REPORTS

Laundering Cash, Whitewashing Reputations

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Abstract

A grow­ing body of analy­sis has explored how klep­to­crats sys­tem­at­i­cal­ly cap­ture and loot their domes­tic state insti­tu­tions, but schol­ars and pol­i­cy mak­ers have paid less atten­tion to how glob­al­iza­tion enables grand cor­rup­tion, as well as the laun­der­ing of klep­to­crats’ finances and rep­u­ta­tions. Shell com­pa­nies and new forms of inter­na­tion­al invest­ment, such as lux­u­ry real-estate pur­chas­es, serve to laun­der the ill-got­ten gains of klep­to­crats and dis­imbed them from their coun­try of ori­gin. Critically, this nor­mal­iza­tion of “every­day klep­toc­ra­cy” depends heav­i­ly on transna­tion­al pro­fes­sion­al inter­me­di­aries: Western pub­lic-rela­tions agents, lob­by­ists and lawyers help to recast klep­to­crats as inter­na­tion­al­ly respect­ed busi­ness­peo­ple and phil­an­thropic cos­mopoli­tans. The result­ing web of rela­tion­ships makes up a “transna­tion­al unciv­il soci­ety,” which bends glob­al-gov­er­nance insti­tu­tions to work in its favor.

Kleptocracy and grand cor­rup­tion are now under scruti­ny as nev­er before. With renewed glob­al atten­tion on these abus­es, a rel­a­tive­ly clear pic­ture has emerged of the domes­tic polit­i­cal economies shaped by klep­to­crat­ic rule. Analysts have shown how state insti­tu­tions are set up to allow elites and their fam­i­lies to sys­tem­at­i­cal­ly loot, while pro­tect­ing these elites polit­i­cal­ly. In par­tic­u­lar, this research has placed under the micro­scope the resource-rich coun­tries that are vul­ner­a­ble to klep­to­crat­ic state cap­ture.

Yet to under­stand the oper­a­tions of today’s jet-set­ting klep­to­crats, one must look beyond the bor­ders of the poli­ties they despoil. Copious news items fea­ture klep­to­crats and their fam­i­lies pur­chas­ing lux­u­ri­ous pent­hous­es and cars; attend­ing inter­na­tion­al cul­tur­al galas and char­i­ta­ble ini­tia­tives; and enlist­ing Western agents, lawyers, spokes-peo­ple, and pil­lars of the estab­lish­ment to white­wash their rep­u­ta­tions. Watchdogs and pol­i­cy mak­ers are begin­ning to turn their atten­tion to the wide range of klep­to­crat­ic activ­i­ty that takes place in the West itself1—whether this entails Equatorial Guinea’s vice-pres­i­dent stand­ing tri­al in France for cor­rup­tion, the for­mer pres­i­dent of Uzbekistan’s daugh­ter fac­ing inves­ti­ga­tions for mon­ey laun­der­ing in a half-dozen coun­tries, or the Malaysian prime min­is­ter under sus­pi­cion in con­nec­tion with the diver­sion of more than US$4.5 bil­lion from his country’s sov­er­eign wealth fund into per­son­al bank accounts around the world. Conceptual analy­sis explain­ing how these pieces fit togeth­er, how­ev­er, remains scarce.

Kleptocrats do not just trans­form their poli­ties in order to [End Page 39] sys­tem­at­i­cal­ly con­trol eco­nom­ic activ­i­ty and plun­der nat­ur­al-resource wealth; they also cul­ti­vate exten­sive net­works of transna­tion­al actors and insti­tu­tions to assist in cam­ou­flag­ing their finan­cial flows and pol­ish­ing their rep­u­ta­tions. Although some of these rela­tion­ships and activ­i­ties remain hid­den, a hall­mark of con­tem­po­rary klep­toc­ra­cy lies in its pub­lic face and vis­i­bil­i­ty. Unlike oth­er illic­it actors—such as nar­cocrim­i­nals and terrorists—who keep their exten­sive transna­tion­al ties in the shad­ows, klep­to­crats tend to use the agents, ser­vices, and insti­tu­tions of glob­al­iza­tion not only to safe­guard their assets, but also to main­tain a high-pro­file sta­tus.

Key to this process is the work of pro­fes­sion­al inter­me­di­aries who blend ill-got­ten gains togeth­er with legal finan­cial flows and invest­ments. The inter­me­di­aries hired by kleptocrats—including bankers, realestate bro­kers, accoun­tants, lawyers, wealth man­agers, and pub­lic-rela­tions agents—work to unteth­er their clients’ pro­files from their orig­i­nal cor­rupt acts, recast­ing them as respect­ed cos­mopoli­tan busi­ness­peo­ple and phil­an­thropists, often through the use of glob­al-gov­er­nance insti­tu­tions. Frequently, this effort involves tout­ing the puta­tive prode­mo­c­ra­t­ic and anti­cor­rup­tion cre­den­tials of klep­to­crat­ic actors.

Using these inter­me­di­aries, klep­to­crats ampli­fy their sway and enhance their secu­ri­ty by build­ing rela­tion­ships with influ­encers and insti­tu­tions abroad. These efforts have giv­en birth to a “transna­tion­al unciv­il soci­ety”: While at home many klep­to­crats crack down on civ­il soci­ety and its links to out­side NGOs, fun­ders, and media out­lets, glob­al­ly they fos­ter a com­plex web of cross-bor­der ties.2 Unfortunately, at present the glob­al bal­ance between transna­tion­al civ­il soci­ety and this dark­er coun­ter­part appears to be tilt­ing toward the lat­ter.

The New Kleptocracy

The inter­na­tion­al aspect of klep­toc­ra­cy is geared toward two prin­ci­pal objec­tives: the laun­der­ing of mon­ey and the laun­der­ing of rep­u­ta­tions. Of course, nei­ther klep­toc­ra­cy nor klep­to­crat­ic net­works are new. Accounts from the 1960s and 1970s relay the bru­tal­i­ty of infa­mous kleptocrats—including Philippine pres­i­dent Ferdinand Marcos (1965–86), Haitian pres­i­dent Jean-Claude Duvalier (1971–86), and Zairean pres­i­dent Mobutu Sese Seko (1965–97)—who enriched them­selves and their fam­i­lies while impov­er­ish­ing their pop­u­la­tions. We now also know that these same fig­ures stashed bil­lions of dol­lars in secret Swiss bank accounts. Yet two impor­tant fea­tures dis­tin­guish the cur­rent era of glob­al klep­toc­ra­cy from these fore­run­ners.

First, a chang­ing glob­al sit­u­a­tion has erod­ed the once-auto­mat­ic pri­ma­cy of geopol­i­tics in the West’s rela­tions with klep­to­crats. Throughout the Cold War, most for­eign-pol­i­cy mak­ers accept­ed as a giv­en that a country’s geopo­lit­i­cal ori­en­ta­tion trumped con­cerns about its domes­tic [End Page 40] abus­es, includ­ing author­i­tar­i­an­ism, human-rights vio­la­tions, and grand cor­rup­tion. To ensure regime sta­bil­i­ty and alle­giance, Western coun­tries often chan­neled devel­op­ment aid to klep­to­crats through inter­na­tion­al finan­cial insti­tu­tions such as the IMF and the World Bank. As U.S. pres­i­dent Ronald Reagan pub­licly com­ment­ed in 1986 with regard to whether the United States should tol­er­ate the author­i­tar­i­an excess­es of Marcos, “I don’t know of any that’s more impor­tant than the bases on the Philippines.“3

Similarly, to safe­guard French com­pa­nies and strate­gic inter­ests fol­low­ing for­mal decol­o­niza­tion in French Africa in 1960, elites in France estab­lished an elab­o­rate sys­tem of post­colo­nial ties lat­er dubbed “La Françafrique.” These arrange­ments, which last­ed over three decades, ensured that African auto­crats would pro­tect French inter­ests in exchange for Paris allow­ing mas­sive sums obtained through graft and kick­backs to pass through French banks, ener­gy firms, and min­ing com­pa­nies.4

The end of the Cold War not only lift­ed geopo­lit­i­cal pres­sure on the United States to sup­port anti-Soviet client states, but also led to a fun­da­men­tal shift in inter­na­tion­al atti­tudes toward cor­rup­tion. Until the 1990s, the view that cor­rup­tion was a nec­es­sary part of doing busi­ness in many devel­op­ing coun­tries was wide­spread; until 1998, for exam­ple, German com­pa­nies could write off over­seas bribes from cor­po­rate tax­es. During the 1990s, how­ev­er, the belief that cor­rup­tion was in fact moral­ly objec­tion­able and harm­ful to domes­tic devel­op­ment spread rapid­ly. In 1995, the Berlin-based watch­dog Transparency International issued its inau­gur­al Corruption Perceptions Index, a sur­vey that dared to name and shame those coun­tries regard­ed by out­side respon­dents as the most cor­rupt in the world.

A series of inter­na­tion­al treaties and agreements—including the the Inter-American Convention Against Corruption (1996), OECD Anti-Bribery Convention (1997), and the United Nations Convention Against Corruption (2003)—solidified the new anti­cor­rup­tion norm. After the Cold War, the United States increased enforce­ment of its own Foreign Corrupt Practices Act (passed in 1977), and anti­cor­rup­tion efforts became a sta­ple of its devel­op­ment-assis­tance pro­grams. Finally, the inter­na­tion­al com­mu­ni­ty came to pub­licly accept the prin­ci­ple that a kleptocrat’s over­seas assets, if proven to have result­ed from ill-got­ten gains, could be returned to their coun­try of ori­gin.5 Even in France, recent tri­als of African klep­to­crats have sig­naled a grow­ing rejec­tion of the arrange­ments that pre­vi­ous­ly shel­tered the prac­tices and pro­ceeds of grand cor­rup­tion.

The strength­en­ing of the trans­paren­cy norm in the post–Cold War era has trans­formed klep­to­crats’ approach to man­ag­ing their wealth and their inter­na­tion­al rep­u­ta­tions. No longer able to siphon mon­ey direct­ly into for­eign bank accounts or trade on their anti­com­mu­nist cre­den­tials, klep­to­crats have devel­oped sophis­ti­cat­ed glob­al net­works to laun­der their [End Page 41] wealth and avoid inter­na­tion­al scruti­ny. Central to these new net­works are pro­fes­sion­al glob­al inter­me­di­aries whose spe­cial­ized ser­vices cater to high–net-worth inter­na­tion­al clients. In short, the West’s insti­tu­tions and bro­kers play a cru­cial role in facil­i­tat­ing transna­tion­al cor­rup­tion.

The Laundering of Money

In the world of busi­ness and finan­cial ser­vices, a whole indus­try ser­vic­ing klep­to­crats has emerged. From cen­ters such as London and New York, it sprawls out­ward to a range of off­shore juris­dic­tions and real-estate hotspots. Even when klep­to­crats or their agents con­duct busi­ness with non-Western partners—such as a Chinese state-owned enter-prise—the mon­ey often flows through net­works of com­pa­nies arranged by Western finan­cial-ser­vice providers, after which it may end up in the hid­den accounts of rulers and their senior offi­cials. Only recent­ly have ana­lysts begun to appre­ci­ate the glob­al geog­ra­phy of mon­ey laun­der­ing.

Offshore finance:

No insti­tu­tion­al inno­va­tion has been more impor­tant for the klep­to­crat than the untrace­able shell com­pa­ny. The sys­tem­at­ic use of shell com­pa­nies is now com­mon­place for multi­na­tion­al firms that seek to min­i­mize their tax lia­bil­i­ties in any giv­en juris­dic­tion, as well as for wealthy indi­vid­u­als and klep­to­crats who wish to oper­ate in secre­cy. Estimates of total wealth held in the off­shore domain vary; econ­o­mist Gabriel Zucman has esti­mat­ed that 8 per­cent of glob­al GDP is kept off­shore, a fig­ure that includes about 30 per­cent of African and 50 per­cent of Russian wealth.6

The release in 2016 of the Panama Papers, detail­ing the hold­ings of the Panamanian law firm Mossack Fonseca, revealed the indus­tri­al scale on which untrace­able com­pa­nies are used and the com­plex­i­ty of their nest­ed struc­tures. Together with recent schol­ar­ship, the Panama Papers have under­scored a crit­i­cal point: Despite pop­u­lar con­cep­tions that these shell com­pa­nies are pri­mar­i­ly reg­is­tered in small tax havens in exot­ic loca­tions, the most prob­lem­at­ic juris­dic­tions are actu­al­ly with­in the OECD. In a ground­break­ing study, Michael Findley, Daniel Nielsen, and J.C. Sharman sent more than 7,400 solic­i­ta­tions to glob­al cor­po­rate-ser­vice providers on behalf of fic­ti­tious clients with vary­ing cor­rup­tion-risk pro­files. Their inves­ti­ga­tion revealed that U.S. and U.K. shell-com­pa­ny providers were less like­ly to com­ply with the guide­lines of the inter­gov­ern­men­tal Financial Action Task Force on ascer­tain­ing com­pa­ny own­er­ship than were so-called tax havens out­side the OECD. In a claim echoed by lat­er reports, the study iden­ti­fied com­pa­ny-ser­vice providers in Delaware, Nevada, and Wyoming, where incor­po­ra­tion ser­vices are a crit­i­cal source of state rev­enues, as some of the most secre­tive in the world.7 As the glob­al trans­paren­cy regime gath­ers more steam, the United States seems to carve out more excep­tions for itself. The trans­paren­cy[End Page 42] NGO Tax Justice Network ranked the United States below only Switzerland and Hong Kong on its 2015 Financial Secrecy Index.8

For many post-Soviet coun­tries, off­shoring and state-build­ing have been inter­twined, with regimes and rul­ing fam­i­lies amass­ing per­son­al for­tunes by chan­nel­ing to for­eign accounts rents from state assets such as com­modi­ties, for­eign aid, and the sale of or prof­its from Soviet-era state-owned enter­pris­es. In Kazakhstan, Mukhtar Ablyazov, a for­mer gov­ern­ment min­is­ter and head of the BTA bank, used more than a thou­sand shell com­pa­nies to hide bil­lions of dol­lars from the authorities—a move that he claimed, with some jus­ti­fi­ca­tion, is used rou­tine­ly by the Kazakhstani busi­ness and polit­i­cal elite. In Tajikistan, the prof­its of the state alu­minum com­pa­ny and biggest nation­al export-earn­er Talco went into shell com­pa­nies reg­is­tered in the British Virgin Islands and then served a vari­ety of pub­lic and pri­vate pur­pos­es, among them retail pur­chas­es and busi­ness deal­ings for the ben­e­fit of mem­bers of the president’s fam­i­ly. In Kyrgyzstan, busi­ness­men linked to the son of President Kurmanbek Bakiyev (2005–10) ran Asia Universal Bank as a node in the off­shore finan­cial sys­tem, with bil­lions of dol­lars flow­ing into anony­mous com­pa­ny accounts, some­times via cor­re­spon­dent rela­tions with major inter­na­tion­al banks such as Standard Chartered and Raiffeisen.9

The global real-estate sinkhole:

Once mon­ey is “cleaned” through net­works of com­pa­nies, its con­trollers may use it to advance both the social or polit­i­cal goals and the busi­ness inter­ests of klep­to­crats. Perhaps its most impor­tant des­ti­na­tion is the glob­al lux­u­ry real-estate mar­ket, where for­eign nation­als invest bil­lions of dol­lars every year, mix­ing illic­it and legal funds into assets pro­tect­ed by Western prop­er­ty laws. Of the ten lead­ing loca­tions that Christie’s International Real Estate iden­ti­fied in its first annu­al report, issued in March 2013, on lux­u­ry hous­ing around the world, nine were in the West; they includ­ed London, New York, and Paris.10 In all these mar­kets, real-estate bro­kers facil­i­tate trans­ac­tions but bear very lit­tle respon­si­bil­i­ty for ascer­tain­ing the true iden­ti­ty of pur­chasers or the legal­i­ty of their funds. In the United States, the National Association of Realtors has suc­cess­ful­ly lob­bied for exemp­tion from the Anti–Money Laundering (AML) dis­clo­sure require­ments of the 2001 Patriot Act.11 In the United Kingdom, bro­kers have a duty to dis­cern the iden­ti­ty of the sell­er, not the buy­er, and the real-estate indus­try is large­ly self-reg­u­lat­ed. With large com­mis­sions at stake, con­flicts of inter­est abound.12 And through­out the world’s high­end mar­kets, lux­u­ry pur­chas­es are com­mon­ly con­duct­ed via shell com­pa­nies or trusts, adding more lay­ers of secre­cy.

The absence of aca­d­e­m­ic research on the dynam­ics of the glob­al mar­ket in lux­u­ry real estate is strik­ing, but a series of high-pro­file inves­tiga­tive reports by jour­nal­ists and NGOs in the United States and the United Kingdom appear to have spurred some action by U.S. reg­u­la­tors. A sting [End Page 43] oper­a­tion con­duct­ed by the mak­ers of the U.K. Channel 4 doc­u­men­tary “From Russia with Cash” revealed that bro­kers, in order to facil­i­tate trans­ac­tions, appeared to will­ful­ly ignore red flags indi­cat­ing that their clients were high cor­rup­tion risks.13 After the pub­li­ca­tion of a high-pro­file New York Times exposé detail­ing the bil­lion­aires and shell com­pa­nies that owned units in Manhattan’s lux­u­ri­ous Time Warner Center, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) rolled out a pilot pro­gram of Geographic Targeting Orders (GTOs) that man­dat­ed dis­clo­sure of the actu­al buy­er in all-cash pur­chas­es above a cer­tain thresh­old ($3 mil­lion in Manhattan and $1 mil­lion in Miami) dur­ing the pur­chase of title insur­ance. In the ear­ly stages of the pro­gram, FinCEN found that 30 per­cent of the ben­e­fi­cial own­ers or pur­chase rep­re­sen­ta­tives whom it iden­ti­fied had been the sub­jects of ear­li­er sus­pi­cious-activ­i­ties reports by U.S.-based finan­cial insti­tu­tions.15 Yet while the Treasury has now expand­ed the GTO pro­gram to ten mar­kets, guide­lines for real-estate pro­fes­sion­als regard­ing AML issues remain in large part advi­so­ry rather than manda­to­ry.

British reg­u­la­tors are only just begin­ning to grasp the scale of the prob­lem. The National Crime Agency esti­mates that laun­dered mon­ey run­ning through the United Kingdom may amount to a stag­ger­ing £90 bil­lion annually—much of it end­ing up in prop­er­ty. Between 2012 and 2016, the mutu­al legal-assis­tance requests (which are used to inves­ti­gate mon­ey laun­der­ing) made to London by for­eign gov­ern­ments more than dou­bled in num­ber. A new law adopt­ed in 2017 has giv­en reg­u­la­tors greater pow­ers to inves­ti­gate unex­plained wealth used in lux­u­ry realestate pur­chas­es.16 But some­times it is activists rather than the author­i­ties who turn up the lid on sus­pi­cious cas­es. The NGO Global Witness found that after flee­ing to the United Kingdom from Kyrgyzstan in 2010, Maksim Bakiyev, the son of the oust­ed pres­i­dent, took up res­i­dence in a man­sion in Surrey bought through an anony­mous com­pa­ny.17 Other exam­ples abound, with a polit­i­cal­ly con­nect­ed Russian bil­lion­aire and a one­time min­is­ter in the Nigerian gov­ern­ment among those believed to have pur­chased lux­u­ry apart­ments in the same London sky­scraper, in which off­shore com­pa­nies con­trol a quar­ter of the units.18

The Laundering of Reputations

Moving and invest­ing mon­ey transna­tion­al­ly is the first imper­a­tive of the mod­ern klep­to­crat, but laun­der­ing one’s rep­u­ta­tion is also crit­i­cal. In the cas­es men­tioned above, Kazakhstan has hired com­pa­nies to paint Ablyazov as a bad apple, Tajikistan has used its off­shore accounts to fund lob­by­ing in the U.S. Congress, and Asia Universal Bank has hired three for­mer U.S. sen­a­tors to serve on its board as a demon­stra­tion of stature and legit­i­ma­cy.19

Reputation laun­der­ing involves min­i­miz­ing or obscur­ing evi­dence of [End Page 44] cor­rup­tion and author­i­tar­i­an­ism in the kleptocrat’s home coun­try and rebrand­ing klep­to­crats as engaged glob­al cit­i­zens. Its murki­er cousin is so-called “black PR,” aimed at sul­ly­ing the rep­u­ta­tions of a kleptocrat’s polit­i­cal rivals. Reputation laun­der­ing com­pris­es a web of inter­re­lat­ed prac­tices that go beyond the eco­nom­ic realm to encom­pass var­i­ous social-net­work­ing and polit­i­cal tech­niques. These include secur­ing the right for the klep­to­crat to reside over­seas, run­ning an aggres­sive image-craft­ing and pub­lic rela­tions cam­paign, and using phil­an­thropic activ­i­ties to ensconce the klep­to­crat in a web of transna­tion­al alliances.

Securing multiple citizenships:

For klep­to­crats and oli­garchs, secur­ing mul­ti­ple rights of res­i­den­cy for them­selves and their fam­i­lies pro­vides a blan­ket of per­son­al secu­ri­ty, includ­ing access to the legal pro­tec­tions of a coun­try where the rule of law is more reli­able than at home. It also offers an exit option should their domes­tic polit­i­cal for­tunes shift.

One com­mon tech­nique is for a klep­to­crat to appoint rel­a­tives to the diplo­mat­ic corps, there­by ensur­ing these rel­a­tives the right to inter­na­tion­al trav­el as well as for­eign res­i­dence and diplo­mat­ic immu­ni­ty for crimes. In each of the Central Asian coun­tries, close rel­a­tives of the pres­i­dent have rou­tine­ly held high-lev­el diplo­mat­ic posi­tions.20For exam­ple, Gulnara Karimova, the scan­dal-plagued daugh­ter of Uzbekistan’s for­mer pres­i­dent Islam Karimov (1990–2016), served as a coun­selor to the country’s UN mis­sion in New York, ambas­sador to Spain, and per­ma­nent rep­re­sen­ta­tive to the UN in Geneva. Ozoda Rahmon, the first daugh­ter of the pres­i­dent of Tajikistan, has held senior posts in the Ministry of Foreign Affairs.

The right to live abroad is also increas­ing­ly avail­able for pur­chase. Over the last decade or two, a glob­al mar­ket in sec­ond cit­i­zen­ship and investor visas has emerged, allow­ing for­eign nation­als to acquire the right of res­i­dence in OECD coun­tries and oth­er poten­tial­ly attrac­tive states through per­fect­ly legal mech­a­nisms. All OECD coun­tries have some type of investor-res­i­dence or visa pro­gram, while over half have intro­duced new pro­grams to attract for­eign cap­i­tal in the wake of the glob­al finan­cial cri­sis.21

A new indus­try of inter­na­tion­al legal firms and sec­ond-cit­i­zen­ship spe­cial­ists has sprung up to arrange these trans­ac­tions.22 One of these firms, Henley and Partners, pub­lish­es and annu­al­ly updates the “Global Residence and Citizenship Handbook,” which it describes as “the inter­na­tion­al stan­dard work in the field and a reli­able guide for pri­vate clients, wealth man­age­ment pro­fes­sion­als and gov­ern­ments.“23 The November 2017 International Residency and Citizenship Exhibition and Conference in Abu Dhabi tar­get­ed more than fif­teen-thou­sand vis­i­tors, who learned about their options in small island nations such as Cyprus, Dominica, and St. Lucia as well as in such major states as Australia, Canada, and Spain.24 While this indus­try is not specif­i­cal­ly tar­get­ed at [End Page 45] klep­to­crats, evi­dence sug­gests that the buy­ers of res­i­den­cy and cit­i­zen­ship are often wealthy nation­als of states with high lev­els of cor­rup­tion.

Data from indi­vid­ual coun­try pro­grams sup­port this view. For exam­ple, fig­ures released by the U.K. Migration Advisory Committee reveal that, of the 1,647 appli­ca­tions grant­ed for res­i­dence under the Tier 1 investor pro­gram from its incep­tion in 2008 to 2013, about a fourth went to Russian (433) and anoth­er quar­ter to Chinese nation­als (419), with Egypt (46) and Kazakhstan (41) also among the top home coun­tries of recip­i­ents.25 By 2015, accord­ing to Transparency International UK (TIUK), the com­bined share of these “gold­en visas” claimed by Chinese and Russian nation­als had grown to 60 per­cent. Critics warned of lax over­sight and a near com­plete lack of due dili­gence as to the ori­gins of the funds invest­ed through this pro­gram. A study con­duct­ed by TI-UK found that “it is high­ly like­ly that sub­stan­tial amounts of cor­rupt wealth stolen from China and Russia have been laun­dered into the UK through the UK’s Tier 1 Investor visa pro­gramme.“26

The gov­ern­ment of Cyprus also has estab­lished a gold­en-investor pro­gram, whose par­tic­i­pants receive pass­ports that—since Cyprus is an EU member—entitle hold­ers to work and reside any­where with­in the EU. According to inves­tiga­tive report­ing by the Guardian, in 2016 alone more than four-hun­dred pass­ports were grant­ed under the pro­gram, which pro­duced more than four-bil­lion euros’ worth of invest­ment between its 2013 incep­tion and mid-2017. Demand was par­tic­u­lar­ly pro­nounced among indi­vid­u­als from Russia and Ukraine. The Guardian relat­ed that a leaked list of pass­port recip­i­ents includ­ed a for­mer Russian par­lia­men­tar­i­an, a bil­lion­aire Russian indus­tri­al­ist with reput­ed ties to President Vladimir Putin, and two Ukrainians who were then the largest share­hold­ers in a bank lat­er nation­al­ized and embroiled in scan­dal.27

Similarly, in 2014, Malta (also an EU mem­ber) launched a pass­port pro­gram that requires appli­cants to hand over 650,000 euros to a nation­al devel­op­ment fund and fur­ther invest 150,000 euros in gov­ern­ment bonds. As of mid-2016, Maltese offi­cials stat­ed that the pro­gram had award­ed close to sev­en-hun­dred pass­ports to for­eign nation­als and yield­ed 200 mil­lion euros in rev­enue.28 EU law­mak­ers have raised con­cerns about both the Cypriot and the Maltese pro­grams, with the European Parliament pass­ing a res­o­lu­tion crit­i­cal of the prac­tice in 2014, but action from Brussels has not fol­lowed.

Public relations and global reputation management:

Another crit­i­cal com­po­nent of “rep­u­ta­tion laun­der­ing” for a klep­to­crat is man­ag­ing the inter­na­tion­al spot­light and influ­enc­ing dis­cus­sion. In the United States, for­mal lob­by­ing for for­eign clients is a well-estab­lished prac­tice reg­u­lat­ed under the Foreign Agents Registration Act (FARA) of 1938. To con­duct polit­i­cal work on behalf of a for­eign gov­ern­ment, a U.S. actor or agent must for­mal­ly reg­is­ter with the Department of Justice’s [End Page 46] Fara.gov data­base and detail the polit­i­cal activ­i­ties per­formed. For the EU, reg­is­ter­ing for lob­by­ing remains vol­un­tary, while nation­al reg­u­la­tions in European coun­tries vary considerably—with nine­teen states, accord­ing to a European watch­dog, lack­ing firm leg­is­la­tion to reg­u­late lob­by­ing.29

But beyond these for­mal activ­i­ties, oli­garchs and klep­to­crats have tak­en advan­tage of a pletho­ra of infor­mal chan­nels to cre­ate dense net­works of polit­i­cal allies, sym­pa­thet­ic com­men­ta­tors, and sites of influ­ence. High-pro­file advi­sors and PR firms in the busi­ness of improv­ing regimes’ rep­u­ta­tions over­seas com­mand hefty fees and offer a broad range of ser­vices. Former U.K. prime min­is­ter Tony Blair has been scru­ti­nized for offer­ing, through his con­sult­ing firm, polit­i­cal and strate­gic advice to Kazakhstan’s President Nursultan Nazarbayev begin­ning in 2011—reportedly with an ask­ing price of £5.3 mil­lion per year. The assis­tance pro­vid­ed by Blair and his firm includ­ed help in shap­ing the Kazakhstani government’s response to the inter­na­tion­al crit­i­cism that fol­lowed its crack­down on protests by oil work­ers in the west­ern town of Zhanaozen in December 2011, which result­ed in four­teen con­firmed deaths.30

In addi­tion, firms under con­tract to klep­to­crats can deploy against their oppo­nents and oth­er tar­gets spe­cial­ized ser­vices resem­bling those of state intel­li­gence out­fits. These offer­ings range from gath­er­ing com­pro­mis­ing infor­ma­tion to hack­ing into per­son­al accounts and infil­trat­ing inner cir­cles. As a recent Financial Times inves­tiga­tive report into London’s murky pri­vate-intel­li­gence mar­ket found, “many firms have amassed exper­tise and trade­craft once monop­o­lised by state agen­cies and put it at the ser­vice of tyrants, oli­garchs and any­one else will­ing to pay.” The report notes that Arcanum Global, a part of this intel­li­gence-gath­er­ing and influ­ence-shap­ing sec­tor, ped­dled its ser­vices to Kazakhstan’s rebel­lious oli­garch Ablyazov while at the same time work­ing for his foes in Astana.31

Public-rela­tions firms also per­form sub­tler forms of “rep­u­ta­tion man­age­ment,” mon­i­tor­ing and shap­ing rel­e­vant open-source mate­r­i­al, such as Wikipedia entries, or gen­er­at­ing tar­get­ed social-media trends and cam­paigns on behalf of their clients. Although such work is legal, it can eas­i­ly cross eth­i­cal lines. The recent col­lapse of the London-based PR firm Bell Pottinger was prompt­ed by the release of a report detail­ing how the com­pa­ny, on behalf of busi­ness allies of scan­dal-plagued South African pres­i­dent Jacob Zuma, had waged a social­ly divi­sive cam­paign to deflect atten­tion away from Zuma. The company’s clients had also includ­ed Syrian pres­i­dent Bashar al-Assad’s wife, as well as Belarus’s dic­ta­tor Alyaksandr Lukashenka.32 In cer­tain cas­es, firms may even pres­sure jour­nal­ists and pub­lish­ers to refrain from pub­lish­ing mate­ri­als that might empha­size clients’ unseem­ly activ­i­ties in their home coun­tries or oth­er­wise dam­age their rep­u­ta­tions.

Knowledge cen­ters and pol­i­cy insti­tutes also make attrac­tive tar­gets for rulers inter­est­ed in bur­nish­ing their images. In U.S. law, dis­clo­sure [End Page 47] require­ments for think tanks are much less strin­gent than those for for­mal lob­by­ists. A New York Times exposé on for­eign fund­ing of U.S. think tanks revealed that many osten­si­bly rep­utable insti­tu­tions reg­u­lar­ly fail to dis­close the for­eign ori­gins of their project fund­ing.33 In addi­tion to their pos­si­ble influ­ence on U.S. for­eign-pol­i­cy think­ing, such funds may deter knowl­edge cen­ters from even address­ing the poten­tial­ly cor­rupt activ­i­ties of their donors. In this way, these monies may work to nor­mal­ize the activ­i­ties of klep­to­crats and keep inves­ti­ga­tions into their per­son­al for­tunes off the agen­da. In a hard-hit­ting review of Ukrainian oli­garchs’ influ­ence and lob­by­ing activ­i­ties in the United States, Taras Kuzio con­cludes that “buy­ing … the ser­vices of politi­cians, con­sul­tants, lob­by­ists, think tanks and lawyers is only one part of a wider prob­lem of reverse cor­rup­tion from cor­rupt coun­tries and author­i­tar­i­an polit­i­cal lead­ers.“34

Even uni­ver­si­ties are now sites for poten­tial influ­ence cam­paigns. Though most pres­ti­gious uni­ver­si­ties do have com­mit­tees to vet pro­posed for­eign dona­tions, there is no accept­ed inter­na­tion­al stan­dard for this vet­ting. In most cas­es, the bur­den of proof is on those seek­ing to show that the monies offered are the pro­ceeds of an ille­gal or nefar­i­ous act. In 2011, a series of scan­dals erupt­ed around rev­e­la­tions of finan­cial links between the London School of Economics (LSE) and the regime of for­mer Libyan dic­ta­tor Muammar al-Qadhafi. In March 2009, the autocrat’s son Saif was found to have made a £1.5 mil­lion dona­tion through his char­i­ty to LSE’s Centre for Global Governance just months after LSE award­ed him a doc­tor­ate. This “Libya links” scan­dal led to the res­ig­na­tion of LSE direc­tor Howard Davies and an inter­nal inquiry into the university’s due-dili­gence process.

Such cas­es also high­light the ques­tion­able stan­dards of a due-dili­gence indus­try oper­at­ing behind closed doors. When the Norwegian con­glom­er­ate Hydro did busi­ness with TML, one of the shell com­pa­nies receiv­ing the prof­its from the Tajikistani alu­minum indus­try, due dili­gence con­duct­ed for Hydro on TML “revealed noth­ing that was con­sid­ered harm­ful for the rep­u­ta­tion of the own­ers.” Yet a large amount of pub­lic evidence—much of it gath­ered in court cas­es to which Hydro had been a party—was avail­able regard­ing cor­rup­tion in Tajikistan’s alu­minum indus­try and the sub­or­di­na­tion of off­shore com­pa­nies such as TML to the gov­ern­ment.35 In cas­es such as this, due dili­gence seems to offer nom­i­nal adher­ence to cor­po­rate reg­u­la­tions while pro­vid­ing plau­si­ble deni­a­bil­i­ty to clients who may then chose to make or break a deal with a klep­to­crat­ic regime as they pre­fer. While look­ing for smok­ing-gun evi­dence of cor­rup­tion, inves­ti­ga­tors ignore the ques­tions that would arise under a bal­ance-of-prob­a­bil­i­ty stan­dard. No region­al expert would have argued that there was a low prob­a­bil­i­ty of cor­rup­tion in Tajikistan’s alu­minum indus­try. [End Page 48]

Philanthropy with a dual purpose?

The pro­fes­sion­al guardians of klep­to­crats’ rep­u­ta­tions often tout their clients’ phil­an­thropic activ­i­ties. For klep­to­crats, such activ­i­ties rep­re­sent not only an addi­tion­al chan­nel for laun­der­ing mon­ey, but also an oppor­tu­ni­ty to cul­ti­vate net­works of allies in oth­er gov­ern­ments, non­prof­its, and inter­na­tion­al organizations—a web of rela­tion­ships con­sti­tut­ing what we call “transna­tion­al unciv­il soci­ety.”

Before her fall from pow­er in 2013, Uzbekistan’s Gulnara Karimova presided over Fund Forum, a char­i­ta­ble foun­da­tion that she used to spon­sor pet projects and pro­mote her image glob­al­ly. The foun­da­tion entered into part­ner­ships with respect­ed insti­tu­tions, includ­ing the Louvre Museum in Paris, the British Council, the Japanese International Cooperation Agency, and a breast-can­cer char­i­ty.36 Much of its work involved orga­niz­ing osten­ta­tious cul­tur­al events for the elite of Uzbekistan, includ­ing the annu­al Style.uz fash­ion and art expo in Tashkent. Nonetheless, for­eign states wish­ing to cur­ry favor evi­dent­ly found tempt­ing the oppor­tu­ni­ty to part­ner with the then-pow­er­ful Karimova, who there­by bol­stered her inter­na­tion­al cred­i­bil­i­ty.

In 2008, the United Nations Educational, Scientific and Cultural Organization (UNESCO) agreed to estab­lish a life-sci­ences research award fund­ed by and bear­ing the name of Equatorial Guinea’s pres­i­dent Teodoro Obiang (it was lat­er renamed in a par­tial sop to crit­ics). Most of Equatorial Guinea’s cit­i­zens lack access to basic med­ical facil­i­ties, while its rul­ing fam­i­ly has been under inves­ti­ga­tion for offens­es linked to grand cor­rup­tion in the United States, Switzerland, France, and Spain; a French court found Vice-President Teodorin Obiang (Teodoro’s son) guilty of embez­zle­ment and mon­ey laun­der­ing in October 2017.37

Azerbaijan offers a strik­ing exam­ple of how klep­to­crats can blend finan­cial and polit­i­cal tac­tics in tar­get­ed influ­ence efforts. In September 2017, an inves­tiga­tive report by the Organized Crime and Corruption Reporting Project and the Guardian revealed that, between 2012 and 2014, the Azeri gov­ern­ment had chan­neled $2.9 bil­lion in pay­ments through the Estonian branch office of a Danish bank and four U.K.-registered shell com­pa­nies whose ben­e­fi­cial own­ers were kept secret. Much of the cash went to a cam­paign aimed at win­ning over image-crafters, lob­by­ists, and European politi­cians engaged with the Caspian coun­try, includ­ing at least one par­tic­i­pant in elec­tion obser­va­tion. This episode came in the wake of the so-called “caviar diplo­ma­cy” scan­dal of 2013, which revolved around rev­e­la­tions that the Azerbaijani gov­ern­ment had pro­vid­ed cash pay­ments, gifts, and lux­u­ry trips to mem­bers of the European Parliament.38

What Is to Be Done?

One of the ironies of every­day klep­toc­ra­cy lies in the fact that klep­to­crats, after per­vert­ing the law to acquire wealth in their home juris­dic­tions, rely on the law to pro­tect that wealth in oth­er juris­dic­tions. [End Page 49] Yet this does not mean that uphold­ing the rule of law requires Western offi­cials to turn a blind eye to ques­tion­able activ­i­ties by for­eign despots. In fact, the con­trary is true. Kleptocracy depends heav­i­ly on the par­tial and selec­tive use of the law, the uneven imple­men­ta­tion of rules to block taint­ed funds from abroad. Tightening laws in a few key areas and, above all, strength­en­ing the enforce­ment of exist­ing reg­u­la­tions could do a great deal to pre­vent Western legal and finan­cial indus­tries from fur­ther enabling klep­toc­ra­cy.

Everyday klep­toc­ra­cy thrives thanks to sig­nif­i­cant short­com­ings in trans­paren­cy and account­abil­i­ty require­ments, includ­ing in states deemed to be among the least cor­rupt in the world. Plugging the holes in the glob­al anti–money-laundering regime will require coun­tries world­wide to estab­lish nation­al ben­e­fi­cial-own­er­ship reg­istries, with the end goal of cre­at­ing a search­able glob­al reg­istry of com­pa­nies. Firms that set up shell com­pa­nies should also be man­dat­ed to estab­lish, record, and report the true iden­ti­ties of their cus­tomers. These mea­sures will also make reg­u­la­tion of the lux­u­ry-prop­er­ty mar­ket eas­i­er. For the real-estate indus­try, report­ing should become manda­to­ry in high-val­ue sales rather than con­tin­ue to depend on self-regulation—which, as in the finan­cial sec­tor, “stands in rela­tion to reg­u­la­tion the way self-impor­tance stands in rela­tion to impor­tance.“39

Governments have out­sourced much of the work of finan­cial sur­veil­lance to pri­vate-sec­tor firms, espe­cial­ly banks. But in the absence of close super­vi­sion and cred­i­ble sanc­tions for dere­lic­tion of duty, it is naïve to expect these inter­me­di­aries to pass up prof­itable oppor­tu­ni­ties to accept dubi­ous clients. While U.S. fed­er­al and state reg­u­la­tors have increas­ing­ly imposed size­able penal­ties on banks, they have large­ly con­tin­ued to give a free pass to oth­er institutions—from law firms to realestate agencies—that have shirked their due-dili­gence respon­si­bil­i­ties.

Western gov­ern­ments can clip the wings of klep­to­crats by impos­ing visa-denial regimes on those cred­i­bly accused of crimes relat­ed to grand cor­rup­tion. The United States and Britain have insti­tut­ed such regimes but applied them uneven­ly, and despite calls for coor­di­nat­ed action by the G-20, oth­er coun­tries have been reluc­tant to fol­low suit.40 Anticorruption efforts could also make greater use of the new sys­tem of world­wide auto­mat­ic tax-infor­ma­tion exchange insti­tut­ed in con­nec­tion with the OECD Common Reporting Standard. Finally, impor­tant allies in the strug­gle for account­abil­i­ty could be empow­ered by giv­ing civ­il soci­ety groups and oth­er pri­vate par­ties stand­ing to take direct legal action (crim­i­nal and civ­il) against taint­ed wealth from abroad and the inter­me­di­aries who host it. This could be done through such legal pro­vi­sions as the United States’ Racketeering and Corruption Organizations (RICO) Act, con­struc­tive-trust pro­vi­sions (allow­ing the repos­ses­sion of illic­it assets), and qui tam law­suits (allow­ing whistle­blow­ers to become a par­ty).41

With regard to rep­u­ta­tion laun­der­ing, we need coali­tions of aca­d­e­m­ic [End Page 50] researchers, jour­nal­ists, and civ­il soci­ety groups to con­duct in-depth and inno­v­a­tive inves­ti­ga­tions. Such explo­rations could start close to home with a look into the fund­ing received by think tanks and uni­ver­si­ties. Moreover, pub­lic insti­tu­tions should be required to abide by trans­paren­cy stan­dards sim­i­lar to those of the Foreign Agents Registration Act, with dis­clo­sure of all meet­ings tak­en and dona­tions received. Finally, the pri­vate-intel­li­gence and rep­u­ta­tion-man­age­ment indus­tries should be sub­ject to sim­i­lar report­ing stan­dards. For deals above a cer­tain thresh­old, due-dili­gence reports—products cur­rent­ly of doubt­ful prove­nance, yet poten­tial­ly of great sig­nif­i­cance in coun­ter­ing corruption—should be pub­lished online with all sources anonymized.

Weak trans­paren­cy regimes have allowed pro­fes­sion­al inter­me­di­aries to con­struct a mask of respectabil­i­ty for cor­rupt rulers and their cash. From aca­d­e­m­ic research to the world of finance, open­ing up the deeds of cor­rupt for­eign actors to pub­lic and reg­u­la­to­ry scruti­ny will help to pre­vent elites who tram­ple on the rule of law at home from selec­tive­ly invok­ing it to pro­tect them­selves abroad. Without such changes, Western states, par­tic­u­lar­ly the United States and the United Kingdom, will see the rule of law and demo­c­ra­t­ic norms cor­rod­ed in their own soci­eties as they play host to increas­ing­ly glob­al­ized and influ­en­tial for­eign klep­to­crats. Alexander Cooley

Alexander Cooley is direc­tor of the Harriman Institute at Columbia University and Claire Tow Professor of Political Science at Barnard College.John Heathershaw

John Heathershaw is asso­ciate pro­fes­sor of inter­na­tion­al rela­tions at the University of Exeter J.C. Sharman

J.C. Sharman is Sir Patrick Sheehy Professor of International Relations at the University of Cambridge.

NOTES

1. World Bank and United Nations Office on Drugs and Crime, “Stolen Asset Recovery (StAR) Initiative: Challenges, Opportunities, and Action Plan,” World Bank, Washington D.C., June 2007; Global Witness, “Undue Diligence: How Banks Do Business with Corrupt Regimes,” March 2009; U.S. Senate Permanent Subcommittee on Investigations, “Keeping Foreign Corruption out of the United States: Four Case Histories,” 2010; Transparency International UK, “Closing Down the Safe Havens: Ending Impunity for Corrupt Individuals by Seizing and Recovering their Assets in the UK,” December 2013.

2. Alexander Cooley and John Heathershaw, Dictators Without Borders: Power and Money in Central Asia (New Haven: Yale University Press, 2017), 47.

3. “The President’s News Conference, February 11, 1986,” Public Papers of Ronald Reagan, www.reaganlibrary.archives.gov/archives/speeches/1986/21186e.htm.

4. Pascal Airault and Jean-Pierre Bat, Françafrique: Opérations secr‘etes et affaires d’État (Paris: Tallandier, 2016).

5. J.C. Sharman, The Despot’s Guide to Wealth Management: On the International Campaign Against Grand Corruption (Ithaca: Cornell University Press, 2017).

6. Gabriel Zucman, The Hidden Wealth of Nations: The Scourge of Tax Havens, trans. Teresa Lavender Fagan (Chicago: University of Chicago Press, 2015).

7. Bastian Obermayer and Frederik Obermaier, The Panama Papers: Breaking the Story of How the Rich and Powerful Hide Their Money (London: Oneworld, 2016); Michael G. Findley, Daniel L. Nielson, and J.C. Sharman, Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism (New York: Cambridge University Press, [End Page 51] 2014); Casey Michel, “The United States’ Problem with Financial Secrecy: How It Undermines U.S. Foreign Policy,” Foreign Affairs, 20 September 2017.

8. “Financial Secrecy Index,” Tax Justice Network, www.financialsecrecyindex.com.

9. Cooley and Heathershaw, Dictators Without Borders.

10. Christie’s International Real Estate, “Luxury Defined: An Insight into the Luxury Residential Property Market,” March 2013, www.christiesrealestate.com/resources/v_1_1_20_1/siteresources/my%20folder/external-files/cire_whitepaper_mar2013.pdf, 17.

11. Transparency International, “Doors Wide Open: Corruption and Real Estate in Four Key Markets,” 2017.

Laundering Cash, Whitewashing Reputations

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