The West Is Open for Dirty Business
The European Union and United States need a joint front against poisonous kleptocracy.
There is a specter hanging over the West—the specter of kleptocracy.
It drifts through the politics and media of Washington, London, Brussels, and Berlin; in the armies of lobbyists, lawyers, and PR teams working for oligarchs, kleptocrats, and state-controlled enterprises. Outside the major capitals, it haunts the edges of the West, where more vulnerable members of NATO and the European Union feel the chilling grip of Russian and Chinese power.
And beyond the West, kleptocracy—not ideology or terrorism—is the main obstacle to democracy across the developing world. It has transformed the psychology of elites: Why respond to popular demands when a billion-dollar bank account in Switzerland remains your ultimate escape route? It has broken a historical pattern: American and European elites in the 19th century were forced to gradually extend the franchise in order to preserve their wealth—because they didn’t have a private plane and somewhere better to take refuge.
But that’s not the only danger. Kleptocracy poisons everything it touches: not only the lives of the poorest and most vulnerable people in the world, but also the recipient countries whose professionals launder and hide stolen funds. As the power of corruption grows, it is not only blocking democracy in the developing world but also corroding it in the West.
To fight it, the West must first understand it. Analysts have for too long naively talked about corruption morally—something that bad people, bad states, or bad cultures do—when it needs to be thought about systemically. The moment that starts, the frame of an honest “us” and a corrupt “them” falls away, clearly showing the West where it needs to start fighting the disease: at home.
The world of offshore finance is not restricted to Mediterranean microstates or colonial holdovers in the Caribbean: It is everywhere, including the United States. It is estimated that developing countries lose up to $1 trillion in illicit finance annually—much of it ending up in the U.S. financial system, which has become a nexus of global corruption. The U.S. Department of the Treasury suggests that approximately $300 billion is laundered in the United States each year, or roughly 2 percent of national GDP—though the true figure may be much greater.
Anonymous finance is kleptocracy’s handmaiden. This system runs primarily on global networks of shell companies that can be created and controlled with almost total secrecy, making them the contemporary jet-setting criminal’s money laundering vehicle of choice. And the United States is mass-producing these weapons of mass corruption.
Domestic reform is urgently needed to enable international action, coordinated primarily between Europe and the United States. The offshore finance and pay-to-play political systems created over decades to maximize the power and wealth of Western plutocrats are now being used by authoritarian kleptocrats to undercut the West itself.
Strategists are overly focused on traditional, hard threats. Too much of the left has fallen victim to a naive anti-imperialism that still sees the rulers of financialized kleptocracies as the wretched of the earth. And on the right, ideological shibboleths about the free movement of capital have blinded conservatives to the dangers of unregulated financial flows. Only in the last few years has there been a gradual realization of how illicit finance can be weaponized as part of what’s known as hybrid warfare.
This phenomenon is at its worst around Russia’s penumbra. Its kleptocratic networks have afflicted Baltic and Eastern European countries for decades: from the impeachment of Lithuania’s prime minister in 2003 over alleged links to the Russian mafia to ongoing ties between Moldovan and Ukrainian power players and the Kremlin.
The ability of Western policymakers to perceive this threat is impaired by outdated attitudes toward their authoritarian counterparts. Few have firsthand experience of life outside Western market democracies. They assume that clear distinctions between the political power and personal funds of public and private players, legally constructed over centuries in the West, also apply in authoritarian societies. But in Russia or China, where the ultimate rules of the game are set by party institutions or autocratic whim, no such clear distinctions exist.
Meanwhile, vulnerabilities in the Western financial system are not just facilitating but exacerbating the threat posed by illicit financial flows. They are empowering authoritarian elites in systems where the lines between state and corporate power do not exist.
Instead of viewing it merely as the actions of bad actors, in bad countries, seeking bad people to bribe in the West, Western powers need to develop a national security strategy that recognizes economic crime as a systemic threat to democracy and security worldwide. But first they need to define it clearly—and explain to the public why it matters. The current debate is marred by unhelpful conspiratorial language, flawed reporting, and mountains of jargon.
The best way to think about the threat posed by kleptocracy’s influence is as a triple-mawed hydra—each head operating independently but tied to the same body of corruption.
The first head is the threat of weaponized finance interfering, corrupting, and influencing Western politics, for both personal and ideological ends, such as an obscure Russian bank’s mysterious loans to the French far-right. The second head is the empowerment of kleptocracy at home through money laundering and the accumulation of Western assets—both individual rulers and autocratic systems as a whole, such as Venezuelan President Nicolás Maduro’s inclusion of top military officers in his regime’s vast drug trafficking operation to ensure their loyalty. The last is the deliberate threat posed by strategic investments and purchases of Western assets by anti-democratic actors with the aim to steal, shut down, or control critical technology or infrastructure. China’s Belt and Road Initiative is the case in point, scooping up acquisitions from Malaysia to Montenegro.
It’s possible to protect against all three of the hydra’s heads. But it can’t be done by any one country alone. Because of the free movement of capital inside the West, any break in the system endangers the whole. Yet instead of working together to fortify common defenses, the United States and the EU are clashing—and Britain could yet spin off altogether. The lack of a strategic conversation that would integrate anti-money laundering efforts into national security means regulation continues to be seen narrowly through the lens of commercial advantage without thinking about the wider costs.
The most recent, and very public, clash has been between the European Commission and the U.S. Department of the Treasury over a proposed EU anti-money laundering blacklist that included U.S. territories such as American Samoa, Guam, Puerto Rico, and the U.S. Virgin Islands. Both the United States and Britain also opposed the inclusion of Saudi Arabia on the list, which was eventually mothballed.
The United States has also voiced anti-money laundering concerns relating to INSTEX, a new European trade mechanism to bypass U.S. sanctions on Iran. And on the horizon simmers the question of how to manage Chinese investment in Europe, especially with Italy now signed up to China’s Belt and Road Initiative.
For the Europeans’ part, there is a chafing resistance to having trade and investment decisions dictated by U.S. foreign-policy priorities—not to mention a long-standing suspicion that U.S. regulators target European banks with sanctions and money laundering fines as a disguised form of commercial policy to protect their own financial institutions.
Last but not least, a no-deal Brexit and the prospect of a Singapore-on-Thames, as some in the U.K. envision their post-Brexit future, risks breaking apart the continent’s existing anti-money laundering regime and triggering a race to the bottom on standards.
Yet kleptocracy is not—unlike the greed that fuels it—an impossible problem to solve. These rifts can be healed, and the defenses of the West can be strengthened.
A three-pronged plan to beat this hydra begins at home.
The political systems of the United States, Britain, France, and others across West have not been firewalled against foreign powers buying access, interfering in elections, and purchasing influence. Existing measures such as the U.S. Foreign Agents Registration Act or bans on foreign political funding in EU member states have not been enough. Instead, too many of their anti-corruption practices reflect a 20th-century world in which only democracies were major exporters of wealth and Western enemies were socialist states with only threadbare diplomats sent abroad.
In the United States, this would begin by barring all senior politicians and officials from working as lobbyists for foreign powers or their proxies, or accepting gifts, jobs, and donations from the same. Basic transparency standards should be codified for all officials, for example requiring senior officials to release a specified period of tax returns and place assets that could present a conflict of interest in a blind trust. (That might require making such positions more financially attractive, in the same manner as Singapore attempts to limit corruption through generosity of officials’ pay: The financial benefits of a post-official career have, depressingly, often been an attraction of the job.)
Next, Congress should move to effectively exclude antagonistic nondemocracies from U.S. public life by mandating the creation of a blacklist of adversarial authoritarian regimes engaged in serious corruption or human rights abuses. Precedents exist—admittedly somewhat loosely—in the form of the Global Magnitsky Act and various country-specific U.S. sanctions programs, various Financial Crimes Enforcement Network advisories, and the State Department’s annual report on narcotics money laundering. States on the blacklist, politically exposed persons, and their proxies would be banned from owning media and funding think tanks, political action groups, or lobbyists. This would be buttressed by modernizing and combining the Lobbying Disclosure Act and Foreign Agents Registration Act, imposing harsher penalties for noncompliance while making the cumbersome process easier for rule-abiding lobbyists.
To some degree, the same problems exist from London to Prague. Stronger restraints on campaign finance as a whole limit the exposure of European democracies compared to the United States—but there are notable exceptions such as explosive revelations about Russian financing in Italy. Europe’s minimum standards should meet the same requirements as those for the United States outlined above.
But while this may stop kleptocrats from gaining direct influence, it can’t blunt their power or their ability to use the West to launder money.
The next step requires fixing European and U.S. anti-money laundering regimes that are both flawed—but in very different ways. The EU has made great strides on improving corporate transparency. Successive EU anti-money laundering directives have mandated beneficial ownership registries for EU member states and those that share its single market. The 5th Anti-Money Laundering Directive, published in 2018, is an impressive document that requires member states to not only make beneficial ownership registries publicly accessible but also create private registries of bank accounts by 2020.
Though huge loopholes remain, these reforms are not to be scoffed at. They make the concealment of assets—either through shell companies or simply in bank accounts—significantly more difficult. But the truth is that laws and regulations only mean so much when Europe fails utterly to enforce them.
The power to act rests with national authorities, meaning—when it comes to dirty money entering the system—the effective EU common standard is that of the weakest member states. This problem hit the headlines recently when it emerged that more than $230 billion in suspicious transactions had passed from customers in the former Soviet Union through Danske Bank’s tiny Estonian branch. This came almost immediately after U.S. (not EU) pressure had precipitated the collapse of Latvia’s ABLV Bank over money laundering failures. Painfully, leading European officials privately admit that when it comes to enforcement they have effectively been relying on the United States.
That’s not surprising, as the United States has what the Europeans lack: a centralized authority with the Financial Crimes Enforcement Network. Not only is this body the U.S. Treasury’s financial intelligence unit, but it can work with other departments and agencies to issue regulations and guidance—and impose fines in cases of noncompliance.
But here the positives of the U.S. system end.
Most urgently, the U.S. government has no idea who owns and controls the companies being used to move money through and within its own borders, because it does not maintain a central corporate beneficial ownership registry. A recent study found that, in all 50 states and the District of Columbia, more information is required to obtain a library card than to form a U.S. company. The ease with which it is possible to create anonymous shell companies means that the United States is routinely ranked alongside Switzerland and the Cayman Islands as a prominent financial secrecy haven. U.S. incorporation services providers were also the most willing to set up untraceable shell companies in a study where researchers posed as money launderers, corrupt officials, and terrorist financiers. And according to a 2011 World Bank study, U.S. companies are used for money laundering in more grand corruption cases than those of any other country. The investigative reporter Mike Forsythe has noted that it is, in fact, easier to obtain corporate records in China than in Delaware. It is this vulnerability above all others that has turned the United States—which otherwise rightly prides itself on rule of law and financial integrity—into a giant secrecy jurisdiction and a magnet for money launderers.
The problem is compounded by the fact that—unlike in Europe—many sectors most at risk of being abused by financial criminals are exempt from the U.S. anti-money laundering regime. Accountants, lawyers, real estate, hedge funds, and fine art dealers have no legal responsibility to report suspicious transactions, leaving banks to carry the can—and the fines.
The U.S. visa system is an overlooked money laundering vulnerability that can easily be turned into leverage. As Europe cracks down on so-called golden visas, America must protect its borders by addressing rampant fraud and abuse within the EB-5 investor scheme. Shallow background checks on applicants means that the scheme has become an open invitation to kleptocrats and their dirty money. Meanwhile, the State Department should be empowered by Congress to reveal the identities of individuals whose U.S. visa applications were rejected because of corruption or human rights abuses and impose visa bans on corrupt foreign officials credibly accused of extorting bribes from U.S. businesses operating overseas.
Finally, there is the question of money that isn’t so much dark as murky. Funds that are not necessarily flat-out illegal, stolen, or laundered but instead from state-owned companies, oligarchs, or enterprises that may pose a strategic threat to national security. The answer is investment screening.
Here, the United States is ahead of the game. The recently strengthened Committee on Foreign Investment in the United States provides an example of the kind of institution that needs to be exported. It is an interagency panel led by the U.S. Treasury that can block foreign investments. However, to date various loopholes exist allowing the committee to be sidestepped—including that the beneficial owners of entities involved in purchases can remain hidden from official view.
The Europeans, meanwhile, lack a centralized mechanism to screen and block investment into member states (though some, like France, have effective national systems). The bloc recently created a new mechanism for member states and Brussels to share information and voice concern on planned non-EU investment in critical infrastructure. But there is less to this program than meets the eye: Not only will national governments continue to make the final decision, but only half of EU member states have national asset screening legislation in place.
What the West needs is a grand compromise—one that recognizes the need for a shared security.
In the United States, conservative hawks in the current administration will have to drop certain illusions about national sovereignty and return to traditional support for EU integration. Europeans, in turn, will need to align more closely with legitimate U.S. concerns about China, Russia, and Iran. But the potential benefits are worth it. It doesn’t simply offer a chance to curb kleptocracy. Such a grand bargain allows the United States to build up Europe as a China-resistant pole for the 21st century, while allowing Europe to export its norms and regulations to the leading superpower.
Above all, a grand bargain would include a commitment to study and adopt each other’s best practices.
To begin with, this would see the United States introduce a registry of corporate beneficial ownership and extend its anti-money laundering regime beyond the financial sector to include other high-risk professions. The Europeans would then commit to creating a single anti-money laundering agency and significantly strengthening enforcement mechanisms and penalties. Both sides should commit to creating cross-border payments databases, a glaring deficiency and something that the U.S. Congress has already mandated but that the Treasury has yet to implement. These could be modeled on systems already in place in Canada and Australia.
Finally, the United States and the EU should begin working toward common standards when it comes to investment screening from authoritarian states, with a particular eye on Russia and China.
The longer-term strategic objective would be to export these institutions and standards to as many allies and partners as possible, forming a kind of anti-kleptocracy shield around their political and financial institutions. The platform for cementing this trans-Atlantic bargain and projecting it onto other democracies would be a new institution called the Global Kleptocracy Initiative. This could be modeled on the Proliferation Security Initiative, established under the stewardship of John Bolton as America’s U.N. ambassador in 2003.
All members of the Global Kleptocracy Initiative would endorse a statement of principles, agree and implement minimum standards, and work toward developing interoperable institutions against a backdrop of increasing formal and informal cooperation on anti-money laundering efforts. The United States could encourage major non-NATO allies (such as Israel, Australia, and Japan) to join, while the Europeans could make membership a precondition of participation in its European Neighborhood Policy, including the ex-Soviet republics participating in the bloc’s so-called Eastern Partnership. Badly needed standards, such as how to recognize the true extent of state control over institutions or oligarchs, could be hammered out.
Failure to tackle kleptocracy invites further attacks on democracy, the erosion of the rule of law, and escalating threats to national security. This path can only lead to a West compromised and divided, unable to shape global norms and at risk of a deeper and more permanent transformation. Because ultimately, Europe and the United States can only excuse, enable, and import so much corruption without starting to look like kleptocracies themselves.
Ben Judah is a British-French journalist and the author of This Is London and Fragile Empire.