How today’s despots and kleptocrats hide their stolen wealth

On Oct. 27, the vice pres­i­dent and heir appar­ent to the tiny oil-rich West African state of Equatorial Guinea was con­vict­ed in a Paris court of mon­ey laun­der­ing and embez­zle­ment. At stake is Vice President Teodorin Obaing’s $200 mil­lion Paris man­sion, a 220-foot yacht and a fleet of lux­u­ry cars, which accord­ing to the French author­i­ties rep­re­sent the pro­ceeds of cor­rup­tion from his country’s oil wealth. A week lat­er, a mas­sive data-dump from the off­shore firm Appleby, the “Paradise Papers,” exposed the finan­cial deal­ings of thou­sands of firms and indi­vid­u­als in small island tax havens from the Caribbean to the South Pacific.

Together, the Obiang case and the Paradise Papers seem to give us a new ver­sion of two stan­dard sto­ries. In the first, a strong­man from an endem­i­cal­ly cor­rupt Third World state steals from his already impov­er­ished cit­i­zens to fund con­spic­u­ous con­sump­tion, while in the sec­ond, secre­tive tax havens hide the dubi­ous funds of the rich and (in)famous. Developing coun­tries like Equatorial Guinea are stig­ma­tized by their poor per­for­mance in inter­na­tion­al rank­ings such as Transparency International’s Corruptions Perceptions Index, while the tax havens are increas­ing­ly tak­ing flak from rich­er coun­tries and inter­na­tion­al orga­ni­za­tions. The inter­na­tion­al watch­dogs and schol­ar­ly writ­ings on the sub­ject tend to sug­gest that cor­rup­tion is a nation­al, bor­dered phe­nom­e­non best assessed and coun­tered on a state-by-state basis.

Yang Xiuzhu is escort­ed from a plane upon arriv­ing at the Beijing Capital International Airport. The for­mer vice may­or and China’s most-want­ed fugi­tive is accused of cor­rup­tion and was arrest­ed after return­ing from the United States. (Yin Gang/Xinhua/AP)

This is wrong. In our arti­cle “Transition Corruption and the Globalized Individual,” we argue that the con­ven­tion­al under­stand­ing of grand cor­rup­tion is bad­ly flawed and com­pla­cent. The real fight is against cross-bor­der flows of taint­ed mon­ey and Western finan­cial cen­ters, which laun­der cor­rupt mon­ey and help peo­ple spend it. Instead of draw­ing a dichoto­my between cor­rupt and clean coun­tries, we should look at the role of transna­tion­al net­works, which cre­ate a sym­bi­ot­ic rela­tion­ship between the source coun­tries of grand cor­rup­tion and the des­ti­na­tion host or haven coun­tries that receive the loot. Kleptocracy is not just an ini­tial act of theft, but also the sub­se­quent abil­i­ty of these cor­rupt lead­ers to legal­ly reside in oth­er coun­tries where their wealth and prop­er­ty will be pro­tect­ed, and where they can enjoy their man­sions and con­spic­u­ous con­sump­tion in cities such as London, Paris, New York and Geneva.

Laundering the pro­ceeds of grand cor­rup­tion is not a do-it-your­self affair. Instead, despots and their fam­i­lies rely on webs of high­ly skilled, well-renu­mer­at­ed inter­na­tion­al pro­fes­sion­als from the bank­ing, legal, con­sul­tan­cy and relat­ed indus­tries that clus­ter in glob­al finan­cial cen­ters. These pro­fes­sion­als offer high­ly prized ser­vices that effec­tive­ly bend and blur the dis­tinc­tion between legal­i­ty and ille­gal­i­ty in host­ing, trans­fer­ring and mul­ti­ply­ing wealth.

Some of these net­works have been obvi­ous for years, but oth­ers are just com­ing to light. Transferring siz­able amounts of mon­ey from A to B almost always involves banks. For decades, banks have been sub­ject to the “Know Your Customer” rule, which says in prin­ci­ple that these insti­tu­tions have a duty to screen, flag or exclude taint­ed funds. It is unclear how effec­tive­ly this sys­tem works in prac­tice. Many trans­ac­tions involve untrace­able shell cor­po­ra­tions, which effec­tive­ly hide the iden­ti­ty of the true indi­vid­ual in con­trol. And while we typ­i­cal­ly blame trop­i­cal tax havens as the lag­gards in con­fronting the reg­u­la­to­ry prob­lems posed by shell com­pa­nies, sur­pris­ing­ly, it is the United States that has proved unwill­ing or polit­i­cal­ly unable to take mean­ing­ful action.

Individual klep­to­crats have glob­al­ized their rep­u­ta­tions and per­sonas as well as their assets by acquir­ing for­eign prop­er­ty, like Obiang’s pala­tial prop­er­ty in France, and cit­i­zen­ship. Kleptocrats are cre­at­ing a bur­geon­ing new mar­ket for phys­i­cal and legal res­i­den­cy, which once depend­ed on birth­place and ances­try, but now is increas­ing­ly a com­mod­i­ty for sale. Again, spe­cial­ists bro­ker deals between new­ly wealthy peo­ple from out­side the West and their host-coun­tries to be.

Recent rev­e­la­tions have stark­ly high­light­ed both dynam­ics. In a delayed reper­cus­sion of the Panama Paper leaks, Pakistani Prime Minister Nawaz Sharif was forced to resign in July after his fam­i­ly was linked to sev­er­al unde­clared lux­u­ry prop­er­ties in London held via shell com­pa­nies. The month before, the U.S. Department of Justice iden­ti­fied one of the main con­spir­a­tors in the dis­ap­pear­ance of bil­lions of dol­lars from Malaysia’s 1MDB sov­er­eign wealth fund as hav­ing pur­chased a pass­port from St. Kitts and Nevis. Countries such as Australia, the United Kingdom, Spain and many oth­er E.U. mem­bers have been increas­ing­ly keen to cash in on the glob­al mar­ket for sell­ing res­i­den­cy, too.

If 1990s-style glob­al­iza­tion was about foot­loose multi­na­tion­al com­pa­nies look­ing to invest in new places, the new era sees klep­to­crats and many oth­ers tak­ing advan­tage of a new age of indi­vid­ual glob­al­iza­tion, not only mov­ing cap­i­tal around, but shop­ping for cor­po­rate, phys­i­cal and legal res­i­den­cy. This means that we need to pay less atten­tion to how coun­tries move up and down the anti-cor­rup­tion rank­ings, and more to transna­tion­al net­works and ser­vice providers that enable klep­toc­ra­cy on a glob­al scale.

By Alex Cooley and Jason Sharman

How today’s despots and klep­to­crats hide their stolen wealth

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