Oligarchy: Ghislaine Maxwell explains LLC rot; America loses zeal for foreign bribe-paying prosecutions

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.

LLCs – THAT’S A FOUR-LETTER WORD

In the months before Ghislaine Maxwell’s arrest, there was much tabloid speculation about how it could be that she was so successfully evading arrest, on grand jury charges, of helping sex offender Jeffrey Epstein groom his underage victims. She was hiding out in Paris. Or was it Israel? Or perhaps she was on a submarine? After all, the reasoning went, if she was in the United States, agents would have found her already.

The truth turned out to be far more mundane, and far more depressing. She was living quietly in her New Hampshire house, her ownership of which was disguised by that indispensable tool of the modern criminal — a shell company.

  • “The defendant appears to have been hiding on a 156-acre property acquired in an all-cash purchase in December 2019 (through a carefully anonymized LLC) in Bradford, New Hampshire,” the US attorney stated in her detention memorandum. (Italics mine) 

The LLC, an abbreviation of the words Limited Liability Company, was invented in Wyoming in 1977. LLCs gave their owners a “best of both worlds” solution, by combining the positive attributes of partnerships and corporations into one single package. With an LLC, you could dodge taxes when things went right, and responsibility when things went wrong, so it’s pretty easy to understand why investors wanted them, and why governments did not. Up to 1977, you could only find such weird hybrids somewhere dodgy, like Panama.

It took awhile for the idea to catch on but, when it did, other states worried Wyoming was going to steal their business, so they passed similar laws too. Now, not only can you find LLCs throughout the U.S., but they’ve spread back offshore to places like Nevis, which offer unholy versions of their own. Every new iteration of the LLC tries to be more attractive than all the ones that have gone before, so the regulations governing them become ever-looser. Nowadays, LLCs don’t just help you dodge tax and liability, they can also shield your identity, even from the FBI, in a way that company providers in traditional tax havens can only dream of.

It is a measure of just how hard the system is to navigate that we’re still not entirely sure what Maxwell’s company was called. Was it Granite Realty LLC? Or Granite Realty, LLC? Or Granite Reality LLC? Or just Granite LLC? You can find them all in the media reports.

For years, researchers and activists have been trying to point out the damage this laxity is doing to tax fairness, security, and the integrity of the financial system, both in the United States and worldwide.

  • A person needs to provide far more personal information to a state to obtain a library card than to create a company.”
  • Rogue regimes, terrorist groups, transnational criminal organizations, arms dealers, kleptocrats, drug cartels, and human traffickers have all used U.S.-registered shell companies to obscure their identities and facilitate illicit activities.”
  • The U.S. has overtaken Switzerland in a global ranking of countries most complicit in helping individuals to hide their finances from the rule of law.”

Occasionally, Congress gets close to closing this monumental loophole — most recently in October — but somehow its efforts always fail at the last minute. It’s hard to get any of the LLCs’ defenders to go on the record, so we can’t see who exactly is so successfully defending them. But it’s pretty easy to see why the rich and powerful might want LLCs to continue undisturbed: these useful little companies help their owners dodge tax, liability, regulation and scrutiny.

Perhaps the news that an LLC helped the woman accused of helping the world’s most notorious pedophile hide from justice will get reform over the line? Frankly, though, I doubt it. LLC-enabled fraud, like gun crime, appears to be something that American politicians are happy to just live with, perhaps because the harm they cause overwhelmingly affects other people.

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FCPA – THAT’S A FOUR LETTER WORD AS WELL

When I give talks, I’m often asked what the world should do to reign in the oligarchs, and I always give the same answer: follow the Europeans on transparency, but follow the Americans on enforcement. The United States may have deplorably lax shell companies, but its prosecutors are decades ahead of the competition when it comes to putting financial criminals in jail.

The cornerstone of America’s global actions is the Foreign Corrupt Practices Act (FCPA), which was passed in 1977, just like the law that created the LLC. (That was also the year I was born, and the year of The Clash’s first album, so there was clearly something in the water back then.) The FCPA applies worldwide, and thus allows U.S. prosecutors to pursue bribe-payers anywhere. Back in the 1970s, it was seen as a crucial way of proving the West’s rectitude in the Cold War but, in Donald Trump’s Washington DC, it is less popular. 

  • “It’s just so unfair that American companies aren’t allowed to pay bribes to get business overseas,” said Trump in 2017, according to a book by two Washington Post reporters published in January.

Trump has not, as he supposedly promised back then, scrapped the FCPA, but perhaps more alarmingly, prosecutors appear to be using it less and less.

Stanford Law School’s FCPA Clearinghouse tracks investigations, and its figures show a pretty steady downward trend since 2016, when prosecutors brought 27 cases, to last year when they brought eight. So far, this year there have been five, which is well below the average recorded over the past decade.

There have been plenty of signs the U.S. retreat from its position as chief exponent of the rule of law has harmed anti-corruption efforts abroad, from Guatemala to Ukraine, which I’ve covered in previous newsletters, but it’s worrying to see the trend on U.S. soil as well.
 

IN THE MARKET FOR A PASSPORT?

There’s some heavy discounting going in the passport business, with the Caribbean vendors of citizenship all slashing prices to try to attract some new business. The cuts are being promoted as temporary, but then such cuts always are, so I wouldn’t worry about missing out on them if you need some time to get your cash together.

  • “In these days of Covid, when tourism is not happening, we have to find ways to create revenue to sustain our economy,” Les Khan, CEO of St. Kitts and Nevis Citizenship Investment Unit, told Bloomberg news.

A source in the passport-selling world got in touch to tell me it’ll take more than lower prices to get people interested in the Caribbean again, however. His clients want to go to Canada, or New Zealand, or anywhere with a sane Covid-19 policy and a well-resourced healthcare system. 

  • “The great white north is looking like a good bolthole for the family,” he tells me.

But, with travel still limited, who’s going to be going anywhere anyway? And that’s bad news for the luxury goods suppliers that have increasingly come to rely on the mega-wealth of the developing world’s mega-wealthy. Apparently, $111 billion of wealth is trapped in China, and the makers of unnecessary luxuries are desperately looking for ways of getting at it. I’m sure we all wish them luck.

WHAT I’M READING

I just raced through Dark Mirror, Barton Gellman’s excellent account of how he reported on Edward Snowden’s leaked documents, and what happened when he did. I’ve spent much of the time since then paranoid about whether I’ve been too careless about my online security, or else whether – since the baddies can apparently hack you whatever you do – my blase approach has been entirely appropriate. I have no answer to that, except to recommend it as a cracking book.

See you next Wednesday,
Oliver

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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.