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Kleptocratic Regimes and National Security: A Pervasive Threat and How it Can be Neutralized

Convened by the TraCCC Center at the Schar School of Policy and Government at George Mason University

Kleptocratic regimes abscond with national assets and use those assets against both their own citizens and the United States and its allies. The national security implications of this global phenomenon are wide ranging, overlapping, and poorly recognized. On November 15, 2017 George Mason University’s Terrorism, Transnational Crime and Corruption Center sponsored a conference on this issue that was hosted by Hudson Institute. It had two objectives:

  •   To identify and raise awareness about the vast array of threats that are caused or exacerbated by kleptocracies. These include great power competitors, nuclear aspirants, terrorism, organized crime, state failure, genocide, and obstruction of peace and stability operations.
  •   To propose and obtain feedback on recommendations for responding to this threat.

I therefore determine that serious human rights abuse and corruption around the world constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States.

On Dec 21, 2017 President Trump issued an “Executive Order Blocking the Property of Persons Involved in Serious Human Rights Abuse or Corruption,” in which he proclaimed:

I therefore determine that serious human rights abuse and corruption around the world constitute an unusual and extraordinary threat to the national security, foreign policy, and economy of the United States, and I hereby declare a national emergency to deal with that threat.1

Given that corruption and human rights abuses (the most extreme form of which is genocide) have now been proclaimed a national emergency, our first purpose has essentially been met by other means. The second purpose thus becomes the paramount contribution of this report: to provide vetted and actionable recommendations for neutralizing this threat.

The Trump Administration’s National Security Strategy (NSS) was also published shortly after this conference was conducted. In Pillar I, “Protect the American People, the Homeland, and the American Way of Life,” the NSS articulates the nation’s gravest threats, which include weapons of mass destruction, specifically referencing North Korea, Russia, China, and Iran.2 The kleptocratic nature of these regimes is discussed below, and this point was reinforced in a Dec 18 announcement by White House homeland security adviser Thomas Bossert that “…the U.S. today publicly attributes the massive “WannaCry” cyberattack to North Korea.”3

A contemporaneous report claims that the proceeds from this hacking are “likely being spent advancing North Korea's development of nuclear weapons.” The same report also cites Bossert as “calling out the ’bad behavior’ by other countries, including what he called the ‘corrupt regime’ of Tehran.”4 The NSS goes on to state that “The primary transnational threats Americans face are from jihadist terrorists and transnational criminal organizations.” 5 The NSS implicitly links this threat to failed states and protracted conflicts that are instigated or perpetuated by kleptocratic regimes stating that “…they thrive under conditions of state weakness and prey on the vulnerable as they accelerate the breakdown of rules to create havens from which to plan and launch attacks on the United States, our allies, and our partners.”6

Kleptocratic regimes are not an added threat that is competing in a zero-sum manner for scarce national security resources; rather they are a cross- cutting national security threat that either causes or contributes decisively to the threat actors already identified by the Trump Administration.

Taken together, President Trump’s declaration that corruption and human rights abuse constitute a national emergency and the catalogue of threats identified in the NSS have recognized all of the topics

Kleptocratic regimes are not an added threat that is competing in a zero-sum manner for scarce national security resources; rather they are a cross- cutting national security threat that either causes or contributes decisively to the threat actors already identified by the Trump Administration.

discussed in this report (i.e., great power competitors, nuclear aspirants, terrorism, organized crime, state failure, genocide, and obstruction of peace and stability operations). The central lesson that should be derived is that kleptocratic regimes are not an added threat that is competing in a zero-sum manner for scarce national security resources; rather they are a cross-cutting national security threat that either causes or contributes decisively to the threat actors already identified by the Trump Administration.

Our first order of business is to catalogue why kleptocratic regimes constitute a pervasive threat to national security. Our second purpose is to propose recommendations for neutralizing this threat by being smarter about how we deal with it. These arguments are summarized below.

Kleptocratic Regimes: A Pervasive Threat to National Security

● Russian/Chinese kleptocracy, a systemic threat, and the general systemic threats posed by kleptocratic regimes

One of the greatest threats to U.S. national security is the corrosive impact of kleptocracy on geopolitical order. Kleptocracy and financial secrecy have metastasized into an existential threat to our civilization. Vladimir Putin has “weaponized” use of corruption for geopolitical ends. The convergence of corrupt values and practices in the former Soviet Union, reformulated for the 21st century and exported to the West, now pose an encompassing threat. The economic power of kleptocrats like Putin is safeguarded in the West by our lack of transparency regarding the real owners of corporations which allows kleptocrats to launder their illicit revenue in shell companies. We must address these threats by enhancing transparency and closing off our financial system to those intent on damaging our country.

● Kleptocracy and the Link to Terrorism, Radicalization, Fragile States, and Political Instability

Inherent in the nature of kleptocracies is massive diversion of public funds for private gain. The consequences – inadequate resources for public services, de-legitimization of the regime, and repression of dissent – fuel radicalization, state fragility, and conflict. Extremist groups draw on public anger at the abuse of power. Prominent current examples include the Houthi rebels in Yemen, the Taliban in Afghanistan, the Islamic State in Iraq and Syria, and Boko Haram in Nigeria. The most salient cases where kleptocractic actors have posed a clear threat to U.S. counter-terrorism and stabilization efforts are Afghanistan and Iraq. Systemic and high-level corruption – within governments we supported and funded – funneled revenue out of the domestic economy, further impoverished the country, hollowed out security institutions, undermined the legitimacy of the state, and fueled recruitment by insurgent and terrorist groups. Kleptocracy also has economic effects that slow growth, thereby undercutting political stability. Corruption distorts markets by adding costs and creating inefficiencies, and it deters Foreign Direct Investment.

● The “Convergence” among terrorism, organized crime, corruption and illicit power structures

The convergence of terrorism, organized crime, corruption, and illicit power structures constitutes an alternative, parasitic, global political economy that represents an existential threat to societies based on the rule of law. Their effects have been exacerbated by the dramatic increase in the flow of goods and services, money, people, and data that have resulted from globalization. Terrorists and criminals take advantage of these same flow paths and are able to do so invisibly as their transactions are lost in the overwhelming volume of licit and illicit transactions. There is an increasing level of organizational collusion between international terrorist organizations, organized crime and networked insurgencies (e.g., Hezbollah and the Sinaloa cartel). This threat is compounded by the collusion of “mafia states” that utilize the traditional tools of statecraft, such as passports, airline and shipping registries, and diplomatic pouches, to provide free passage to engage in criminal activity.

● Criminalized Power Structures: Leading Spoilers of Peace and Stability Operations

Criminalized power structures, defined as regimes that obtain and maintain power through exploitation of illicit revenue, have been responsible for obstructing or thwarting peace processes in at least 70% of the internal conflicts in which the United Nations has intervened since 1990.7 When the U.S. has been involved–and this has included both peace and stability operations–the figure rises to 100% (i.e., Somalia, Haiti, Bosnia, Kosovo, Afghanistan, and Iraq). Both the U.S. and the international community chronically overlook this problem. In the ten case studies examined in Criminalized Power Structures: The Overlooked Enemies of Peace, almost five years elapsed before missions had the mandate and means to mount a strategy to confront their kleptocratic spoilers.8 Not only had the “golden hour” been squandered, the legitimacy of the mission had typically been severely compromised. This is perhaps the most likely explanatory factor for the 50% rate of return to conflict within five years after an international intervention, as claimed by Kofi Annan.9

● Violent kleptocracy as the source of genocide

“Violent kleptocracy” is a system of state capture in which ruling networks hijack governing institutions for the purpose of looting public coffers and natural resource wealth. The state is thus transformed from an institution that is supposed to provide social and educational services and employment opportunities for its citizens and to safeguard the rule of law into a predatory criminal enterprise that does quite the opposite. Ruling kleptocratic networks utilize violence to maintain power and repress dissenting voices leading to a propensity for conflicts to spiral out of control and precipitate mass atrocities and genocide. Terrorist organizations, militias, and rebel groups can also control territory and operate in a similar manner. The most prominent current examples in Africa are South Sudan, Sudan, Democratic Republic of the Congo, Central African Republic, and Somalia. Previous African conflicts that have metastasized under the influence of violent kleptocracies include Angola, Liberia and Sierra Leone. In all cases, the result has been destabilized/ungoverned regions, humanitarian crises, and gross human rights violations that have frequently led to mass atrocities and genocide.

Kleptocratic Regimes: How They Can Be Neutralized

The sine qua non for neutralizing the pervasive national security threat posed by kleptocratic regimes is to recognize the threat. Proper assessment and planning are essential. This requires the identification of the network of actors and their most vulnerable nodes so that a comprehensive strategy exploiting all the relevant tools at our disposal can be orchestrated. The second requirement is to craft effective tools for attacking their center of gravity: access to the illicit revenue that is vital to maintain kleptocratic rule. To raise the cost of continuing to govern in a predatory manner, kleptocrats must be deprived of impunity. Hybrid justice institutions, comprised of both indigenous and international personnel,10 are the means to accomplish this. Finally, the admonition to “do no harm” must be heeded. In our unseemly haste to proclaim an exit strategy, all too often capacity building for the security sector is regarded as the simplistic elixir. When the security sector is also an instrument of repression for a kleptocratic regime, this only compounds the problem. Recommendations for addressing each of these pivotal issues are summarized below.

● Tailor assessment and planning to the threat from kleptocratic regimes

A proven assessment methodology exists that was responsible for the success in Bosnia against the 3rdEntity Movement. It emphasizes identifying both the formal and informal components of these pernicious networks and the “exchanges of power” between them (e.g., illicit revenue in exchange for impunity from prosecution or repression of opposition). Identifying critical nodes and enablers in these exchanges of power and exploiting their vulnerability to prosecution are keys to developing an effective strategy.

● Pass beneficial ownership legislation

The vehicle of choice for most kleptocrats to disguise the source of their illicit revenue is to set up corporations where their identity is hidden (i.e., shell companies). The U.S. sets up nearly two million corporations a year, but none of the states requires that the owners be identified (known as beneficial ownership). Federal legislation has recently been introduced with broad bipartisan support to require disclosure of beneficial owners (i.e., the identities of who controls, has an ownership interest in, or benefits from the corporation).

Federal legislation has recently been introduced with broad bipartisan support to require disclosure of beneficial owners (i.e., the identities of who controls, the corporation.

● Use data science to combat kleptocracy’s threat to national security

Increases in computing processing power and storage capability coupled with developments in data science make possible creation of a computationally analyzable graph database that maps the networks of primary kleptocratic targets down to at least their first and second level connections. To dismantle hubs of connectivity, identify the nodes that contain the greatest degree centrality and betweenness centrality. Focus data scientific efforts on suspicious pattern recognition, anomaly detection, network analytics, and predictive analytics. These techniques are useful for lead generation, targeting, preemptive action, and evidentiary analysis. For agencies tasked with combatting kleptocracy, equip them with data scientists. Finally, National Security Presidential Memorandum 7 on “Integration, Sharing, and Use of National Security Threat Actor Information to Protect Americans” should be amended to include kleptocratic regimes as threat actors.

● Create a database of Politically Exposed Persons and a procedure for the U.S. Government (USG) to share analysis about them with financial institutions

There is a high probability that kleptocrats will appear to the international financial sector as Politically Exposed Persons (PEP). A PEP is “…an individual who is or has been entrusted with a prominent function…many PEPs are in positions that potentially can be abused for the purpose of committing money laundering…corruption and bribery, as well as…terrorist financing.11 Currently there is no requirement for banks to provide the data they collect about PEPs or their transactions to anyone. An information sharing procedure should be established between the U.S. government and financial institutions to enable secure exchange of information and USG analysis about the transactions of PEPsThe use and enforcement of precision-guided policy tools

Targeted sanctions (i.e., smart sanctions) and asset seizure have been unleashed with decided impact against terrorists, transnational organized crime, and nuclear proliferation. These tools need to be harnessed for use against the nemesis of kleptocratic regimes, since these national security threats are routinely intertwined. The U.S. can also lend substantial weight to international regimes by invoking Section 311 of the USA PATRIOT Act against money laundering and the Global Magnitsky Act to counter kleptocratic regimes. Precision-guided policy tools include targeted sanctions focused on designating networks more than individuals and the creative use of sectoral and secondary sanctions. Sectoral sanctions can be tailored to vulnerable nodes in kleptocratic networks denying transactions in the U.S. financial system to an entire sector or sectors of the economy. “Secondary” sanctions can also be imposed on financial institutions that are enabling the illicit activities of kleptocrats, allowing the denial of all or only a portion of the array of correspondent financial services provided by the U.S. financial system.

Targeted sanctions and asset seizure have been unleashed with decided impact against terrorists, transnational organized crime, and nuclear proliferation. These tools need to be harnessed for use against the nemesis of kleptocratic regimes.

● Use hybrid justice institutions to combat impunity of kleptocrats

When contemplating a prospective international peace or stability operation, the international community has shackled itself with a false dichotomy between either completely replacing the local legal system (i.e., exercising full executive authority) or merely providing advice and assistance to develop its proficiency (i.e., capacity building). The purpose of this recommendation is to expand the repertoire to include an intermediate “partnership” option involving collaborative exercise of legal authority involving international and carefully selected and assiduously protected judges, prosecutors, police and corrections officials. For peace and stability operations, the authority of this hybrid justice institution would be limited to crimes against the mandate. Hybrid justice institutions may also be a viable option for averting state capture.

● Accountability is essential when building capacity in the security sector

U.S. and other donors involved in security sector capacity building in a given country should develop a coordinated strategy that provides equal weight to capacity building and establishing transparent and accountable security sectors. To provide clout, metrics should be developed for determining whether accountability systems are functioning, and they should be used annually to review performance and reallocate spending as needed to address the most serious accountability deficiencies. An assessment of the risk that corruption could pose to our capacity building efforts needs to be conducted prior to intervention, and policies and procedures should be implemented to mitigate the risk and ensure we “do no harm.”

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