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Albania: Selected Issues

Author(s):
International Monetary Fund. European Dept.
Published Date:
December 2017
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Judicial Reform and Anti-Corruption Efforts in Albania1

Implementing judicial reform and strengthening the fight against corruption are key prerequisites for advancing Albania’s EU accession process. This note takes a comparative look at Albania’s recent performance, using multiple third-party indicators and reports by external observers to show that the country continues to lag behind regional peers. It shows how corruption and inefficiency within judicial institutions stunt investment, entrepreneurship, and growth in Albania. The note discusses recent efforts to reform Albania’s judiciary and strengthen its anti-corruption framework, including the comprehensive judiciary reform launched by the July 2016 constitutional amendments. Finally, it discusses next steps in the reform process.

A. Corruption and the Rule of Law: Albania in International Perspective

1. This section takes a comparative look at Albania’s recent performance. It uses third-party indicators and compares Albania to other countries in the Western Balkans, as well as Central, Eastern, and Southeastern Europe (CESEE) and the European Union (EU). This section also surveys assessments of the status quo by external experts.

2. The charts below show that Albania falls short of the averages for the EU, CESEE, and the Western Balkans in areas such as corruption perceptions, control of corruption, and bribery incidence. While each of these measures has its own shortcomings, the message is consistent across the various indicators. It is important to emphasize that most of these indices are perceptions-based. Thus, they don’t measure actual corruption or its impact, and they also change very slowly over time. However, IMF (2017b) found that perceptions-based measures are highly correlated with other (institutions-based) measures of corruption, with worldwide correlation coefficients of around 0.70-0.75. Still, these indicators should be interpreted with caution, given the standardized assumptions, the limited number of respondents and geographical coverage, and the underlying uncertainty around point estimates.

ICRG Corruption Index, March 2017

(Lower values indicate higher corruption)

Source: PRS Group, International Country Risk Guide.

Corruption Perception Index, 2016

(Lower values indicate higher corruption)

Source: Transparency International

Control of Corruption Index, 2015

(Lower values indicate higher corruption)

Source: Worldwide Governance Indicators.

Bribery Incidence

(Percentage of firms experiencing bribe requests)

Source: World Bank, Enterprise Surveys.

3. Reports by external experts confirm the findings from third-party indicators. The latest review of Albania’s implementation of the UN Convention Against Corruption (UNCAC) found deficiencies pertaining to the criminalization of all acts of corruption. It also found weak spots in Albania’s legal framework regulating international cooperation under UNCAC.

4. While there are problems with Albania’s legal framework on anti-corruption, practice lags even further behind. In its latest annual report on Albania (from November 2016), the European Commission found that anti-corruption institutions have limited independence and effectiveness due to political pressures and weak capacity:

  • While there has been a positive trend in investigations, prosecutions, and convictions of corrupt low- or mid-level officials, this has not been the case for high-level officials.
  • Cooperation and exchange of information among institutions has been poor. In particular, although there has been some recent progress, the police, prosecutors, and the High Inspectorate for Declaration and Audit of Assets and Conflicts of Interest (HIDAACI) all lack access to several registers and databases, which hampers their capacity to do their jobs.
  • The number of investigations resulting in asset confiscations remains very low and penalties for corruption-related offences are overly lenient.
  • Very few cases of conflicts of interest have been formally investigated, due to legislative gaps and lack of capacity for proactive checks, even though public opinion and media reports suggest that such conflicts are a pervasive feature of Albanian public life.
  • There is no independent system to audit party financing and electoral campaign spending.There is also no code of ethics for members of parliament and their asset declarations are not published automatically.
  • Little progress has been made on setting up an integrated electronic anti-corruption case management system.
  • However, credit should be given to the authorities for the passage and implementation of the Decriminalization Law in December 2015 and the Whistleblower Protection Law in June 2016.

5. Long time series on corruption-related indicators are scarce, but they confirm the weakness in Albania’s anti-corruption framework. While there has been some improvement over the past decade, Albania is perceived as lagging behind peers.

ICRG Corruption Index, 1999-2017

(Lower values indicate higher corruption)

Source: PRS Group, International Country Risk Guide.

Control of Corruption Index, 1996-2015

(Lower values indicate higher corruption)

Source: Worldwide Governance Indicators.

6. Despite the small improvement in corruption perceptions registered by third-party indicators, corruption remains the top concern for Albanian businesses, as illustrated by the comparison below between 2013 and 2016.

Top Ten Problematic Factors for Business in 2013

(Weighted scores)

Source: World Economic Forum, Global Competitiveness Report, 2013-2014.

Top Ten Problematic Factors for Business in 2016

(Weighted scores)

Source: World Economic Forum, Global Competitiveness Report, 2016-2017.

7. The charts below provide some regional granularity on the incidence of corruption in Albania. According to the World Bank’s Enterprise Surveys, the incidence and depth of bribery is perceived to be lower in smaller, inland, less prosperous cities like Elbasan and Korçë than in the more populous and wealthy cities on or near the Adriatic coast like Tirana, Durrës, Vlorë, Shkodër, and Fier. These findings are consistent with those reported in UNODC (2011).

Bribery Incidence, 2013

(Percentage of firms experiencing bribe requests)

Source: World Bank, Enterprise Surveys.

Bribery Depth, 2013

(Percentage of public transactions with bribe requests)

Source: World Bank, Enterprise Surveys.

8. For many years, inefficiency and corruption in the judiciary have been a key feature of Albania’s systemic corruption problem. The cross-country comparisons below show that Albania is perceived as lagging behind the average for the EU, CESEE, and the Western Balkans in areas such as the rule of law, protection of property rights, court impartiality, judicial independence, and efficiency of the legal framework in settling disputes and enforcing contracts. And while Albania has registered continuous improvements in the rule of law and protection of property rights, it has deteriorated recently on the other measures.

Rule of Law

(Ranges from −2.5 to +2.5)

Source: Worldwide Governance Indicators.

Property Rights

(Ranges from 1 to 7)

Source: World Economic Forum, Global Competitiveness Report, 2016-17.

Impartial Courts

(Ranges from 0 to 10)

Source: World Economic Forum, Global Competitiveness Report.

Judicial Independence

(Ranges from 1 to 7)

Source: World Economic Forum, Global Competitiveness Report, 2016-17.

Efficiency of Legal Framework in Settling Disputes

(Ranges from 1 to 7)

Source: World Economic Forum, Global Competitiveness Report, 2016-17.

Enforcing Contracts, 2016

(Distance to frontier, 1–100)

Source: World Bank, Doing Business 2017.

9. In its 2016 report on Albania, the European Commission found that:

  • The high politicization of appointments to Albania’s High Court, the Constitutional Court, and the position of General Prosecutor directly contributes to the lack of judicial independence, in addition to direct political interference in investigations and court cases.
  • The High Council of Justice (HCJ) and the General Prosecutor enjoy too much discretion in managing the careers of judges and prosecutors.
  • The unified case management system is only partly functional. As a result, cases continue to be allocated non-transparently, through drawing lots, and without ensuring balanced workloads in the system.
  • Recusals and exclusions of judges are not registered systematically.
  • The monitoring of integrity and ethical standards is insufficient. For example, existing evaluation criteria do not emphasize sufficiently professionalism and integrity, and compliance with the code of conduct is not part of annual evaluations.
  • Disciplinary measures are rarely taken over failures to declare assets with HIDAACI.
  • Salaries, as well as working and security conditions for judges and prosecutors are inadequate. Due to insufficient resources, court hearings often take place in judges’ offices, undermining transparency and creating a conducive environment for corruption.
  • The overall inefficiency of the judicial system creates incentives for judicial corruption. The system for notifying parties and witnesses is inadequate. As a result, about half of court hearings get canceled. Case backlogs are high and clearance rates are low, particularly in the administrative and appeals courts, as well as the High Court. Court proceedings are long, especially at the appeal stage, due to lack of capacity and unclear legal provisions. Improving court efficiency is hampered by the lack of statistical data.
  • No effective online research tools are available to jurists. While a justice system archive was established in 2016, it is not yet operational. A case law database exists, but the publication of decisions is inconsistent.
  • Enforcement of judicial decisions is poor, including due to misaligned incentives for private bailiffs.

B. The Economic Costs of (Judicial) Corruption in Albania

10. This section shows that corruption and inefficiency in Albania’s judiciary stunt investment, entrepreneurship, and growth. According to the cross-country scatterplots below, there is a strong positive relationship between average income (as measured by the natural log of PPP- adjusted GDP per capita) and institutional quality (as measured by various third-party indicators). In the scatterplots below, Albania consistently lies below the regression line. In other words, Albania’s institutions appear to lag behind those of other countries at similar levels of economic development, sometimes by fairly substantial margins.

Cross-Country Association Between Corruption Perceptions and GDP per Capita, 2016

Sources: Transparency International; and WEO database.

Cross-Country Association Between Rule of Law and GDP per Capita, 2015

Sources: Worldwide Governance Indicators; and WEO database.

Cross-Country Association Between Property Rights and GDP per Capita, 2015

Sources: WEF, Global Competitiveness Report, 2016–17; and WEO database.

Cross-Country Association Between Impartial Courts and GDP per Capita, 2014

Sources: WEF, Global Competitiveness Report; and WEO database.

Cross-Country Association Between Judicial Independence and GDP per Capita, 2015

Sources: WEF, Global Competitiveness Report, 2016–17; and WEO database.

Cross-Country Association Between Efficiency of Legal Framework in Setting Disputes and GDP per Capita, 2015

Surces: WEF, Global Competitiveness Report, 2016–17; and WEO database.

Cross-Country Association Between Enforcing Contracts and GDP per Capita, 2016

Sources: World Bank, Doing Business 2017; and WEO database.

11. Since scatterplots like these cannot provide causal identification, various studies have sought to address this issue. It is plausible that good institutions make countries rich, but also that richer countries have better institutions (Barro, 2015). However, multiple studies have identified the causal link from institutions to growth (Mauro, 1995; Hall and Jones, 1999; Acemoglu, Johnson, and Robinson, 2001; and Banerjee and Iyer, 2005). To overcome the endogeneity of institutions, these studies focus on variations in institutional quality that were driven by exogenous factors such as culture or historical events. For example, Acemoglu, Johnson, and Robinson (2001) used European mortality rates during colonization to instrument for current institutions, and estimated large effects of institutions on per capita income. Similarly, within-country variations in property rights protection due to exogenous historical events have been found to correlate with persistent income differences in Peru (Dell, 2010).

12. IMF (2016b) uses a stochastic frontier model to quantify the economic costs of inadequate judicial institutions. It estimates the impact of institutional factors on the TFP gap between 20 CESEE countries, including Albania, and the average for EU-15. The study finds that judicial independence, impartial courts, and protection of property rights are all statistically significant determinants of the TFP gap. The figure below (which comes from IMF, 2016b) illustrates the country-specific potential efficiency gains from improving judicial independence and court impartiality to the average EU-15 level. The potential gains for Albania are substantial and among the largest in the Western Balkans.

Potential Efficiency Gains from Improving Selected Structural Characteristics of CESEE Economies for the Average EU 15 Level (Percent)

Source: IMF (2016b)

13. A 2016 IMF Staff Discussion Note provides an extensive summary of the channels through which systemic corruption imposes economic costs on a country:

  • Most importantly, it hurts economic efficiency, macroeconomic and financial stability, public and private investment, human capital accumulation, and total factor productivity. On the impact of corruption on GDP growth, see the sources cited in footnotes 7, 12, and 13 in IMF (2016a).
  • Corruption also reduces tax compliance and increases tax evasion. The resulting revenue shortfalls make it more difficult to strengthen institutions, resulting in a vicious circle.
  • It undermines trust in government and discourages entrepreneurs from starting new businesses.
  • A 2013 study by PwC found that corruption raised the cost of public projects by 13% on average in eight European countries, by distorting the selection of public investment projects through bribery, rent seeking, and cronyism.
  • Corruption lowers firm productivity by diverting scarce resources to rent-seeking and erecting barriers to entry by raising transaction costs.
  • It limits the accumulation of human capital by promoting emigration and through the inadequate provision of healthcare and education services (as manifested through higher child mortality rates and teacher absenteeism).
  • Rent seeking and cronyism generate the type of inequality in incomes and wealth which is both unfair and harmful to growth.

14. In addition, there is a substantial body of literature on the economic cost of inefficient or corrupt courts.2 That literature shows the negative impact of judicial inefficiency and corruption on firm size, labor market outcomes, incentives to invest, access to credit, and the depth of financial markets. These findings suggest that corruption and inefficiency in Albania’s courts are at the root of some key characteristics of the Albanian economy, such as the disproportionate number of small companies and shallow financial markets.

C. An Agenda for Reforming the Judiciary and Strengthening Albania’s Anti-Corruption Framework

15. The Albanian authorities have recently taken some bold and comprehensive steps to address the issue of corruption and inefficiency in the judiciary and the related elite impunity. After 18 months of contentious negotiations, in July 2016 Albania’s parliament passed unanimously a package of constitutional amendments which fundamentally restructures the country’s judiciary. Seven priority laws were passed soon thereafter, and 40 more laws and bylaws are in the process of being amended or overhauled, including the Code of Criminal Procedure. The entire reform package was developed in intensive cooperation with the European Commission for Democracy through Law (informally known as “the Venice Commission”), an advisory body of the Council of Europe composed of independent experts in the field of constitutional law.

16. Perhaps the single most important component of the reform is the so-called “vetting law” passed by parliament in 2016. It provides for a re-evaluation of all judges every three years, with a focus on judges’ assets, backgrounds, competence, and integrity. An International Monitoring Operation, made up of senior judges and prosecutors from the EU and the US has been established to monitor the formation and functioning of the vetting bodies for the Albanian judiciary. The three vetting bodies were established in May 2017, at the conclusion of the political crisis which opened the way for the June 2017 general elections. The Independent Qualification Commission will operate for five years, while the Ad-Hoc Chamber of Appeals will operate for nine years. The two public commissioners will represent the public in the re-evaluation process. The actual vetting of judges and prosecutors is expected to start by end-2017.

17. Another priority law (the so-called “SPAK law”) established specialized institutions to fight corruption and organized crime. The law establishes a National Bureau of Investigations which is modeled after the FBI in the US, with safeguards aimed at ensuring institutional independence. It also provides for special prosecutors and judges, which will be subject to asset reviews and background checks both before and after their appointment. There should be institutional safeguards in place to ensure that the Special Prosecutions Office will be independent from the General Prosecutor. Finally, criminal cases against high state official will be transferred from the High Court to the new bodies.

18. The reform package aims to overhaul the governing bodies of Albania’s judiciary. The High Council of Justice is being replaced by the High Judicial Council (HJC), a self-governing body which will be in charge of the recruitment, appointment, evaluation, promotion, transfer, dismissal, and imposition of disciplinary sanctions for all judges. The HJC will enjoy more independence both because Albania’s president will no longer be a member and because five of its eleven members will come from the general public and will be elected by parliament with a 60 percent supermajority (the other six will be judges nominated by their peers). The HJC will be chaired by one of the members of the public. In addition, the minister of justice will no longer be a regular member of the HJC, but will attend some of its meetings, as needed.

19. Similarly, a new High Prosecutorial Council (HPC) will manage the careers of prosecutors. It will be independent from the Office of the General Prosecutor and will consists of six prosecutors nominated by their peers and five lay members elected by a parliamentary supermajority. The HPC will nominate the General Prosecutor and parliament will confirm the nomination by a 60 percent majority.

20. A Justice Appointments Council will vet the competence and integrity of nominees to the Constitutional Court and the position of High Justice Inspector. A High Justice Inspectorate will verify complaints against judges and prosecutors, and will replace the minister of justice in initiating disciplinary proceedings. A new territorial distribution of courts and judges should reduce backlogs. Finally, the backlog of cases at the High Court will be reduced by narrowing its scope. It will become a cassation court, with members nominated by the HJC and appointed by the president, whose job will be to provide legal interpretation and unify case law rulings.

21. Albania has taken steps to strengthen its anti-money laundering (AML) framework, which could also support anti-corruption efforts. Because the proceeds of corruption are often laundered in order to avoid detection or confiscation, an effective AML framework can contribute to both prosecuting and deterring corruption. Following its 2011 AML/CFT assessment by the IMF, Albania has taken steps to address strategic deficiencies. In line with the 2012 Recommendations by the Financial Action Task Force (FATF), work has been ongoing to strengthen banks’ due diligence measures on financial transactions conducted by “politically exposed persons,” to ensure the availability and adequacy of information on beneficial owners of corporate vehicles, and to improve the credibility of specialized institutions such as the financial intelligence unit.

D. Next Steps in the Reform Process

22. Implementation of the 2016 judicial reform is in its early stages and should be pursued with speed and determination, as it remains a key prerequisite for EU accession. Albania’s Ministry of Justice has formulated a Cross-Sector Justice Strategy which contains a comprehensive package of measures to improve the judiciary’s efficiency, including:

  • supporting the introduction of an EU-funded electronic system for operational case management;
  • requiring all courts to use the electronic system to allocate judges and keep registers of cases from which judges have been recused;
  • strengthening online access to legislation and judicial decisions in macro-critical areas (such as insolvency and foreclosure);
  • amending the Codes of Civil and Criminal Procedure to align them with the judicial reform and increase court efficiency;
  • reducing case backlogs in administrative and appeal courts, as well as at the High Court; and
  • reforming court fees.

23. While the implementation of judicial reform will undoubtedly require increased budget allocations, it is important to heed the findings in OECD (2013). That study found that higher judicial efficiency is driven less by the total resource envelope and more by factors such as the structure of spending and the structure and governance of courts. The study flagged factors such as computerization, active case management, the regular production of statistics, free negotiation of lawyer’s fees, and granting broader managerial responsibilities to chief judges as particularly beneficial for judicial efficiency.

24. A number of measures could be prioritized to support broader anti-corruption efforts, including:

  • operationalizing the National Bureau of Investigations (the new specialized national anti-corruption structure);
  • strengthening the system for high-level public officials to declare their assets, with a focus on comprehensiveness, verification, and publication;
  • as suggested by the latest UNCAC report, plugging legal and regulatory loopholes, and strengthening international cooperation;
  • and mobilizing the AML framework to help deter, detect, and prosecute the laundering of the proceeds of acts of corruption, particularly by politically exposed persons.

25. To strengthen the protection of property rights, Albania needs to expedite work on property registration and the legal cadaster. As a first step, the 2012 2020 strategy on property rights needs to be updated to reflect the new legal provisions and provide for coordination among the restitution, compensation, and legalization processes. The authorities should appoint a national coordinator for property rights, and consider merging the various government agencies involved. The ongoing process of property registration and mapping, including the property digitalization process, should be finalized, and overlaps in land ownership phased out. The authorities should carefully coordinate and sequence work on the legal and fiscal cadasters in order to ensure that the two electronic platforms are fully compatible.

26. The Albanian authorities remain committed to this reform agenda. They confirmed that implementation of the judicial reform (including the Cross-Sector Justice Strategy) remains their top priority. They pointed out that the planned restructuring of district courts and changing the evaluation criteria for judges will also improve judicial efficiency. They are committed to reforming court fees in the near future, and to amending the Codes of Civil and Criminal Procedure by the end of the government’s term in 2021. Regarding anti-corruption, the authorities are working on a comprehensive plan to strengthen the asset declaration system, as part of a twinning project with the EU. Finally, they are working on a new property rights strategy which is expected to be unveiled in 2018.

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1

Prepared by Slavi Slavov. The author thanks Min Song for his outstanding research assistance.

2

Esposito, Lanau, and Pompe (2014) offers a comprehensive survey of the literature.

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