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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