Kleptocracy is often thought to plague developing countries, but this grand corruption would be infeasible without the West’s financial and legal plumbing to launder misbegotten gains. American and European government initiatives to remedy their complicity have run aground or even reversed course, particularly in the United States under the new Trump administration, writes Alexander Cooley.
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The looting of Malaysia’s 1MDB sovereign wealth fund. The embezzlement of hundreds of millions of dollars from Angola’s oil wealth by the former president’s daughter. One of Russia’s wealthiest oligarchs using Cypriot banks to swiftly evade European sanctions following Russia’s invasion of Ukraine in 2022. These scandals share a troubling feature: reputable Western financial service providers played pivotal roles in facilitating these massive corrupt schemes. The investment bank Goldman Sachs was complicit in Malaysia, the management consultants of Boston Consulting Group had their hands in Angola, and the Russian oligarch couldn’t have done it without accounting firm PricewaterhouseCoopers in Cyprus. These high-profile examples reveal that Western professional service providers are entangled in most of the large corruption scandals uncovered worldwide.
Almost reflexively, we tend to divide the world into “clean” countries and “dirty” countries, which generally overlap with wealthy Western and Asian countries and then all the rest. Prominent international corruption rankings and indices, such as Transparency International’s Corruption Perceptions Index, help to reinforce this view. Transparency International’s index is perhaps the most widely recognized of all and has, since 1995, ranked countries in the world according to perceived levels of public sector corruption, creating a seemingly clear global moral geography.
But perceptions of public corruption are only one part of what is a long, complex, transnational chain. Consider this scenario: a Chinese regulator accepts a bribe from a foreign company, then uses an accounting firm in Hong Kong to purchase an opaque offshore shell company from a law firm in Panama. Within this shell company, an entity registered in the British Virgin Islands opens a Swiss bank account, which then purchases a Manhattan apartment for the official’s family members. In this chain of corruption and money laundering, the jurisdictions that facilitate each step—Hong Kong, Panama, the British Virgin Islands, Switzerland, and New York—would likely remain undetected and unacknowledged in our conventional understanding of where corruption “happens.” Yet these supposedly “clean” financial centers are indispensable to making the whole scheme work.
It is exactly because property rights and trust in institutions in many countries are so fragile that even a kleptocrat who is powerful in that country must ensure that their ill-gotten gains are stored in jurisdictions where property rights are guaranteed and their assets will be secured, irrespective of their political and social status in their home country. Professional service providers are critical to this transnational cleansing. They include the wealth managers who construct intricate maps to store their clients’ assets in jurisdictions that ensure secrecy, providers of shell companies that sell anonymity to buyers who wish to avoid being identified, lawyers who establish trusts for clients who they suspect might be compromised, second-citizenship providers that enable them to reside in foreign jurisdictions, and real estate agents who accept all-cash payments from shell company purchasers without ascertaining the real owner. These professionals—many of them based in Western or “clean” jurisdictions—provide market-related services which are usually perfectly legal but cumulatively enable kleptocrats to disintermediate the illicit or dubious origin of their source of wealth and reinscribe them in protected assets and jurisdictions.
The 2016 leak of the “Panama Papers” underscored the industrial-like production of shell companies by the Panamanian law firm Mossack Fonseca. The scandal implicated politicians, business leaders and even celebrities from around the world in a web of offshore schemes and financial secrecy arrangements designed to hide their dealings from scrutiny.
These leaks inspired a series of other whistleblowers and disclosures and have helped launch many international investigations and academic research projects to uncover and understand these hidden transnational roles. Scholars are providing valuable and surprising insights into how these service providers operate, often employing innovative methods to uncover their workings.
One research team used large-scale email experiments to impersonate individuals with profiles that should be flagged for corruption. The experiment sought to ascertain if shell company providers across the world comply with guidelines by the Financial Action Task Force, an international organization set up by the G7 to combat money laundering, that require potential clients to provide proof of identity and residency. Their findings showed that jurisdictions based in the United States and United Kingdom, two of the historically “cleanest” countries, were actually less compliant with international norms and rules than jurisdictions outside the OECD, a cohort of wealthy, mostly Western countries. Anonymous shell companies can be obtained relatively easily and cheaply in the U.S., especially in Wyoming, Nevada and Delaware.
Other scholars have fully immersed themselves into the inner workings of service professionals. These scholars have trained to be wealth managers for high-net worth individuals or even executive assistants to international investors who regularly “play in the gray” when operating in so-called frontier markets like Vietnam and Cambodia, where larger payoffs are expected.
From anti-corruption advocates and investigators housed at non-governmental organizations, we have seen important role-playing sting-like operations, including impersonating corrupt Russian health ministers interested in purchasing central London real estate or purportedly representing corrupt African dictators interested in securing assistance from New York City-based lawyers. These operations have captured on video the eagerness of Western professional service providers to secure foreign clients, even when confronted with classic signs that their services are likely facilitating money laundering.
The other component of money laundering that receives less discussion than the legal and financial movements is that kleptocrats and their allies must “launder” their reputations in parallel with their illegally ascertained assets. Failure to do so risks undue scrutiny of these questionable dealings. Here, too, Western entities facilitate the burnishing of tainted officials’ reputations into respectable global businessmen or otherwise respected members of transnational society.
Charities and other philanthropic causes like higher education, international humanitarian initiatives, and cultural institutions happily accept money from kleptocrats interested in purchasing new reputations. Lawyers and public relations firms ensure that negative information on past corrupt dealings is minimized in the public sphere (including in Google searches and Wikipedia entries) and monitor investigative reports into their clients’ dealings. They deter journalists by threatening or filing Strategic Lawsuits Against Public Participation (SLAPPs). Whole national governments are implicated as well by selling residency and citizenship to kleptocrats—such as the UK’s controversial Tier 1 investor program—looking for a bolt hole in return for large investments. Private companies help here too by advising clients on how to secure citizenship and even designing their programs.
Despite the powerful firms and entities financially invested in abetting money laundering—or at least looking the other way—scholars and investigators have translated their work into legislative successes over the last decade. In the U.K., the Criminal Finances Act 2017 introduced unexplained wealth orders, which allow law enforcement to question the origins of a foreign buyer’s wealth if attempting to purchase real estate. The U.K.’s Economic Crime (Transparency and Enforcement) Act 2022 requires overseas entities transacting in land and real estate in the U.K. to register their beneficial owners with the government’s agency that oversees the country’s registrar of companies.
In the U.S, the landmark Corporate Transparency Act of 2021 mandated that U.S.-based companies report their beneficial owners. The European Parliament halted the “golden passport” programs of Malta and Cyprus, which kleptocrats appeared to have exploited and allowed individuals to buy EU citizenship.
After Russia’s invasion of Ukraine in 2022, the U.S. formed with the G7, Australia, and the European Commission the Russian Elites, Proxies, and Oligarchs (REPO) Task Force to identify, freeze, and seize assets of sanctioned Russian individuals and entities worldwide. The multilateral effort has frozen or seized $30 billion in Russian assets since 2022. In addition, the U.S. Department of Justice launched the KleptoCapture initiative in March 2022 to enforce sanctions, export restrictions, and economic countermeasures against Russian oligarchs. The initiative also scrutinizes professionals who might be implicated in facilitating sanctions evasion on the oligarchs’ behalf.
Still, Western jurisdictions like London remain a glub hub for servicing kleptocrats from across the world. Implementation of new transparency directives remains spotty and underfunded. In December 2022, the U.S. Senate blocked the package of the then-landmark “Enablers Act,” which would have required trust companies, accountants, and lawyers to conduct due diligence on clients and report suspicious transactions by their clients. Moreover, the new Trump administration is aggressively rolling back the enforcement of many existing legislative initiatives, including pausing enforcement of the Foreign Corrupt Practices Act and announcing that it will no longer enforce the Corporate Transparency Act for U.S. entities. Furthermore, what increased scrutiny and sanctions have arisen—and survived—in the West have in many cases simply rerouted the misbegotten gains of non-Western elites and kleptocrats to offshore centers in the Arabian Gulf and Singapore.
Global efforts to combat kleptocracy and its transnational facilitators stand at a crossroad. At a time when we have never known more about the infrastructure that facilitates the global kleptocracy, the political momentum in the U.S. and much of the rest of the world to clamp down and restrict these activities appears to have stalled or be waning outright.
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