Kleptocracy | financial system

Financial system

Contemporary studies have identified 21st century kleptocracy as a global financial system based on money laundering (which the International Monetary Fund has estimated comprises 2-5 percent of the global economy).[5][6][7] Kleptocrats engage in money laundering to obscure the corrupt origins of their wealth and safeguard it from domestic threats such as economic instability and predatory kleptocratic rivals. They are then able to secure this wealth in assets and investments within more stable jurisdictions, where it can then be stored for personal use, returned to the country of origin to support the kleptocrat's domestic activities, or deployed elsewhere to protect and project the regime's interests overseas.[8]

Illicit funds are typically transferred out of a kleptocracy into Western jurisdictions for money laundering and asset security. Since 2011, more than $1 trillion has left developing countries annually in illicit financial outflows. A 2016 study found that $12 trillion had been siphoned out of Russia, China, and developing economies.[9] Western professional services providers are an essential part of the kleptocratic financial system, exploiting legal and financial loopholes in their own jurisdictions to facilitate transnational money laundering.[10][11] The kleptocratic financial system typically comprises four steps.[12]

First, kleptocrats or those operating on their behalf create anonymous shell companies to conceal the origins and ownership of the funds. Multiple interlocking networks of anonymous shell companies may be created and nominee directors appointed to further conceal the kleptocrat as the ultimate beneficial owner of the funds.[13]
Second, a kleptocrat's funds are transferred into the Western financial system via accounts which are subject to weak or nonexistent anti-money laundering procedures.
Third, financial transactions conducted by the kleptocrat in a Western country complete the integration of the funds. Once a kleptocrat has purchased an asset this can then be resold, providing a legally defensible origin of the funds. Research has shown the purchase of luxury real estate to be a particularly favored method.[14][15]
Fourth, kleptocrats may use their laundered funds to engage in reputation laundering, hiring public relations firms to present a positive public image and lawyers to suppress journalistic scrutiny of their political connections and origins of their wealth.[16][17]

The United States is international kleptocrats' favoured jurisdiction for laundering money. In a 2011 forensic study of grand corruption cases, the World Bank found the United States was the leading jurisdiction of incorporation for entities involved in money laundering schemes.[18] The Department of Treasury estimates that $300 billion is laundered annually in the United States.[19]

This kleptocratic financial system flourishes in the United States for three reasons.

First, the absence of a beneficial ownership registry means that it is the easiest country in the world in which to conceal the ownership of a company. The United States produces more than 2 million corporate entities a year, and 10 times more shell companies than 41 other countries identified as tax havens combined.[18] It currently takes more information to obtain a library card than to form a US company.[20]
Second, some of the professions most at risk of being exploited for money laundering by kleptocrats are not required to perform due diligence on prospective customers, including incorporation agents, lawyers, and realtors.[21] A 2012 undercover study found that just 10 of 1,722 U.S. incorporation agents refused to create an anonymous company for a suspicious customer; a 2016 investigation found that just one of 13 prominent New York law firms refused to provide advice for a suspicious customer.[22]
Third, such anonymous companies can then freely engage in transactions without having to reveal their beneficial owner.[citation needed]

The vast majority of foreign transactions take place in US dollars. Trillions of US dollars are traded on the foreign exchange market daily making even large sums of laundered money a mere drop in the bucket.[citation needed]

Currently, there are only around 1,200 money laundering convictions per year in the United States and money launderers face a less than five percent chance of conviction.[21] Raymond Baker estimates that law enforcement fails in 99.9% of cases to detect money laundering by kleptocrats and other financial criminals.[23]

Other Western jurisdictions favoured by kleptocrats include the United Kingdom and its dependencies, especially the British Virgin Islands, the Cayman Islands, Guernsey and Jersey.[24][25] Jurisdictions in the European Union which are particularly favoured by kleptocrats include Cyprus, the Netherlands, and its dependency the Dutch Antilles.[26][27]

Bust of Ferdinand Marcos in Tuba, Philippines
Montenegro's president Milo Đukanović was listed among the twenty richest world leaders according to the British newspaper The Independent in May 2010, which described the source of his wealth as "mysterious".[28][29]