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Africa/Global: Professionals Enabling Corruption
AfricaFocus Bulletin
October 1, 2018 (181001)
(Reposted from sources cited below)
Editor's Note
"Lifting the veil of corporate secrecy reveals a simple principle: Offshore is
actually a set of professional services that specialize in enabling businesses and
individuals to effectively retreat from legal, regulatory, and public scrutiny,
empowering them vis-a-vis those who have remained 'onshore' without access to such
services." - Hudson Institute
The image of "tax havens" and the term "offshore" may evoke islands such as Jersey in
the channel between Great Britain and France, the Cayman Islands in the Caribbean, or
Cyprus, which served as a intermediary between the Ukraine and Paul Manafort's
extravagant purchases in the United States. But, as this new report from the Hudson
Institute explains clearly, the system is in fact "without borders," with money from
the global rich, including authoritarian leaders, parked in many places, including
the City of London, Delaware, and New York.
This AfricaFocus contains excerpts from the report on "The Enablers," which is also
available on the Hudson Institute website. Highlighting particularly the flow of
money from authoritarian states to the United States, it spells out the role played
by legal services, incorporation services, financial services, real estate services,
lobbying and public relations services, fintech and cryptocurrency.
There are abundant other sources documenting this system, which is a fundamental
component of today's globalized economy. On legal services, particularly of interest
is the 2016 investigation by Global Witness, in which investigators went under cover
to ask New York lawyers had to hide funds, posing as representatives of an anonymous
African government official (Global Witness, Lowering the Bar;
https://www.globalwitness.org/shadyinc/)
For background on groups campaigning to change this system in the United States, see
The Financial Accountability and Corporate Transparency (FACT) Coalition
(https://thefactcoalition.org/).
For previous AfricaFocus Bulletins on corruption and illicit financial flows, visit
http://www.africafocus.org/intro-iff.php
Other background resources include:
Top 10 books on illicit financial flows, tax justice, and africa
http://www.africafocus.org/iff-books.php
Resources on the Stop the Bleeding Africa campaign
https://usafricanetwork.org/home/issues/stop-the-bleeding-africa/
++++++++++++++++++++++end editor's note+++++++++++++++++
The Enablers: How Western Professionals Import Corruption and Strengthen
Authoritarianism
Ben Judah, Research Fellow & Nate Sibley, Program Manager, Kleptocracy Initiative
September 2018
http://www.hudson.org
Excerpts only: An audio file of a discussion on this report, and a link to the full
report, is available at http://tinyurl.com/y8re74a5
Introduction
Globalization is playing out unexpectedly as governments, businesses, and individuals
around the world are connected to one another at an unprecedented rate. These new
connections were at first widely hailed as enhancing the influence of the United
States, but their true political consequences are only just beginning to become
clear.
One of the most important but overlooked dynamics, given its national security
implications, has been the pervasive networking of American professional services
providers with power brokers and their acolytes from corrupt authoritarian states.
Certain elements within the legal, financial, and influence communities, seeking new
markets, clients, and profits among an emerging global class of super wealthy actors
with fortunes of dubious provenance, have in the past fifteen years begun offering
their services to transnational kleptocrats linked to authoritarian regimes. From
Washington lobbyists with Kremlin-linked accounts to New York law firms with Chinese
Communist apparatchik clients, these tie-ups have a detrimental effect on the
political and the financial workings of American democracy�one that is only growing.
This report argues that these professionals have become enablers of authoritarian
influence within democracies in a twofold manner. First, they are facilitating the
concealment, insertion, and deployment of kleptocrats� illicit funds within Western
economies. Second, they are using their skills and expertise to help kleptocrats
establish networks of influence inside democratic societies. This relationship
between Western professionals and authoritarian elites has not only fueled a boom in
money laundering; it has transformed significant elements of the most distinguished,
influential professions into wholesale importers of transnational corruption.
The Emergence of Offshore and the Rise of the Enablers
Before we try to understand the enablers, we need to understand the system in which
they thrive. For Western professionals, facilitating the finances of hostile powers
is nothing new. They have always overseen the offshore financial dealings of hostile
powers, particularly since the rise of the Eurodollar and the Eurobond in the 1960s,
to a significant extent on the back of Soviet funds and as a result of the
disintegration of the Bretton Woods system.
Since the end of the Cold War, however, the tempo has shifted. The dismantling of
totalitarian regimes across Eurasia allowed their elites to become individual
financial actors for the first time. This dovetailed with an aggressive expansion of
American professional services into these territories. Whereas in the 1960s it was
the Soviet state seeking Eurodollars, by the late 1990s, any Eurasian power brokers
worth their salt were personally seeking access to Western professional services.
The consequences of this access to the globalized economy have arguably been vastly
more empowering to political actors hostile to the United States than any other
development of the late 20th century.
But why? Since the Bretton Woods system collapsed, one financial trend has been
constant: the aggressive expansion of a shadow financial system referred to
collectively as �offshore.� On the surface, this is a fiendishly complex interlocking
web of anonymously owned companies and accounts, legally located in secretive
jurisdictions that allow them to circumvent the regulatory and taxation systems of
conventional jurisdictions. Yet lifting the veil of corporate secrecy reveals a
simple principle: Offshore is actually a set of professional services that specialize
in enabling businesses and individuals to effectively retreat from legal, regulatory,
and public scrutiny, empowering them vis-a-vis those who have remained �onshore�
without access to such services. This system is how a business run, staffed,
operating, and earning its profits in the United States can claim that it is in fact
located in another country altogether, despite having no physical presence there.
�Globalization and financial deregulation have led to the ballooning of offshore
finance,� said Gabriel Zucman, assistant professor of economics at UC Berkeley.
�Changes in cultural norms have also played a role: before the 1980s, for instance,
not all corporate executives thought that it was their fiduciary duty to avoid
corporate income taxes by all possible means (e.g., by shifting profits to places
like Bermuda). Today they almost all do.�
Profit margins provide ample explanation for the motivation to escape taxation but
tell us little about the shape and scale of the system itself. This has been driven
by targeted innovation in the legal and financial communities, empowered in the
commanding heights of both the state and the private sector itself, which equated the
dismantling of regulatory frameworks with automatically encouraging growth. This
process was powered by new technologies that permit instantaneous transactions and
emerging forms of secrecy, encryption, and concealment.
The offshore system has turned Western professional services providers into partners
for non-Western authoritarian elites and brought the latter into the Western
financial system. �There are both ethical problems in the finance industry,� says
Zucman, �and a collective intellectual failure at regulating tax havens and
globalization.� Instead, perks set up to profit Western corporations have become
sources of unprecedented power for kleptocrats.
These powers�the power to generate, store, and deploy wealth in different countries,
and the power of anonymity, which enables personal connections to that same wealth to
vanish without a trace�are the common threads stitching together various global
political trends. The increasing capacity of Russia, China, and even the Gulf States
to interfere in Western political systems, and the eruption of protest movements in
countries as varied as Malaysia, Ukraine, Libya, Egypt, and Pakistan, are all fueled
by the power that the offshore system has bestowed upon authoritarian elites�and how
they have played, abused, or mismanaged their hand. Money may not explain
everything�but it does explain rather a lot.
Given the vast figures involved, it is often tempting to discuss global financial
flows from a systemic point of view. However, zooming in, we realize that no
individual transactions�and especially no illicit ones�happen without a helping human
hand. Taking this view enables us to better understand the role played by
professionals within Western legal, financial, incorporation, and real estate
communities who have become systemic enablers of transnational kleptocracy. The boom
in global money laundering that continues to empower authoritarian kleptocrats and
fuel their growing influence would not be possible without them. Studying the
intersection of Western professionals with these kleptocrats is essential to
understanding this trend in modern power.
The Enablers' System
Thanks to a surge in investigative reporting and academic studies, the pattern by
which kleptocrats typically operate in the United States and other democracies has
been clearly established in recent years.
First, a kleptocrat will engage legal and incorporation service providers to place
illicit funds into the legal economy and conceal their origins. Second, financial and
real estate professionals are used to integrate the funds into the mainstream U.S.
economy. Third, lobbying and public relations specialists can suppress scrutiny of
the kleptocrats, whitewash their criminal past, and extend their political reach.
This well-trodden path has emerged from two systemic failings: an outdated and
inadequate anti-money laundering (AML) system, and the failure of ethical standards
and self-regulation within the professions themselves.
Regulators are also paying increased attention to this pattern and the critical role
played by Western professionals within it. The Financial Action Task Force, the
global anti-money laundering watchdog, published a report with the Egmont Group in
July 2018 concerning the role of �professional intermediaries� in concealing
beneficial ownership of legal entities. In 100 case studies from 34 jurisdictions,
�approximately half of all intermediaries involved were assessed as having been
complicit in their involvement,� rather than simply �unwitting or negligent.� In June
2018, the U.S. Treasury Department�s Financial Crimes Enforcement Network (FinCEN)
published extensive guidance on the use of �financial facilitators� by corrupt
foreign officials, exploring how these facilitators enable the officials to �access
the U.S. and international financial system to move or hide illicit proceeds, evade
U.S. and global sanctions, or otherwise engage in illegal activity, including related
human rights abuses.�
Legal Services
The first port of call for any kleptocrat seeking to benefit from this system is
contact with the legal community. A lawyer is utterly essential, both to enter the
offshore world and then to exploit its complex landscape, which cannot be navigated
by anyone legally blind. From there, lawyers typically engage incorporation agents
(if they cannot provide the service of company formation themselves) before managing
the kleptocrats� offshore affairs. This includes providing introductions to the
financial community, specific investment opportunities such as real estate, and even
political opportunities such as contacts with lobbying or public affairs
professionals.
Anti-corruption groups allege that the practice has become widespread within the
American legal community. This was brought sharply to light in 2016, when twelve out
of thirteen law firms approached by an undercover investigator for Global Witness
were willing to discuss ways for an African kleptocrat to move money into the United
States. ...
Unscrupulous lawyers have become the primary accomplices of transnational
kleptocrats. This is abundantly clear from the trickle of kleptocrats who have been
brought to justice in the United States. In recent cases prosecuted by the
Kleptocracy Asset Recovery Initiative of the Department of Justice, in which members
of the American legal community played a key enabling role, the defendants included
Pavlo Lazarenko, former Ukrainian prime minister; Chen Shui-bian, former president of
Taiwan; and Teodoro Nguema Obiang Mangue, current vice president of Equatorial
Guinea. Legal services were their primary guides.
The legal community�s services to kleptocrats sometimes extend far beyond advising
them on their rights or conducting litigation. They often include business and
investment advice; handling illicit funds in their clients� trust accounts; setting
up corporate entities or handling interactions with incorporation agents on their
behalf; and introducing them to other professionals in the financial, lobbying, and
public relations communities.
The prevalence of such activities stems from lawyers� longstanding omission from the
extensive�if often ineffective�AML requirements, which are based on affirmative
reporting. This means that lawyers are not required to screen their clients or file
suspicious activity reports in the same way, for example, as financial institutions�
though they often handle substantial client funds. In fact, attorney-client privilege
can be asserted to protect information about the sources of customer funds pooled in
Interest on Lawyers Trust Accounts (IOLTAs). Up to $400 billion runs through IOLTAs
each year, almost all of it for entirely legitimate and productive reasons�but the
anonymity they afford has also made them ripe for abuse by all manner of financial
criminals, including kleptocrats.3
The role of the legal community in facilitating transnational kleptocracy needs to be
reassessed. Cases in which kleptocrats have been caught and prosecuted in the United
States show that American legal professionals operate not merely as enablers, but
also as force multipliers for kleptocrats� economic and political influence within
democratic societies. A dangerous minority of legal professionals has been abusing
important legal protections�such as attorney-client privilege�in order to use them as
cover for illicit activity.
These practices have made the legal community an importer of weaponized corruption
into the United States. Once illicit funds have been laundered into the U.S. economy,
they are not just stashed in luxury real estate. They also have the potential to be
deployed in the service of bad actors�including to further the geopolitical ambitions
of adversarial states like Russia.
This has brought the legal profession in for intense criticism from activists
campaigning against authoritarian kleptocracy across the world. �When you look at
Russian government�connected crime,� said Bill Browder, the leading anti-Putin
campaigner, �even more insidious than the actual Russian criminals are the Western
lawyers who are letting them cover up their crimes. These people weren�t brought up
in the live-or-die criminal underworld of Russia but went to the same schools as us
and should know better.� What is strange is that, on the face of it, none of this
should be happening. On paper, the legal community in the United States holds itself
to the highest ethical standards. The American Bar Association�s Model Code for
Professional Responsibility goes as far as to say in its preamble: �Lawyers, as
guardians of the law, play a vital role in the preservation of society. The
fulfilment of this role requires an understanding by lawyers of their relationship
with and function in our legal system. A consequent obligation of lawyers is to
maintain the highest standards of ethical conduct.�
However, even the most casual look at the networking between the legal community and
authoritarians shows that the profession is falling short of these standards and
neglecting its role. �For years now the ABA has been downplaying the role of lawyers
in money-laundering misconduct, claiming that voluntary anti-money laundering efforts
are sufficient when it�s clear lawyers, like banks, should operate under mandatory
AML requirements,� said Elise Bean, a former staff director of the U.S. Senate
Permanent Subcommittee on Investigations, who conducted multiple money-laundering
investigations.
...
Policy Recommendations
- Congress should pass legislation requiring legal services providers to perform
reasonable due diligence on prospective foreign clients.
- Given the potential for abuse of attorney-client privilege, Congress should
consider whether legal firms should continue to be able to combine business,
lobbying, legal, and other functions.
- Congress should also consider whether IOLTA accounts should be subject to the same
anti-money laundering regulations as other financial products.
Incorporation Services
Though authoritarian kleptocracies differ from each other in their nature and in the
quantity of funds they bring into the Western financial system, investigators from
U.S. law enforcement are quick to point out that almost without exception, when they
enter this system, they make use of anonymous shell companies. �We consistently see
bad actors using these entities to disguise the ownership of the dirty money derived
from criminal conduct,� Kendall Day, then acting deputy assistant attorney general of
the Justice Department�s Criminal Division, told a Congressional hearing in January
2018.
Anonymous shell companies differ from other money-laundering vehicles such as �front�
companies in that they are legal entities that grant the rights and privileges of a
company to the owner without obligating the owner to perform any of the activities
typically associated with a company. Usually they are deployed within a vast, complex
network of other such companies that are legally located across multiple
jurisdictions. This renders the true identity of the beneficiaries almost impossible
to determine without heavy mobilization of resources, and it is why anonymous shell
companies have been dubbed �weapons of mass corruption� by anti-corruption
campaigners.
The United States is currently the leading mass-producer of anonymous shell
companies, generating 10 times more than 41 other jurisdictions identified as
financial secrecy havens combined. Though some states require more information than
others when a company is incorporated, none require full disclosure of the beneficial
owners who ultimately control it. With a few exceptions�most notably Delaware, which
now supports the collection of beneficial ownership information by the U.S.
Treasury�a race to the bottom between some U.S. states is underway, as they become
increasingly dependent on revenue generated by registration fees. The result is that
it currently takes more information to obtain a library card in the U.S. than to
create an anonymous shell company, a situation unmatched anywhere in the world except
Kenya. �The rest of the world is starting to crack down on secret and illicit finance
while the United States continues to play banker to the world�s authoritarian
kleptocrats,� said Gary Kalman, executive director of the Financial Accountability
and Corporate Transparency Coalition.
Researcher Anat Admati calls this �a crisis of the corporate form.� The American
company, historically intensely guarded, has become in her eyes bastardized,
transformed into a tool that permits those with the resources to exploit it to evade
financial liability and act with criminal impunity. This interpretation was largely
validated by the 2014 Global Shell Games study, in which researchers approached
incorporation agents for assistance in setting up anonymous shell companies while
posing as money launderers, corrupt officials, and terrorist financiers. Despite the
suspicious nature of their inquiries, it was incorporation agents based in the United
States who proved the most willing to help and least anxious to ask questions�putting
the U.S. behind traditional financial secrecy havens like the Cayman Islands, St.
Kitts and Nevis, or the British Virgin Islands.
This state of affairs has led to widescale abuse of U.S. company incorporation, not
only by kleptocrats from countries as diverse as Ukraine, Malaysia, and Equatorial
Guinea, but also by terrorist groups such as Hezbollah and hostile regimes such as
Venezuela and Iran. In fact, Iran somehow managed to purchase and lease out an
entire skyscraper on New York�s Fifth Avenue for 20 years without detection. The
confluence of two factors has permitted this transformation in the use of American
companies. One is the incorporation sector�s omission from affirmative AML reporting
requirements. The other is a powerful coalition of state and professional lobbies
that resist the imposition of even a non-public beneficial ownership register
available only to law enforcement�though this opposition is dwindling as the national
security arguments in favor of such a register become more widely accepted.
Policy Recommendations
- Congress should mandate the creation of a federally overseen register of beneficial
ownership for companies and trusts.
- Incorporation agents should be legally required to perform reasonable due diligence
on prospective clients.
- Penalties should be introduced for failure to carry out reasonable due diligence
and/or for intentionally submitting misleading information to the beneficial
ownership register.
Financial Services
Law enforcement breaks down money laundering into three stages: placement (moving
illicit funds into the financial system), layering (concealing their origin), and
integration (using the successfully laundered funds for purchases and investments).
Whereas the legal community is essential for the placement and layering of
kleptocrats� illicit funds, financial services providers can be engaged to assist
with integration. This is the point at which funds are set to work�accumulating value
if securely stored in luxury real estate, generating profits if invested in Western
business interests, acquiring influence if used for political or philanthropic
donations�all the while multiplying the kleptocrat�s wealth into new sources of
power.
Unlike the legal community, however, most financial institutions are governed by the
Bank Secrecy Act (BSA) of 1970, which requires them to proactively report suspicious
financial activity to the U.S. Treasury. ... Not all financial services providers are
covered by this AML [Anti-Money-Laundering] framework, however: hedge funds, asset
managers, and the directors of family offices, for example, are not subject to any
affirmative reporting requirements. ...
Kleptocrats, or their agents, will solicit financial services providers operating
outside the U.S. AML regime not only to open bank accounts, provide financial advice,
or transfer funds, but also to present them with investment platforms or
opportunities or undertake deals on their behalf.
[Full report continues with more details and recommendations on financial services,
as well as on real estate services, lobbying and public relations services, and
fintech and cryptocurrency services.]
AfricaFocus Bulletin is an independent electronic publication providing reposted
commentary and analysis on African issues, with a particular focus on U.S. and
international policies. AfricaFocus Bulletin is edited by William Minter.
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