Governments outsource sanctions enforcement to private industry to mixed results
DO SANCTIONS WORK?
I’m in the Bahamas this week (I know, I know, it’s a tough life, but I’ve learned to cope) to attend a conference on money laundering hosted by the Central Bank of the Bahamas and to chat to people about the good old bad old days when all you had to do to launder a plane-full of dollars was to fly it from Miami to Nassau. I’ve written a paper about a bugbear of mine, which is how Western countries print extravagant quantities of banknotes, without asking — in an era of supposedly declining cash usage — who exactly is using them all.
There are lots of other folks talking too, and I’ve been spending this morning reading their papers, and I want to pick out two that address the important issue of sanctions and what we can learn from the experience of the last year.
Regular readers of this newsletter may have noticed that I’m pretty agnostic about the modern enthusiasm for sanctions as the answer to geopolitical problems. After all, they were a favored tool of the League of Nations, and their success rate at reigning in aggressive governments during the 1930s was, let’s be honest, mixed. It seems to me that, by announcing sanctions against kleptocrats and then expecting private companies to enforce them, governments are getting credit for tough action without having to spend any money on actually being tough. It risks being the worst kind of government-by-press-release.
Just to be clear, I do think sanctions can be useful but only as the cherry on top of a cake of well-resourced investigative and prosecutorial work into financial crime, as a temporary holding solution while other resources are put in place. If we expect them to take the place of the whole cake, we’ll end up pretty under-nourished.
The first paper I want to highlight (it’s the ninth on this list) is by Michael Findley, Daniel Nielson and Jason Sharman and lays out their investigation into whether private companies are following the sanctions. If you don’t know how this trio of academics work, they specialize in a “secret shopper” approach to financial crime, writing carefully calibrated emails to potential enablers, seeing how many of their correspondents reply, then assessing how many of them followed the anti-money laundering rules around checking identities, etc. (If you haven’t read their book “Global Shell Games,” I think you should). It turns out that a depressingly high number of people are happy to do business with pretty much anyone if the price is right.
- “We have many international clients with the same confidentiality concerns so I am happy to tell you that you have found the right service provider for your needs!” is one genuine reply they received in a previous investigation into how easy it is to set up shell companies.
They started their new round of research into sanctions before February last year, when the war broke out. They had a natural experiment about whether the Ukraine crisis would change the effectiveness of the existing Magnitsky-type sanctions in multiple jurisdictions. They wrote emails purportedly coming from people who were already sanctioned and other emails from people with unremarkable names, then compared the replies. Their first finding, derived from hundreds of pre-war solicitations to company formation agents and banks asking for a shell company or an account, is that those so-called “smart sanctions” were pretty feeble. There was almost no difference in the replies they received when pretending to be sanctioned individuals, compared to when they weren’t.
- “The results from the first round of solicitations cast doubt on the effectiveness of the sanctions. Before the Russian invasion, private firms in the United States, European Union, the U.K., Canada, and other countries with Magnitsky sanctions legislation were statistically as likely to accept business and flout compliance requirements when dealing with high-risk sanctioned names as they were when fielding requests from the low-risk placebo solicitations,” they note.
But that changed after Vladimir Putin launched his full-scale war on Ukraine last year. Suddenly, far fewer professional enablers were prepared to countenance doing business with people on the sanctions list. So, what does this mean? Does this mean that the sanctions suddenly started working after February? Or something else? Fortunately, Sharman and his co-authors addressed that question by sending solicitations to potential enablers in countries that had not adopted Magnitsky-style legislation.
- “The results indicate that, even though firms in countries without Magnitsky laws had no legal requirement to discriminate in their treatment of sanctioned names relative to placebo solicitations, they nevertheless did so. In countries without Magnitsky laws there was a substantively large and statistically significant decrease in the number of firms willing to engage with treatment emails, and a corresponding decline in refusals (compliance and non-compliance declined also, but these results were not significant statistically). These results suggest that it was the effects of the war, perhaps in political and reputational terms, that drove the sensitivity to approaches,” they write.
So does that mean sanctions work? Kind of. To see what I mean by that, it is interesting to also read the paper by Anjishnu Bandyopadhyay and Max Heywood (it’s the second one on the list), which looks at the problem from the other end of the telescope and examines the macro data on financial flows between banks inside and outside Russia.
- “We find that in aggregate, banks in the sample are effective in reducing cross-border flows to newly sanctioned entities. However, these flows do not fall to zero, indicating that gaps in sanctions implementation remain,” they note.
- “The continued use of cross-border transactions across a range of jurisdictions by both originators and beneficiaries with links to Russian banks highlights the importance of a cohesive international approach to effective anti-money laundering and sanctions implementation.”
The conclusion I draw from these papers is that relying too much on sanctions means we are putting too much faith in the willingness of the private sector to fulfill the demands of governments. If past behavior shows us anything, it is that private companies are more than willing to help criminals dodge the rules if the price is right. Logically, the more that private companies impose sanctions, the higher a price that can be charged by those that do not.
If we outsource our response to a national security threat, we have to be prepared for the very real risk that some firms are willing to take money to undercut it. Even a small compliance failure can let through a very large amount of money. That means we need to properly resource our investigative bodies so they can check up on how compliant private companies are being.
In short, sanctions on kleptocrats are not — and must not become — a substitute for real substantive action against financial crime, and we must beware of governments trying to make them become so. In the meantime, if you want to know what sanctions evasion looks like, check out this indictment alleging that a Russian and a U.K. national helped oligarch Viktor Vekselberg maintain access to the U.S. financial system even after he was sanctioned in 2018, in order to maintain his superyacht.
- “The efforts of these facilitators permitted Tango to continue to operate as a luxury yacht with the full array of services and luxury goods available to it, supported by hundreds of thousands of dollars of illegally-obtained U.S. services and U.S. financial transactions, and all for the benefit of Vekselberg,” the indictment notes.
I have to say though, the fact that these two characters used the codename “Fanta” to disguise the identity of a yacht called “Tango” does not suggest to me that they were exactly criminal masterminds.
I received an interesting email this week from a reader suggesting that I should retire the word “oligarch” because, in relation to Russia, it’s so overused that it mainly just means “wealthy Russian I don’t like.” I can see his point, and it’s one that also applies to the word “corruption,” which tends to be used to describe actions taken by the political enemies of whoever’s speaking. If a word is only something you apply to people you already don’t like, then it isn’t very useful.
So I thought I’d lay out what I mean by “oligarch,” and why this newsletter is called “oligarchy.”
We decided to start this newsletter long before February 2022, because we thought it was important to talk about extreme wealth’s gravitational force and how it distorts the shape of politics, society and everything else. I admit that, since Putin launched his large-scale attack on Ukraine a year ago, I’ve talked more about Russian oligarchs than about others, but that doesn’t mean I don’t think there are oligarchs elsewhere.
In fact, I cannot wait to write about oligarchs from other places, just as soon as Ukraine defeats Russia, Putin’s regime collapses and peace is restored to Eastern Europe. But I’m going to keep using the word oligarchy, and I mean it in its original ancient Greek sense. If it’s good enough for Aristotle, it’s good enough for me.
On that note, this is an interesting article by Jodi Vittori and Matt Page, two of the smartest thinkers on kleptocracy anywhere, asking what happens next in the battle against kleptocracy. They accurately highlight how extremely adaptable kleptocracy is, thanks to its network of entrepreneurial enablers scattered all over the world, all looking to move their clients’ wealth quickly, secretly and efficiently. As such, democracies need to create an anti-kleptocratic network that is equally adaptable, in order to expose that wealth.
They lay out how rich Russians have begun moving wealth via Turkey and the UAE in order to hide it from prying eyes and then to use those countries’ connections to the West to move the money onwards anonymously. This risks undermining all the progress that has been made, and Western countries will need to decide what they value more: containing Russia or maintaining close ties to Ankara and/or Dubai.
- “Too many democracies fail to prioritize global corruption as a major national security threat or to see how their own laws, institutions, and social norms enable it. Few recognize that corruption is a leading driver of crime, conflict, poverty, and democratic backsliding worldwide, considering it instead as more of a nuisance best tackled by helping foreign anti-corruption agencies, journalists, and civil society groups. As a result, democratic policymakers cannot see the cost to democracy of subordinating anti-corruption concerns to security and other geopolitical interests they perceive as being more important,” they write.
If democracies do not accept that kleptocracy is a challenge every bit as serious as communism was in its day, that it will not go away on its own and that confronting it requires standing up to some powerful interest groups in our own countries and among our allies, then we will never contain it, let alone defeat it.
You’ll be pleased to know that Page and Vittori have multiple policy proposals to add to my evergreen favorite of adequately resourcing enforcement agencies, all of which I agree with: increasing support for journalists and activist groups, improving cooperation between all parts of the anti-kleptocracy alliance and preventing abusive lawsuits that stifle public interest journalism. If you’re interested in more, they held a virtual event to discuss the report, which you can watch here.
WHAT I’VE BEEN READING
It’s a long flight across the Atlantic, and there was nothing I wanted to watch on the video screen, so I read a lot. Firstly, I finished Matt Stoller’s “Goliath,” which is a sweeping account of the rise and fall of anti-monopoly politics in the United States. I read it because it features Wright Patman, a politician I’ve recently become slightly obsessed with, but I found it interesting and provocative. I finished that somewhere near northern Canada and moved on to “I Used to Live Here Once,” a biography of the novelist Jean Rhys by Miranda Seymour, which took me all the way to the queue for immigration. I read it because I adore the Wide Sargasso Sea, but I didn’t think it added all that much to what I already knew, although I did discover that Rhys occasionally used to stay in a pub near my house. I’ll raise a glass to her next time I drop by.