The Law Firm of Piacentile, Stefanowski & Malherbe LLP

Corruption in Central America

According to a recent report, Central America is one of the most corrupt regions in the world. Large corporations and government officials take advantage of the region's weak rule of law to line their own pockets, while ordinary citizens are left scraping by. But there is hope. Organizations and law firms like ours are working hard to fight corruption and bring those responsible to justice. If you believe you have information about the corrupt activity, we urge you to come forward and help us expose it. Together, we can make a difference.

From constant small bribes to huge public fraud, corruption runs deep in Central America. The Corruption Perception Index ("CPI") is an index that ranks countries “by the perceived levels of public sector corruption, as determined by expert assessments and opinion surveys.” It published the 2021 rankings of most corrupt Central American countries. This list is based on a scale. 100 means the country is very clean. 0 means the country is highly corrupt. The ranking takes into consideration their respective situations between May 2020 and May 2021.

The top 6 most corrupt Central American countries per the 2021 index were:

  • Nicaragua

  • Honduras

  • Guatemala

  • El Salvador

  • Panama

  • Costa Rica

The region is plagued by corruption and is often tied to the organized crime syndicates behind the drug trade. In these Central American economies, corruption costs about $13 billion a year. This often combined with widespread tax evasion, corruption limits funding for development. Countries such as El Salvador, Guatemala, and Honduras have some of the lowest spending on social service in the hemisphere. Guatemala for example, invests just over 8 percent of its gross document product in health care, education, social security, and social assistance.

White-collar crimes are only part of the equation, with low-level corruption taking an immediate toll on citizens. In a World Banks survey done in 2020, up-to 20 percent of Guatemalans and Honduras admitted to paying bribes in exchange for social services. Extortion costs Hondurans roughly $200 million per year. Consequently, many desperate Central Americans fleeing corruption, weak institutions, and indiscriminate violence make their way across Mexico to seek asylum at the United States’ southern border. Such immigrations fuel illicit economies in Central America and Mexico, as human traffickers, cartels, and public officials alike prey on vulnerable and desperate immigrants.

The economic and social toll of corruption in these countries imposes a massive cost not only on them but also on their citizens. It also undermines the legitimacy and credibility of the state, which causes serious problems in governance. It corrodes public institutions by subverting laws and regulations. As a result, corruption obstructs economic growth and development. It has been estimated that the ratio of investment to GDP is 16 percent lower in countries with high and unpredictable levels of corruption than those with low levels of corruption.

Many of Central America’s anti-corruption commissions were also disbanded during the past years. I.e., the widely popular International Commission Against Impunity in Guatemala ("CICIG") which was empowered to launch its investigations, exposed the extent of criminal penetration into Guatemala’s political establishment. It was disbanded in September 2019 by the Guatemalan President Jimmy Morales. He himself was even under investigation for corruption. Although the CICIG was never intended to be permanent, many of the institutional reforms it championed are now at risk of being rolled back. By contrast, in Honduras, the most significant reforms proposed by the commission, including the establishment of anticorruption courts, failed to pass in Congress.

Whistleblowing is one of the most effective ways to detect and prevent corruption and other malpractices. Whistleblowers’ disclosures have exposed wrongdoing and fraud, helping save billions of public monies, avoid disasters in healthcare, the environment, etc. It is known that whistleblowers play a very important role in safeguarding public goods. For example, whistleblowers have uncovered wide scale tax avoidance practices like the Panama Papers, and money laundering scandals like Danske Bank. However, many more cases could have been prevented had more people forward to expose wrongdoings in their organizations.

In the previously mentioned example, the Panama Papers, roughly 11.5 million internal documents were leaked from Panamanian law firm Mossack Fonseca. These documents revealed hundreds of high-profile clients with 214,000 shell companies stashing funds in 21 different jurisdictions, including in Central American countries. This discovery was thanks to a reporter from a German magazine Süddeutsche Zeitung, who received an anonymous message from a whistleblower. As a result of this, as of April 2019, there have been hundreds of investigations, which resulted in an estimated collective $1.2 billion being recovered through fines and back taxes.

Another internationally known case that happened in one of the top 3 most corrupt countries in central America was “La Línea.” Working with Guatemala’s tax authority, a network of high-profile public officials and businesspeople artificially lowered import taxes in exchange for a fee. Customs agents, importers, and officials used a special phone line, which they nicknamed “La Linea”, to settle commissions in exchange for lower taxes. “La Linea” was one of the cases made public by the partnership between CICIG and Guatemala’s attorney general’s office in 2015. The investigation intercepted thousands of calls and emails among customers, officers, and importers. Bribes were discussed in exchange for fraudulent invoices. The losses related to uncollected taxes were projected at 1.8% of Guatemala’s entire GDP and investigations implicated then President Otto Perez and Vice President Roxana Baldetti.

To ensure that whistleblowers do step forward with evidence and uncover wrongdoings, a robust legal framework of protections and incentives must be established in Central American countries. Whistleblower retaliation protections and incentives should be equally as strong as applied to both the public and private sectors for reporting suspected acts of corruption. This is integral to combatting corruption, promoting public sector integrity and accountability, and to creating a clean business environment.

The US whistleblower protection laws are among the strongest in the world, but many don’t know that these laws can also be applied transnationally, allowing whistleblowers around the world, U.S. citizens or not, to confidentially report fraud to U.S. law enforcement authorities. A well-designed legal framework that protects and incentivizes whistleblowers can play a key role in deterring corruption and other malpractices in Central American countries. We hope that this article provided some useful information for those interested in fighting corruption and bringing justice to Central American countries. If you believe you have evidence of corruption or wrongdoing in your country, please don’t hesitate to contact our whistleblower attorneys and investigators at Whistleblowers International.