The Biden admin. wants to combat kleptocracy. It should start here.

Hello, and welcome to Oligarchy. We are tracking how Covid-19 and the world’s response to it is affecting the super-rich — and what that means for power and politics. 

US ACTION AGAINST KLEPTOCRACY

It’s been an interesting few weeks for us non-Americans watching President-Elect Joe Biden assemble his team members. As far as I can tell none of them are random grifters who caught Biden’s eye while spouting off on television, so we are already in positive territory, but I was particularly heartened when I read this: a profile of Jake Sullivan, the man who will be Biden’s National Security Adviser (mercifully, it’s not a role that requires Senate confirmation).

The world has badly missed having an American president committed to tackling kleptocracy, and the consequences have been particularly grim in past success stories like Guatemala and Ukraine. Donald Trump’s White House did not completely give up anti-corruption efforts. The Department of Justice, for example, was still making respectable progress on prosecutions under the Foreign Corrupt Practices Act, despite Trump’s stated opposition to the law. The two biggest years for corporate settlements in the act’s history have been 2019 and 2020

Still though, having a U.S. president who attempted to force a foreign country to investigate his political rival was not a good look. So, it was great to see Sullivan setting as a goal “To rally our allies to combat corruption and kleptocracy, and to hold systems of authoritarian capitalism accountable for greater transparency and participation in a rules-based system.”

Kleptocracy is for the 21st century what fascism and communism were for much of the 20th. Unlike those two previous rivals, however, the West is completely complicit in the maintenance of kleptocratic networks, which exploit the flaws in globalization to send illegal wealth straight into the international financial system, and eventually to major centers like New York and London. So, in the spirit of congratulating Mr. Sullivan on the excellent goal he’s set himself, I want to suggest some places for him to start.

SHELL COMPANIES

Anonymous companies are the kleptocrats’ deadliest weapons, the getaway cars for international fraudsters, without which grand corruption would be all but impossible. There has been a gradual push in some of the more notorious tax havens – the British Virgin Islands, Jersey, the Isle of Man, Luxembourg – to open up their registers to outside scrutiny, however, so the world has improved markedly from the bad old days.

There is, however, one outlier in this coordinated push to deprive crooks and thieves of the dark alleys they need to conduct their illegal deals: the United States. In designing a survey, three academic researchers pretended to be clients, sending requests to Company Formation Agents (companies that create companies) asking them to sell them a company, while refusing to provide the documents that should be needed to do that. Then they collated the responses from companies all over the world, to see who was most lax. It was respondents in the US who were most happy to do this trade.

  • “Your stated purpose could well be a front for funding terrorism, and who the f*** would get involved in that? Seriously, if you wanted a functioning and useful Florida corporation you’d need someone here to put their name on it, set up bank accounts, etc,” wrote one U.S. respondent in the academics’ survey. “I wouldn’t even consider doing that for less that 5k a month, and I doubt you are going to find any suckers that will do it for less, if at all.”

Their findings showed clearly that US company formation agencies are far laxer than those of any country, including all the traditional tax havens. Delaware’s rate of compliance with the kind of checks required before a company is created – just 6%– was the worst anywhere. In fact, when Global Financial Integrity investigated shell companies, they found that it was consistently easier for Americans to open a shell company than to obtain a library card.

  • “In addition to tax evasion and shady campaign contributions, U.S.-based shells have been used to hide the proceeds of activities as diverse as cigarette smuggling and weapons dealing,” Global Financial Integrity’s report said.

So what should Mr. Sullivan do about this? A series of measures (such as this one) have been suggested in Congress in recent years to force states to declare the true owners of their companies. This would undeniably irritate the wealthy U.S. individuals and companies accustomed to hiding their activities and assets behind LLCs, and it would annoy states that rely on incorporation income, but it’s time that the White House put its weight behind fighting offshore secrecy at home, if it wants other countries to help it do so abroad.

As a side benefit, this would help drive dirty money out of U.S. property markets. Without an LLC to hide behind, oligarchs, criminals and kleptocrats will stop using America condominiums as bank accounts.

PERPETUAL TRUSTS

Not all money is hidden behind corporations; quite a lot is hidden behind trusts, which is why the latest European Union anti-money laundering rules required that European countries – which includes the UK – create a register of trusts, which disclose beneficiaries of the arrangements.

In the United States, however, trusts are regulated at the state level, and the movement has been towards greater opacity, rather than transparency. Here’s a piece I wrote about South Dakota’s world-beating trust industry, after I visited last year. The state now offers asset protection superior to anything available in an offshore haven in the Caribbean, which is why it has sucked in $350 billion or so in assets to hide. That money is owned anonymously, tax free, in perpetuity.

  • “I don’t think there are 100 people in this state who understand the ramifications of what we’ve done,” said Susan Wismer, a member of the local house of representatives.

And South Dakota is just the leading jurisdiction in this race to the bottom: Wyoming, Nevada, Alaska, Delaware and several others are all close behind. In the long run, the only people to benefit from these states’ frantic drive to under-regulate each other will be the already-very-rich, who can hide their money from their fellow citizens, obliging other people to pay taxes on their behalf, and thus becoming ever richer.

This is exactly the business model that Switzerland used to follow, and everyone knew that was a magnet for kleptocrats and tax evaders, which is why the United States forced it to provide information about its banks’ account holders after the 2007-8 financial crisis. If the White House can do that to Switzerland, it can do it to South Dakota, and all the others. And it should do it fast.

GOLDEN VISAS

I am always waiting for an American investigative journalist to do the definitive piece on the EB-5 visa program, which is a thirty-year-old scandal that has mysteriously survived into the modern age without anyone really noticing how much of a scandal it is. If you invest $900,000 in a “targeted employment area”, and pass the checks, you get a Green Card. That makes it not only an incredibly cheap program (the equivalent British program is more than twice as expensive), but also very badly run.

Each year there 10,000 successful applicants, and they file their documents on paper as if it was still 1990, when the system was set up.

  • “We found in August 2015 that USCIS is unable to comprehensively identify and address fraud trends across the program because of its reliance on paper-based documentation,” said the Government Accountability Office, four years ago, and the situation hasn’t improved since then.

It is not surprising that a system that sells one of the most valuable travel documents in the world, which brings in billions of dollars a year, and which is entirely done without even the most basic kind of automated anti-fraud checks that are routine on an e-commerce site, should have been a magnet for scandal: for example, here, here, here, here, here. I could go on pretty much indefinitely with these kind of links but here’s one about Russia, here’s one about China, and here’s one about North Korea, to end with. What is surprising is that, after years and years of such scandals, nothing has been done to stop them.

So, my last suggestion to Mr. Sullivan: sort it out. You’ll annoy some property developers addicted to cheap money, but you’ll make the American financial system far more secure against infiltration by kleptocratic cash. That should be enough to keep him going for the first week or two, I’ll be back with some more thoughts as soon as he’s done.

WHAT I’M READING

There was another installment today of Cam Simpson’s series for Bloomberg Businessweek about major corporations selling cartels huge quantities the precursor chemicals needed for making illegal drugs, and yet barely being punished for it (if at all). It’s pretty rage-inducing, but it’s proper journalism, and I’d recommend you take a look.

See you next Wednesday,

Oliver

The story you just read is a small piece of a complex and an ever-changing storyline we are following as part of our coverage. Now we want to hear from you, our readers. Please take a moment to fill out this survey and tell us what matters most to you. We are about to launch a new membership program at Coda Story, and getting to know your news needs will help us make it better!

Tell us what you think

Oliver Bullough

Oliver Bullough is an author and journalist from Wales, who specializes in writing about financial crime, often when it has links to the former Soviet Union. His most recent book is Moneyland, why thieves and crooks now rule the world and how to take it back, and he is currently trying to write another one despite lockdown.

@OliverBullough