judicial system has come in a very short time.

Senator "Joker" Arroyo (unrelated to former President Arroyo and now under detention on charges of electoral sabotage) raised concerns during the impeachment trial that no fewer than three investigations are being simultaneously conducted against Corona. Beyond the Senate halls, the Bureau of Internal Revenue initiated an investigation for tax fraud against the Corona family, citing undeclared property and income, including US property as well as undeclared sizable dollar deposits. According to the House prosecution, of the handful of concealed dollar deposits, one deposit in particular amounts to $700,000, which, under Philippine purchasing power indices, is considered extraordinary wealth.

As if in concert, the Anti-Money Laundering Council commenced its own investigation. While the Philippines still has among the strictest bank secrecy laws in the world, it has been argued -- perhaps rightly so -- that impeachment proceedings, tax fraud investigations, and the ongoing anti-money laundering inquiry qualify as exceptions to non-disclosure rules on depositor information and could thus be admissible in court -- including an impeachment court.

In conjunction with the impeachment trial of former Ombudsman Navarro-Gutierrez last year, Corona's impeachment trial is a clear sign of movement in the right direction for the Philippine justice system. There are of course many more public officials in all levels of office who could become the subject of future impeachment trials, and who breach the public trust on a daily basis, but the fact that two such high profile and significant officials have been taken to task for their blatant breaches of the public trust is a hopeful sign that the current government means to change the rules of the game -- permanently.

Edsel Tupaz is a private prosecutor of the House prosecution panel in the impeachment trial of Philippine Chief Justice Renato Corona. He is a graduate of Harvard Law School and Ateneo Law School, founder and managing partner of Tupaz and Associates, and a professor of international and comparative law, based in Manila. Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), Director of Global Strategy with the PRS Group, and author of the new book Managing Country Risk (www.managingcountryrisk.com)

Follow Edsel Tupaz on Twitter: www.twitter.com/edseltupaz.

Follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt.

India Should Look to Hong Kong's Example in Its Fight Against Corruption

2012-02-02T12:09:59-05:00

The legislative showdown currently underway in the Indian Parliament over the Lokpal bill -- intended to put some boundaries around India's legendary corruption -- is unfortunately not unusual. Political gridlock has gripped nearly every potential significant reform since Prime Minister Singh's reelection in 2009. It is a shame that the bill was introduced in an already politically charged atmosphere, where critical issues deserving immediate action lay at the mercy of politicians who treat law-making simply as a game of compromises for political and economic spoils. The outcome of the Lokpal bill will demonstrate whether Indian politicians are capable of reform that encroaches on their personal interests.

Some political analysts have laid part of the blame for the absence of more meaningful progress at Anna Hazare's refusal to make concessions, alleging an inflated ego and his political ambitions for tainting the anti-corruption movement. The propensity to finger point among all the parties is certainly not constructive, which makes one wonder how genuine any of their positions truly are. Soutik Biswas, a BBC correspondent from Delhi, recently said of this:

On the street, people are asking thorny questions to which the politicians, both ruling and in the opposition, have no answers. What was the problem in voting for a less than perfect bill and make a beginning in combating graft? True, laws alone don't reform societies, but they do allow building strong, independent institutions, which India sorely lacks.

Will the Lokpal bill simply add yet another bureaucratic layer to India's sclerotic institutional and criminal processes? Even though the passage of the bill could be India's best first step towards genuine reform, it is becoming more apparent that any end result will likely be a product of unprincipled compromises, without achieving any meaningful change to the status quo. If this is its fate, will its symbolism, at the very least, take on a redemptive force in Indian society today, so as to treat the measure at least as a step in the right direction? This would be depressing, given the stakes at hand, and the overwhelming support of the Indian people for the initiative. But given Indian parliamentary dynamics, the already watered-down bill will likely be subjected to even further amendment and political gridlock.

India's Parliament should at least ensure that the proposed ombudsman will wield concrete independent powers -- beyond nominal authority. In fashioning legislation and a structure aimed at eliminating widespread corruption, India should look to the experience of Hong Kong and its Independent Commission Against Corruption (ICAC). Many countries have turned to this model in their own anti-corruption efforts -- some more successfully than others. The ICAC was established in 1974 at a time when corruption was especially rife in Hong Kong. Like India today, corruption was considered to be a way of life. Law enforcement agencies were associated with criminal syndicates and all types of organized crime, including illegal gambling, smuggling, and drugs. When the ICAC was first established, people in Hong Kong considered its aims to be out of reach, if not impossible to meet. However, in just three years the ICAC cracked down on all major corruption syndicates in the government and prosecuted 247 government officials, including 143 police officers.

Mr. Tony Kwok Man-Wai, a former Deputy Commissioner and Head of Operations of the ICAC, points to the following successes of the commission since its inception:

Eradicating all overt types of corruption in the Government. Corruption now exists as a highly secretive crime, and often involves only satisfied parties.

Among the first in the world to effectively enforce private sector corruption.

Ensuring that Hong Kong had clean elections.

Changing the public's attitude to no longer tolerating corruption as a way of life, supporting the fight against corruption, and becoming not only willing to report corruption, but being prepared to identify themselves in the reports.

The ICAC adopted a three-pronged approach to fighting corruption: deterrence, prevention (both through law enforcement), and community education. Furthermore, Hong Kong has comprehensive legislation in place to deal with corruption, and the ICAC has existed as a constitutionally sanctioned body since Hong Kong was formally ceded by Britain to China. The agency is empowered to investigate all crimes connected with corruption in both the public and private sectors. The ICAC devotes a significant amount of resources to its Operations Department, since "any successful fight against corruption must start with effective enforcement on major targets, so as to demonstrate to the public the government's determination to fight corruption at all costs, as well as to demonstrate the effectiveness of the anti-corruption agencies."

India's legislators should draw valuable lessons from the ICAC's success in institutionalizing the fight against corruption. Hazare's Lokpal bill envisioned such an agency, but given the parliament's continuing dilution of the potential powers of the ombudsman, this seems improbable -- at least at the present time. While there is no doubt that India faces its own unique challenges, Hong Kong's experience showcases the ingredients for meaningful change: sufficient political will, adequate resources, a clear platform, an efficient strategy, and a strong and independent anti-corruption agency. It would be nice to imagine that India can achieve what Hong Kong did almost 40 years ago -- but given the reality of India's political process and the self-interest of its politicians, the parliament seems intent on proceeding down a path of self-destruction.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), Director of Global Strategy with the PRS Group, and author of the forthcoming book Managing Country Risk (March 2012). Edsel Tupaz is founder and managing partner of Tupaz and Associates, and a professor of international and comparative law, based in Manila. The authors thank Joan Martinez for her comments.

Follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt

Follow Edsel Tupaz on Twitter: www.twitter.com/edseltupaz

Of Politics and the Rule of Law in the Philippines

2012-01-18T13:25:56-05:00

The impeachment of incumbent Philippine Chief Justice Renato Corona has commenced in the Philippine Senate, with the customary fanfare one would expect in Manila. Consistent with the circus-like atmosphere that has prevailed throughout the course of former President Arroyo's prosecution for alleged corruption and electoral manipulation while she was president, pro- and anti-Arroyo forces were out in force. The proceedings may ultimately become a commentary on whether the Rule of Law is taking substantial root in the Philippine judicial and political process, or whether pretensions to reform remain nothing more than political machinations dressed up in the emperor's new clothes.

Depending on one's viewpoint, Corona's impeachment may prove to be the crowning achievement of the so-called 'Davide Watch' -- the eponymous description given to the vision of former Chief Justice of the Philippines Hilario G. Davide Jr. (1998 to 2005) who, during his stewardship, envisioned and promoted "a judiciary that was independent, effective and efficient, worthy of public trust and confidence." On the other hand, a conviction could in fact point to Davide's failure to inspire fundamental and normative change in judicial culture. Much will depend on the aftertaste left by the process of the impeachment itself.

The impeachment of the head of the judiciary of any state can but be seen as the ultimate homage to the Rule of Law, and it is of particular resonance in the Philippines, where the establishment of the Rule of Law received primacy as part of Davide's agenda through his Action Program for Judicial Reform (AJPR). With its six-pillared reform agenda, the AJPR sought to establish and ensure judicial autonomy and independence from political interference, and the speedy and impartial administration of justice. The World Bank has endorsed it as 'among the most comprehensive and successful judicial and legal reform programs today.'

If recent media reports are anything to go by, however, the World Bank may be changing its tune. Some sectors of the media seem intent on laying the blame for this debacle squarely at Corona's feet. On January 15, 2011, a report in the Philippine Daily Inquirer pronounced that 'the Supreme Court, under the watch of Chief Justice Renato Corona, has been weighed and found wanting.' This pronouncement is based ostensibly on a World Bank finding of questionable procurements and disbursements in the high court in connection with the Judicial Reform Support Project (JRSP), the World Bank's adaptation of the name of the APJR, designed to restore efficiency in the dispensation of justice in the country.

Amidst accusations by Corona's attorneys against the media and others of 'black propaganda.' one has reason to question Sunday's pronouncements and the media's agenda, if the Philippine Daily Inquirer is an example to go by. Could this be symptomatic of 'extra-judicial' attempts to prejudice the hearing of the complaint against Corona?

It has been reported that an audit was conducted by a World Bank task team in October and November 2011, which found that 'since Corona assumed his post in mid-2010, progress in reforming the judiciary "has been rated unsatisfactory," with "implementation delays and additional work required for smooth project closing." Other World Bank complaints include the fact that the fiduciary environment pertaining to JRSP implementation had so deteriorated that the task team now rates the JRSP as 'high risk' and 'unsatisfactory' on project management, project procurement and financial management dimensions -- and that project financial statements can no longer be relied upon. The audit is said to have also uncovered "inaccurate/incomplete information" on the project's financial management report and "diminished existing internal check-and-balance mechanisms."

Corona is specifically fingered for his appointment of one individual as court administrator, head of the Public Information Office, and chair of the Bids and Awards Committee leading to a diminished internal auditing mechanism. No other specific allegation is made against him in the media report, perhaps with good reason, since delays in the project clearly started before Corona took office. While the buck stops with the man in charge, any insinuation in the media report that Corona is to be held responsible solely or mainly for the breaches in the program may be premature, at best, and possible propaganda. What of the Program Management Office and other players in the program? What of the role of individual justices who claimed for and/or received ineligible disbursements? Surely, all knowing and willing participants in the alleged abuse of the program are individually and equally culpable, irrespective of administrative weaknesses.

When a former president and a Chief Justice of the Supreme Court can be hauled into court for alleged abuses, the Rule of Law is surely alive. The question is, is it well? Will the prosecution of both Arroyo and Corona result in convictions and meaningful sentences? One must guard against overzealousness in expecting too much from a process that is politically charged. The Rule of Law may be of little significance where an impeachment, which many argue ought to be akin to a judicial process, takes place in an otherwise political tribunal. The legislative branch is not well rehearsed in processes meant to guarantee fairness in a trial, and with political interests which may be averse to such a process.

Where political motives and loyalties inherent in a legislative chamber creep into the process, rightly or wrongly, the impeachment process may prove to be a juridical farce and political circus. Any result, conviction or acquittal, will therefore be suspect. The integrity of the process through which Corona is impeached will be a litmus test as to Davide's overall achievement in advancing the constitutional learning of the Rule of Law. Moreover, it will be the ultimate test as to whether the Philippine legislative and political process deserves the right to say it has overcome its tainted and regrettable past.

*Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), Director of Global Strategy with the PRS Group, and author of the forthcoming book, Managing Country Risk (March 2012). Edsel Tupaz is founder and managing partner of Tupaz and Associates, and a professor of international and comparative law, based in Manila. Jermaine C. Spence is an attorney-at-law and law professor who designed and taught the Offshore Finance Law course at Fordham Law School.

Follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt

Follow Edsel Tupaz on Twitter: www.twitter.com/edseltupaz

Japan's Emerging Activist Diplomacy With North Korea

2012-01-11T14:51:29-05:00

Mindful of the stakes involved for Japan, the Japanese government was quick to enhance its attempt at diplomacy with North Korea immediately following news of the death of Kim Jong-Il last month. On Christmas Day, Japanese Prime Minister Noda paid an official visit to China to meet with Prime Minister Wen in an attempt to improve bilateral ties while at the same time discussing security-related concerns arising from the murky transition to power of Kim Jong-un. The stakes for Japan, which has no diplomatic relations with North Korea, and for which recent tests of long-term missiles by North Korea have flown over Japanese territory, are especially high.

Relations between the two countries have been unstable since World War II. Following the announcement of Kim's death, the Japanese government immediately ordered the country's self-defense forces and coast guard to enhance surveillance of the waters dividing Japan from the Korean peninsula -- a defensive shift in Japan's bilateral posture. During Noda's meetings in Beijing, Chinese President Hu and Noda formally agreed to coordinate and strengthen ties to ensure regional security during North Korea's power transition. Had it not been for the holidays, the Japan/China joint declaration of "common interests" over "regional security" would have drawn more attention from western powers, especially given that it was a Japanese-led initiative.

However, Japan's swift and bold steps on the North Korean issue may yet prove to be unwise in the near term. Considering the relative inexperience of the Noda administration in foreign policy, as well as Japan's ongoing domestic concerns, choosing to deal with North Korea by directly engaging its most important ally may become problematic. Given North Korea's penchant for acting as a petulant child, Kim Jong-un (and his minders) may lash out at Japan for attempting (from their perspective) to sway China away from North Korea and toward Japan. For its part, China is unlikely to change its basic diplomatic posture in the region -- certainly not in the near term. The last thing it presumably wants is for the 'new' North Korean regime to wonder whether it can continue to count on China's support.

It is worth noting that days before Japan's initiative with China, Japanese Foreign Minister Gemba met with U.S. Secretary of State Clinton and announced a predictable united front, citing a "common interest" in encouraging a peaceful transition in the rogue state. It is commonplace for Japan to secure Washington's consent in many aspects of its regional foreign policy -- its engagement with Beijing was no exception. But Japan's new orientation toward bilateralism signals an increasingly activist foreign policy, particularly in the case of North Korea, where it must believe it has little to lose by attempting to influence the resumption and outcome of Six Party talks.

By taking the initiative in setting up an apparent united front with Washington and Beijing, in the longer term, Japan might well succeed in jumpstarting regional dialogue and perhaps establish itself as a stabilizing influence on the Korean Peninsula, if only for its own self-interest. Of course, that remains to be seen. Although Japan is showing signs of wanting to cast aside its typical risk averse approach to foreign affairs, it is constrained by Article 9 of its constitution, which prevents Japan from any projection of military power beyond self-defense. Any deployment of its security forces can therefore only be made within a few nautical miles of its territorial waters.

For its part, China is likely to prefer the status quo, and in all likelihood, North Korea will prefer no significant change in regional political dynamics in the short-term. China has shown no willingness to share information about its diplomatic relations with North Korea -- an idea Noda floated and Beijing flatly rejected. Japan and the U.S. may therefore need to consider alternatives if they are determined to restart Six Party talks.

The resumption of talks will ultimately depend on whether the North feels secure enough to project its perception of influence, stability and strength over South Korea, and the rest of the region. If the U.S., South Korea, Japan, and China send encouraging signals to North Korea by continuing food aid or making welcome overtures, the young Mr. Kim may find it hard to refuse the resumption of talks in an effort to secure even more concessions from the other parties. This would require a fundamental shift in the position of South Korea, which has drawn a firm line against resumption of the Sunshine Policy for the time being, and as long as Mr. Lee is in power in the south, overcast skies are likely between the two Koreas.

Although security concerns against North Korea are certainly well founded, the possibility of near term military conflict in the region appears to be slight, given that all sides will be on their best behavior in an effort to avoid any incidents that may provoke a nationalistic response from Mr. Kim and his minders. A period of calm should continue over the next few months while the government and military rally the country behind the new Supreme Leader.

In all likelihood, in the absence of any meaningful options, and without the support of China to pursue an alternative path, Japan will simply choose to live with its dangerous neighbor for the time being, as it has in the past. While the Noda administration has much to gain by maintaining its newly activist foreign policy, the truth is that the U.S. and regional powers are unaccustomed to thinking of Japan as an assertive player in foreign affairs, and Japan can in reality do little more than maintain an engaged posture. However, it is possible that such an approach may spur other powers in the region to reconsider their own entrenched stance toward North Korea, in which case, Japan's approach will have served a useful purpose.

Daniel Wagner is CEO of Country Risk Solutions, a cross-border risk management consultancy based in Connecticut (USA), Director of Global Strategy with the PRS Group, and author of the forthcoming book, Managing Country Risk (March 2012). Edsel Tupaz is founder and managing partner of Tupaz and Associates, and a professor of international and comparative law, based in Manila. The authors thank Joan Martinez and Christina Shi for their comments.

Follow Daniel Wagner on Twitter: www.twitter.com/countryriskmgmt
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