Milton Friedman’s neoliberal triumvirate of privatization, deregulation – free trade, and drastic cuts to government spending laid the groundwork for Reagan economic policies of deregulation that began in the 1980s. This, in turn, launched globalization which was supposed to undermine authoritarianism. It was believed that the openness of the new century generated an advantage for emerging middle classes, on-line dissidents, NGOs and democratic movements. The lobbying profession exploded, and industries began writing legislation affecting their sectors; public services such as incarceration and war fighting were privatized; the brakes on money in politics were released; and presidents began filling top regulatory positions with bankers. Since the 1970s the technology of moving money around has changed radically, as both technological and political changes dovetailed. The dismantling of capital controls and the creation of global capital markets, tied together with instantaneous money transfer and effective free movement for the mass affluent, has created an environment highly suited to kleptocracy.
This rapid deregulation has made wealth easier both to hide and defend. Since the 1970s the complex of lawyers, bankers, lobbyists, accountants, and public relations experts – the ‘wealth services industry’ – have matured in power and skill. Not only has it successfully defended its clients from taxation, it has created new legal tools for them to avoid it: for example, the ability to keep cash owned by foreign subsidiaries in U.S. banks, untaxed but controlled in all but name by the U.S. parent company. At the same time, the wealth defense industry enables an escalation of offshore tax avoidance: consider the 30 major U.S. corporations which, between 2008 and 2010, collectively paid more in lobbying fees related to promoting tax avoidance measures in Congress than they did in federal income taxes. The wealth services industry has evolved from more or less defending Western clients into a global concern whose kleptocracy clientele now includes Russian, Chinese, Central Asian, and Gulf autocrats.
The World Bank has shown how frighteningly easy it is to launder money with complete anonymity. Under international guidelines, incorporation agents are supposed to establish the identity of a beneficial owner. The purpose of this requirement is to prevent the ability of criminals to launder funds through the system, though in reality this flimsy stipulation has broken down in the contemporary offshore environment. A recent World Bank study found that 42 out of 102 incorporation agents surveyed failed to establish the identities of their clients. This finding was further corroborated by the Global Shell Games project, an academic research project that posed as 21 aliases mimicking everything from terrorists to corrupt officials and contacted nearly 4,000 incorporation agents worldwide. This project revealed that one quarter of these agents were ready to create a shell company without any documentation, and half were ready to do so without meeting the requirements of the law.1
The key element in maintaining the kleptocracy is the anonymous or “shell” company, a company stripped to its legal essence that provides neither goods nor services. Shell companies are used to hold funds and conceal their owners’ identities. Rather than be misled by the designation of “company,” it is best to conceptualize these entities as something closer to secret codes. Shell companies are often mathematically generated legal formulas, a chain of interlocking companies and holding companies, created simply for the benefit of anonymity. This is, of course, exactly what a criminal or kleptocrat needs in order to avoid detection in either his own country or the West. Once established, these shell companies can freely acquire assets across the West with anonymity. Russian, Chinese, Central Asian, and Gulf ruling classes have shown a marked preference for laundering their wealth into prime real estate assets in Western capitals through these same anonymity devices.
Why is anonymity so important? This is the successful criminal’s dilemma. Once you are successfully stealing, your problem becomes not simply the ability to steal more, but the ability to launder these ill-gotten gains effectively. The successful criminal is accumulating dirty black cash that he cannot easily use or secure and needs to convert it into clean white cash: this is why money laundering is so important. The easier it is to launder money, the richer, more powerful, and more influential criminals become, and the quicker it becomes for the proceeds of crime to turn into new sources of power and activity. This is why nothing is more beautiful for a corrupt dictator than the ability to anonymously and untraceably move enormous sums electronically around the world. This empowers him, both at home and abroad. Gigantic sums of money are now travelling the world incognito. This dirty money is undermining democracy, weakening capitalism, and threatening security – both in America and abroad.
Globalization has created the golden age of money laundering and the rise of kleptocracy. Nestling in Western economies are offshore financial structures (and their professional enablers) which allow funds to instantaneously and anonymously jump between countries, empowering authoritarians and corrupting Western institutions. The International Monetary Fund estimates up to 5 percent of the world’s GDP is laundered money – and only 1 percent of it ever gets spotted. It has never been simpler or safer to be a kleptocrat. Globalization’s deep, structural motors are in fact enabling authoritarians. Not only can capital now mask itself and disappear without any trace, but gigantic sums of money are now traveling the world in a concealed manner. This is why the closest places to see the results of the looting are not in Africa or Central Asia but in downtown Manhattan and central London, where hundreds of “ghost apartments” now sit empty. Their primary function is no longer as residences, but as deposit boxes for illicit, laundered wealth.1
Globalization apologists optimistically predicted opportunities for peace, prosperity, and freedom would be created. Rather than retreat, democratize, and reform towards the rule of law, the autocratic ruling classes of Russia, China, Central Asia, the Arabian Gulf, and beyond have globalized with great success. The openness of the new century, the U.S. and the EU are now finding, is in fact rather well suited to the kleptocracy behind a dictator – with a coterie of American lawyers, French bankers, German accountants, and British public relations teams in tow. When a kleptocrat seeks to secure his illicitly gained and vulnerable assets, he is enabled at every step by Western bankers, lawyers, accountants, and other professionals. Recent corruption scandals have shown that major financial institutions such as HSBC, Deutsche Bank, UBS, and BNP Paribas have all participated in such money transfers. This has significantly altered the psychological perception and relationship between authoritarian and Western elites.1
Authoritarian conduct is now shaped by the ease and ability to move both their money and their persons easily offshore and into the Western world. The modus operandi of the contemporary authoritarian kleptocratic is: steal in a zone without the rule of law, and then secure it in a state with the rule of law. This changes the psychology of contemporary authoritarians. They have much less to lose if they lose power, so they can rule more avariciously and engage in much less state building when in office. This mechanism behind kleptocracy has been clear to Western bankers, lawyers, accountants, and public relations specialists for over a decade. Globalization has made it easier for corrupt officials to sequester their assets abroad. The White House, still with one foot in the Kennan paradigm, has been slower to catch on. The Robert Mueller investigation includes probing how offshore financial structures allow economic elite to corrupt American institutions and politics.
On the night of February 22, 1946, a young U.S. diplomat named George Kennan, then based in Moscow, sent a famous telegram outlining what he saw as a gathering conflict with the Soviet Union. In embryonic form, that telegram prefigured a strategy Kennan would later term “containment”: a “long-term, patient but firm and vigilant” resistance to Soviet expansion. The telegram was about Soviet behavior after their threats on Poland in 1945, and especially with regards to their refusal to join the newly created World Bank and International Monetary Fund. As the Western financial system became hospitable to authoritarian elites, powerful players from authoritarian regimes have taken advantage of offshore anonymity to amass fortunes worth billions of dollars with the aid of western enablers. Today the Kremlin uses the methods and connections of the Russian kleptocracy, and the power and influence they generate, to advance its agenda abroad.
Though unanticipated, the growth of opaque financial systems has become one of the key features of globalization: enormous amounts of money are now moving around the world covertly. Kleptocratic regimes not only are able to wield power inside Western institutions and game them to their own ends, but also use their financial heft to project influence on international media and events. These processes include undermining American foreign policy: crippling development, threatening democracy, damaging Western soft power, and fuelling state collapses. The response requires a new paradigm to replace the Cold War paradigm. These forces have become a multifaceted threat to democracy that requires a coordinated and sophisticated transnational response. It is necessary to shut down the corrupt wealth services industry involved in laundering money for clientele that includes Russian, Chinese, Central Asian, and Gulf aristocrats. Ending the anonymous shell companies must become a national security priority for the US.
1 Judah, Ben. October, 2016. Kleptocracy Initiative of the Hudson Institute. The Kleptocracy Curse: Rethinking Containment https://s3.amazonaws.com/media.hudson.org/files/publications/20161020JudahTheKleptocracyCurseRethinkingContainment.pdf