Cracking down on kleptocracy Interview LJefferson 4 August 2022

In the third of a series of interviews with the Queen Elizabeth II Academy faculty, Alex Cooley examines the challenges of reigning in kleptocratic networks.

Recently you spoke at the Queen Elizabeth II Academy about kleptocracy, and the impact of the individual sanctions used to target kleptocrats since the war on Ukraine began.

As you can imagine, the problems of dark money and  kleptocracy are familiar to Londoners. People tend to associate kleptocracy with Russia; why is that? Is its rise linked to the global decline of democracy that has taken place over the past 15 years?   

This is a great question. Kleptocracy literally means ‘rule by thieves’, and in contemporary usage refers to the plundering of economies and societies by political elites for their own personal gain. 

It does not necessarily have to track with democratic backsliding, but in many countries, it has for a couple of reasons. First, over the last 30 years, as globalization has expanded, with more integrated financial markets and greater provision of services to support this expansion (accountants, shell company providers, lawyers), transnational kleptocracy networks have also become more expansive as there is now a more sophisticated co-mingling of licit and illicit funds through these networks of globalization.

Second, like the illiberal norms and practices that are promoting democratic backsliding, kleptocracy networks should be thought of as global in scale and reach. Corruption tends to be framed as an illegal act that takes place within states, while international rankings of levels of corruption by watchdogs like Transparency International tend to reinforce this view.

However, corrupt acts that may initially occur domestically are facilitated by a number of transnational actors and processes, many of them operating out of so-called ‘clean’ countries. At the end of the day, for a kleptocrat to profit from his or her stolen loot, they must store those funds where their value will be guaranteed by strong property rights protections. That means that the destination for kleptocrats is often the West, jurisdictions that enjoy rule of law, that have good financial services, and that guarantee privacy to client services. 

To give  a brief example of a hypothetical kleptocrat, take a regional official in China who has skimmed money off a state contract; that money will be booked into by an accounting firm in Hong Kong, then will be used to purchase an offshore vehicle – another tool of globalization – a shell company that is registered in the British Virgin Islands (BVI) but is sold, as part of a complex structure of nested companies, by a shell company provider, such as the Panama-based law firm Mossack Fonseca, at the centre of the Panama Papers exposé, which specialized in selling complex shell company structures to conceal the true owners.

Then, that entity will open an actual corporate bank account in a global financial centre, say in Switzerland. Finally, that account from a ‘clean’ jurisdiction may purchase a luxury asset, such as a condominium in New York, without having to disclose the actual beneficial owner. That is a relatively simple transaction, but it includes jurisdictions from Hong Kong, the BVI, Panama, Switzerland, and New York to abet this initial act of local embezzlement by a mid-level Chinese official. 

You’re telling the story of why this has become transnational and global, but this is very much a supply-driven story. Is there a demand-side to this story?  

Sure, and this is the other side of globalization. You asked initially why so many Russians and former Soviet individuals were associated with kleptocratic schemes. This is because in the 1990s, as these institutions and tools of globalization proliferated, there was a chaotic economic transition underway in the former Soviet Union.

Economic transition in places like Russia, Ukraine, Kazakhstan andTajikistan, transpired at the time of this financial deregulation, where there was a general perception that all capital account openness was good and that the international community assisted these countries with financial liberalization. The offshore dynamic is particularly pronounced in the post-Soviet countries because the state-building, regime consolidation, and reform of these economies coincided with this era of financial globalization.  

Why has the UK government turned a blind eye to this problem for so long? Is there profit that has been made? Is it too difficult?  

This is a really good question. First, the UK is the centre of many of the service providers that are absolutely critical for the operation of kleptocratic networks. There are two sides to being a kleptocrat. One is the money-laundering side, where dubiously acquired loot needs to be turned into legitimate assets that are safe and protected by the rule of law – this requires Western-based wealth managers, bankers, lawyers, real estate brokers and accountants.

The second is reputation laundering. How do you recast yourself in the global spotlight from a controversial figure who made money in controversial transactions into an internationally respected, global business and philanthropist? Doing so requires that you donate to philanthropic causes, secure appointments on corporate and non-for-profit boards, support higher-education institutions and retain lobbyists, advisors, and cultivating allies within your residing country’s political system. These are all ways in which you can try and manage your image.

Also, because of the UK’s strict libel laws, you have leaders in public relations and reputation management industries that are retained to closely monitor all media mentions of that individual, and to challenge or quash any negative characterizations about them. 

It is easy to see why the UK is attractive to kleptocrats, but why has it taken the UK government so long to respond? Is it just a simple calculation: this is money that is hard to turn down and there is at least plausible deniability of its more nefarious sources? 

It is really good money and kleptocrats engage in various legitimate business and cultural activities in order to obscure their sketchy pasts. It is very difficult to prove that their original wealth was actually obtained illegally. And, until now, there has not been a strong international norm and cooperation against kleptocrats the way there is with illicit actors such as terrorists or drug traffickers. 

Is it also because it is not strictly speaking illegal? Is there a sense that there is ‘money from uncertain sources being put to good purposes’? 

Many will make this argument too! If the source of funds is not strictly illegal, then why not actually use this wealth to ‘do good’? For example, why not have scholarships for students who need them at the university?  As long as there is no overt interference in the terms of these donations, what is the harm?

The problem with this line of reasoning is that it allows kleptocrats to create positive profiles. Indeed, these acts of charity can be leveraged in legal proceedings or in public opinion to burnish their reputations and establish track records of being good citizens.

It also creates supportive constituencies in society. For example, if you buy, even with your questionably acquired wealth, a major football team and you take it to the peak of success, you are revered and now have a platform to even contest previous critical accounts of you. 

Do you think that the war in Ukraine will prove to be an inflection point in terms of how other advanced democracies in Europe and North America treat this problem, and not only the UK?

I hope so – I have seen some hopeful trends. For instance, some countries have expedited the implementation of important anti-corruption legislation that they already passed. And there is a broader understanding that it is now a matter of national security to actually know who owns what in your country, whether it’s a company, commercial property, a bank account, or a holding company. 

I also think the Russian oligarchs themselves have been fatally stigmatized.. They can no longer control the overwhelmingly negative image and association with the Kremlin that this ghastly war has brought. Also, we are seeing push in the UK for reform on SLAPPS, while the National Crime Agency has established a dedicated ‘kleptocracy cell’ designed to investigate the hidden wealth of oligarchs and possible sanctions avoidance.

But the latter will require sustained funding and staffing. Unfortunately, most of their assets are not in luxury yachts that are relatively easy to seize, but embedded in complex webs of opaque global transactions. It will be challenging to even identify these assets, let alone freeze and confiscate them. 

We have talked a lot about Russia for obvious reasons, but if you go down the list, who’s next when it comes to the source of this problem? 

Countries with especially powerful ruling families that have been in power for a long time, and that have some sort of rentier economy, either extractives, natural resources, or big former state-operated enterprises that perhaps have been privatized.

For example, oil-exporting countries like Equatorial Guinea, Angola, Kazakhstan, Turkmenistan and Azerbaijan have incubated classic kleptocrats along with transnational reputation laundering schemes involving Western institutions.   

During your talk with the Academy fellows at Chatham House, you suggested that the pressure on kleptocrats would also have broader geopolitical effects. Can you say more about this? Is there a risk that measures intended to excise kleptocrats from our economies leads to greater divisions globally?

Whether there will be comprehensive anti-kleptocracy reforms in the US, London, Canada and Switzerland  remains an open question, but already  kleptocrats are shifting away from Western jurisdictions and going further Eastward; they are going to Singapore, and they are also going to the Gulf, especially the UAE.

There are a number of reports now of Russian oligarchs relocating and residing there and taking their assets with them. The UAE is not part of the sanctions regime even though it is a US security partner, and in fact it has scored very poorly on illicit money laundering rankings and watchdog lists.

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