Trump’s gift to kleptocrats
A funny thing happened to me on my way back from a financial crime conference last week. I was sitting on the train, reading a book, minding my own business, when a middle-aged Englishman at the neighbouring table started a video call with a business partner.
Their plan was to hire a “medium sized” private jet, obtain a few shrink-wrapped pallets of banknotes, then get a friend who had been in the US Special Forces to fly them to the Democratic Republic of Congo and pick up 150-200 kilograms of gold. This would then be flown to Dubai, refined, and sold on. He was determined to keep things simple, so wouldn’t be using diplomatic immunity this time, just quickly in and out, and there’d be a few hundred thousand dollars in profit for everyone, including himself and his interlocutor, who was called Martin.
CONFLICT GOLD
Rwandan-backed M23 rebels continue to advance in mineral-rich eastern Congo. Control of the DRC’s mines is one of the major prizes in the region. Gold is Rwanda’s biggest export, despite it having few if any mines of its own. Westerners’ willingness, for whatever reason, to buy these minerals are thus a major reason the war continues. The man on the train for example.
I did wonder for a while if the whole experience was an elaborate joke. I write about financial crime for a living and I was on my way back from a conference on that same topic. It seemed too much of a coincidence that someone would be discussing an extremely crude example of that very phenomenon two metres away from me. But the longer he went on – and he went on for a good half-hour – the more I came to understand he was just a real prick.
So-called “conflict gold” has been sanctioned by all major Western countries, and my fellow-passenger appeared aware that his trade was risky – “loose lips sink ships, Martin, let’s keep this to a tight circle” – but not sufficiently so that he didn’t broadcast his intent to an entire train carriage.
What was interesting though was the one thing he was afraid of, and the reason he wanted $10,000 from Martin – the risk of Donald Trump putting sanctions on gold while his jet was in the air, since that could upend the market and wipe out their profits.
The U.S. government’s decisions affect everyone on earth, even when they seem technical and unimportant. This is why Trump’s decision to smash the US government’s anti-corruption efforts will ripple outwards, causing misery and distress in places like Eastern Congo.
WHY ANTI-CORRUPTION POLICIES MATTER
Here’s an interesting new paper that shows that, if a country is targeted by US prosecutors investigating offences under the Foreign Corrupt Practices Act (which Trump ended enforcement of last week), the country’s leaders respond by burying their wealth more deeply behind further layers of shell companies.
“When the United States investigates corruption in a foreign jurisdiction, we find that elites from that jurisdiction quickly and substantively move their money abroad. Using data on 275,000 offshore incorporations, we illustrate that flows are directed to tax havens that have uncooperative relationships with the US,” academics Lorenzo Crippa and Nikhil Kalyanpur concluded.
This may make it look like investigations are a waste of time. If the result of prosecutors’ actions is that criminals not only keep their money but also make it harder to find, then why bother? In fact, the opposite is true: this is a sign that the FCPA is doing its job. No one thinks that stopping corruption and money laundering is possible, unless we can somehow re-engineer humans so we’re not greedy. The aim of legislation is not to stop these practices, but to make them expensive and perhaps not worth the trouble.
If a kleptocrat has to set up new shell companies, in inconvenient jurisdictions, as a result of prosecutors’ actions, that costs the kleptocrat money and – on the margin – makes some crimes unprofitable. So, Donald Trump is wrong to say the FCPA has been holding back U.S. companies. On the contrary, it has been helping companies by forcing officials to think before demanding bribes.
Of course, criminals learn to adapt to enforcement efforts. Here’s a fun example from British lawyer Dan Neidle’s Tax Policy Associates, showing how efforts to bring transparency and verification to the UK’s corporate registry is forcing criminals to recruit proxies via Facebook to put their names on the necessary documentation. Upcoming reforms in March that will oblige people to present proof of identity when filing corporate documents will likely lead to an exponential growth in the recruitment of such proxies.
The ability of criminals to keep finding a way around the law may make it look like the regulations are a failure. But actually the way criminals are having to hide behind ever-more complex screens is a sign of success here too. The transparency of the U.K.’s Companies House, which can be searched for free, allows sleuths like Richard Smith or Graham Barrow to spot what criminals are up to, and force them to engage in ever-more elaborate and expensive forms of deception.
Sadly, progress on the Corporate Transparency Act, which would start the United States down the road towards an open register has been halted by yet another federal judge in Texas. Back in December, a court in Texas issued a nationwide injunction against the enforcement of the CTA. The U.S. Supreme Court stayed the injunction.
But now another injunction has been granted, this time in response to two people called Samantha Smith and Robert Means who own property through companies. “Plaintiffs will be irreparably harmed if they are forced to comply with the new law,” the Texas court’s ruling said.
It’s not entirely clear what irreparable harm the law would cause them, though it is ironic that a court case they brought to stop anyone knowing they owned their companies – Sage Rental Properties LLC, and Oak Alley LLC, respectively – means that now everyone does.
While anti-corruption is stalled in the U.S., the European Union is hurtling towards a bright future when its long-promised Anti-Money Laundering Agency will actually do something. Well, maybe not “hurtling”.
After a year or two of discussion about where the new agency would be based, the choice of Frankfurt was made, as everyone knew it would from the very beginning. In January, AMLA gained a chairperson. And an office will, presumably, open at some point in the next few months. AMLA’s now going to consult on some “implementing rules” and should choose which entities it will supervise at some point in the next two years or so, before becoming fully operational in 2028. Tremble, criminals, the EU is coming towards you. Very, very slowly.
A version of this story was published in this week’s Oligarchy newsletter. Sign up here.