.
T

his week, internet news outlet Buzzfeed released an exposé called the FinCEN Files, a massive trove of documents that illustrates how Western financial institutions move trillions of dollars of dirty money from kleptocrats, drug cartels, terrorists, and others. It should go without saying but, as Buzzfeed writes, “money laundering is a crime that makes other crimes possible.”

Kleptopia: How Dirty Money Is Conquering the World | Tom Burgis | Harper | September 2020.

Composed of over 2,100 suspicious activity reports (SARs) shared with the International Consortium of Investigative Journalists (ICIJ) and other media organizations, the FinCEN Files describe nearly $2 trillion in transactions involving some of the world’s largest banks. The generation of the reports themselves does not necessarily prove illicit activity or wrongdoing, but SARs are a compliance requirement and can offer intelligence into illegal activity.  

The release of these documents is a fortuitous event for author Tom Burgis and his fascinating new book Kleptopia: How Dirty Money is Conquering the World. A deeply reported, thrillingly written book, Kleptopia follows the narrative thread of how states and kleptocrats seize assets for themselves, launder these assets through western institutions to “clean” them, and in doing so enable their autocracies.

Abusing the West’s Legal & Financial Systems

Burgis’ greatest strength is in illuminating the reach of money laundering into nearly every facet of modern life, but also in illustrating how this parallel economy supports and indeed enables autocrats around the world. Here Burgis draws on a work by Ernst Fraenkel, a German legal scholar. In his book The Dual State: A Contribution to the Theory of Dictatorship, Fraenkel describes how dictatorships have concurrent state-systems: normative and prerogative. In the case of the former, the state obeys its laws; in the case of the latter, the state violates those laws and does what it wants.

It is a useful framework for understanding how the figures in Burgis’ book operate; how Nursultan Ábishuly Nazarbayev of Kazakhstan expropriated the wealth of the country for his benefit and that of his family, how the leadership of Zimbabwe did the same, and how the oligarchs of Russia first used the system to their benefit and then had the system used against them by President Vladimir Putin. There is a rule of law, to be sure, but it is only for other people and only when it is convenient.

Nearly every kleptocrat profiled in this book sought out the West’s institutions and legal systems to validate their behavior and their aims. In the case of Kazakhstan—the central storyline of Burgis’ book—Nazarbayev pursued Mukhtar Ablyazov to the famous courts of London, seeking to eliminate an ally-turned-rival and acquire his assets. The lengths to which Nazarbayev went are incredible: he hired private security and intelligence firms, leveraged the venerable law firms of London, conducted an all-out public relations war against Ablyazov, and even planned to film a fake documentary (via one of the intelligence firms in question) to gain inside information on Ablyazov and his defense.

The Beneficiaries of Ill-Gotten Gains

Throughout Burgis’ book, the ecosystem that enables money laundering lurks just off-stage. Occasionally, as the cases he describes evolve, you get a tantalizing glimpse of the lawyers, the publicists, the private security firms, the real estate agents, and others, all of whom facilitate the global kleptocracy. This ecosystem exists in tiers: the top level consists of those closest to the kleptocrats—the ones with the least claim to ignorance as to the origin of the funds they are either benefiting from or of which they are facilitating the movement.

But there are secondary and tertiary tiers that radiate out from this core. At each layer, it becomes harder to separate the ill-gotten gains from the legitimate economy. The real estate agents may do business with the various shell corporations that purchase high-end properties, but there are equally those that furnish those residences, staff the houses, or benefit from the largess of those ill-gotten gains. As one moves further away from that center, the awareness of the origin of those funds decreases, yet, ironically, the influence of those very funds increases.

This proliferation of influence and effect makes closing the gaps through which illicit money flows challenging, if not impossible. If a good portion of your real estate market relies on the inflow of cash from a dubious origin, what incentive is there to shut that inflow off?

Tilting at Regulatory Windmills

There are few heroes in this story. Burgis, for his part, focuses on Nigel Wilkins, a Don Quixote of sorts, who attempts at multiple stages in his career to expose the complicities of banks, financial regulators, and others in global money laundering from both the inside and the outside. His effort is unsuccessful, but his experiences illustrate the extent to which these institutions (even those charged with monitoring this issue) are corrupted by the system.

He attempts to raise the flag within his bank but is dismissed. He absconds with records and documents, provides them to the British government, but nothing happens. He joins the financial services authority but finds an entity that is unwilling to see the evidence before them. They dismiss him as well. He speaks to a reporter in hopes that his information will make front-page news, but sadly, it does not have the desired effect. Undoubtedly there are other Wilkins in the world, those who want to close the taps of dirty money, but the institutions and system are stacked against them.  

For many of the regulators and financial institutions chronicled by Burgis, compliance is merely a box-ticking exercise and something around which to work. It appears that there are few (if any) incentives to prevent illicit money from entering one’s bank, for conducting thorough due diligence to know the beneficiary of an account, or any of the accountability activities that are nominally on the regulatory or statutory books. Rather, the incentives are to get one’s share—and protect one’s bonus—by enabling clients’ efforts to work around the system, get their money into the bank from wherever it came, and avoid upsetting any proverbial apple carts.

At one point in the book, it is said that tax avoidance or evasion is something governments pursue aggressively because they lose revenue. By contrast, money laundering is about funds entering into the economy, the financial system, the banking networks, and into legitimate, taxed enterprises. As such, there are few incentives to cut off these inflows for even the taxman gets his cut.

Follow the Money

Burgis is a masterful storyteller. Money laundering is a fascinating subject, but one that can easily become exceptionally dull if not properly explored or connected to the real world. Burgis quite rightly dispenses with the minutiae of know-your-customer reports and focuses instead on a globe-trotting tale of skullduggery, familial abductions, private investigators, shady characters, and more. The book could have benefited from a network map of the connections and relationships between all the characters profiled, but one suspects that may have been an exceptionally large insert and probably would not have been feasible.

Perhaps the greatest irony in this story is that the licit financial system needed the illicit economy to survive. In many parts of the world, to excise the illicit economy from the legitimate one would be an operation that would kill the patient. As Burgis also notes, in the wake of the 2008 financial crisis, the very foundations of the capitalist economy were shaken. To survive and to support the failing banks, any money was good money, creating a golden opportunity to clean dirty money. Still, were the West to take on money laundering, the system of incentives would need to change, the punishments would need to increase, and compliance and accountability would need to go beyond merely ticking the proverbial box.

Why it Matters

Closing the loopholes—legal and otherwise—to illicit finance and money laundering is at the heart of many of today’s policy challenges. From shutting down terrorist networks and combating drug cartels, to affecting real change in Russia’s behavior, if Washington or London wants to have an appreciable impact, it will do so by preventing dirty money from entering the clean economy.

Doing so will, however, have an impact on the markets, financial institutions, and associated ecosystem, but that is a necessary sacrifice if positive outcomes on those aforementioned issues are desired. To be sure, dirty money will always seek a way to clean itself, but making it as difficult as possible will slow the process and stymie kleptocrats’ efforts. Failing to tackle illicit finance while attempting to address these issues is akin to fighting with one hand tied to one’s back—you may make progress, but it won’t be as effective as if both hands were free.

About
Joshua Huminski
:
Joshua C. Huminski is Director of the Mike Rogers Center for Intelligence & Global Affairs at the Center for the Study of the Presidency & Congress.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.

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www.diplomaticourier.com

Kleptopia: How Dirty Money Is Conquering the World

Photo by Jonny McKenna via Unsplash.

September 26, 2020

Kleptopia: How Dirty Money Is Conquering the World | Tom Burgis | Harper | September 2020.

T

his week, internet news outlet Buzzfeed released an exposé called the FinCEN Files, a massive trove of documents that illustrates how Western financial institutions move trillions of dollars of dirty money from kleptocrats, drug cartels, terrorists, and others. It should go without saying but, as Buzzfeed writes, “money laundering is a crime that makes other crimes possible.”

Kleptopia: How Dirty Money Is Conquering the World | Tom Burgis | Harper | September 2020.

Composed of over 2,100 suspicious activity reports (SARs) shared with the International Consortium of Investigative Journalists (ICIJ) and other media organizations, the FinCEN Files describe nearly $2 trillion in transactions involving some of the world’s largest banks. The generation of the reports themselves does not necessarily prove illicit activity or wrongdoing, but SARs are a compliance requirement and can offer intelligence into illegal activity.  

The release of these documents is a fortuitous event for author Tom Burgis and his fascinating new book Kleptopia: How Dirty Money is Conquering the World. A deeply reported, thrillingly written book, Kleptopia follows the narrative thread of how states and kleptocrats seize assets for themselves, launder these assets through western institutions to “clean” them, and in doing so enable their autocracies.

Abusing the West’s Legal & Financial Systems

Burgis’ greatest strength is in illuminating the reach of money laundering into nearly every facet of modern life, but also in illustrating how this parallel economy supports and indeed enables autocrats around the world. Here Burgis draws on a work by Ernst Fraenkel, a German legal scholar. In his book The Dual State: A Contribution to the Theory of Dictatorship, Fraenkel describes how dictatorships have concurrent state-systems: normative and prerogative. In the case of the former, the state obeys its laws; in the case of the latter, the state violates those laws and does what it wants.

It is a useful framework for understanding how the figures in Burgis’ book operate; how Nursultan Ábishuly Nazarbayev of Kazakhstan expropriated the wealth of the country for his benefit and that of his family, how the leadership of Zimbabwe did the same, and how the oligarchs of Russia first used the system to their benefit and then had the system used against them by President Vladimir Putin. There is a rule of law, to be sure, but it is only for other people and only when it is convenient.

Nearly every kleptocrat profiled in this book sought out the West’s institutions and legal systems to validate their behavior and their aims. In the case of Kazakhstan—the central storyline of Burgis’ book—Nazarbayev pursued Mukhtar Ablyazov to the famous courts of London, seeking to eliminate an ally-turned-rival and acquire his assets. The lengths to which Nazarbayev went are incredible: he hired private security and intelligence firms, leveraged the venerable law firms of London, conducted an all-out public relations war against Ablyazov, and even planned to film a fake documentary (via one of the intelligence firms in question) to gain inside information on Ablyazov and his defense.

The Beneficiaries of Ill-Gotten Gains

Throughout Burgis’ book, the ecosystem that enables money laundering lurks just off-stage. Occasionally, as the cases he describes evolve, you get a tantalizing glimpse of the lawyers, the publicists, the private security firms, the real estate agents, and others, all of whom facilitate the global kleptocracy. This ecosystem exists in tiers: the top level consists of those closest to the kleptocrats—the ones with the least claim to ignorance as to the origin of the funds they are either benefiting from or of which they are facilitating the movement.

But there are secondary and tertiary tiers that radiate out from this core. At each layer, it becomes harder to separate the ill-gotten gains from the legitimate economy. The real estate agents may do business with the various shell corporations that purchase high-end properties, but there are equally those that furnish those residences, staff the houses, or benefit from the largess of those ill-gotten gains. As one moves further away from that center, the awareness of the origin of those funds decreases, yet, ironically, the influence of those very funds increases.

This proliferation of influence and effect makes closing the gaps through which illicit money flows challenging, if not impossible. If a good portion of your real estate market relies on the inflow of cash from a dubious origin, what incentive is there to shut that inflow off?

Tilting at Regulatory Windmills

There are few heroes in this story. Burgis, for his part, focuses on Nigel Wilkins, a Don Quixote of sorts, who attempts at multiple stages in his career to expose the complicities of banks, financial regulators, and others in global money laundering from both the inside and the outside. His effort is unsuccessful, but his experiences illustrate the extent to which these institutions (even those charged with monitoring this issue) are corrupted by the system.

He attempts to raise the flag within his bank but is dismissed. He absconds with records and documents, provides them to the British government, but nothing happens. He joins the financial services authority but finds an entity that is unwilling to see the evidence before them. They dismiss him as well. He speaks to a reporter in hopes that his information will make front-page news, but sadly, it does not have the desired effect. Undoubtedly there are other Wilkins in the world, those who want to close the taps of dirty money, but the institutions and system are stacked against them.  

For many of the regulators and financial institutions chronicled by Burgis, compliance is merely a box-ticking exercise and something around which to work. It appears that there are few (if any) incentives to prevent illicit money from entering one’s bank, for conducting thorough due diligence to know the beneficiary of an account, or any of the accountability activities that are nominally on the regulatory or statutory books. Rather, the incentives are to get one’s share—and protect one’s bonus—by enabling clients’ efforts to work around the system, get their money into the bank from wherever it came, and avoid upsetting any proverbial apple carts.

At one point in the book, it is said that tax avoidance or evasion is something governments pursue aggressively because they lose revenue. By contrast, money laundering is about funds entering into the economy, the financial system, the banking networks, and into legitimate, taxed enterprises. As such, there are few incentives to cut off these inflows for even the taxman gets his cut.

Follow the Money

Burgis is a masterful storyteller. Money laundering is a fascinating subject, but one that can easily become exceptionally dull if not properly explored or connected to the real world. Burgis quite rightly dispenses with the minutiae of know-your-customer reports and focuses instead on a globe-trotting tale of skullduggery, familial abductions, private investigators, shady characters, and more. The book could have benefited from a network map of the connections and relationships between all the characters profiled, but one suspects that may have been an exceptionally large insert and probably would not have been feasible.

Perhaps the greatest irony in this story is that the licit financial system needed the illicit economy to survive. In many parts of the world, to excise the illicit economy from the legitimate one would be an operation that would kill the patient. As Burgis also notes, in the wake of the 2008 financial crisis, the very foundations of the capitalist economy were shaken. To survive and to support the failing banks, any money was good money, creating a golden opportunity to clean dirty money. Still, were the West to take on money laundering, the system of incentives would need to change, the punishments would need to increase, and compliance and accountability would need to go beyond merely ticking the proverbial box.

Why it Matters

Closing the loopholes—legal and otherwise—to illicit finance and money laundering is at the heart of many of today’s policy challenges. From shutting down terrorist networks and combating drug cartels, to affecting real change in Russia’s behavior, if Washington or London wants to have an appreciable impact, it will do so by preventing dirty money from entering the clean economy.

Doing so will, however, have an impact on the markets, financial institutions, and associated ecosystem, but that is a necessary sacrifice if positive outcomes on those aforementioned issues are desired. To be sure, dirty money will always seek a way to clean itself, but making it as difficult as possible will slow the process and stymie kleptocrats’ efforts. Failing to tackle illicit finance while attempting to address these issues is akin to fighting with one hand tied to one’s back—you may make progress, but it won’t be as effective as if both hands were free.

About
Joshua Huminski
:
Joshua C. Huminski is Director of the Mike Rogers Center for Intelligence & Global Affairs at the Center for the Study of the Presidency & Congress.
The views presented in this article are the author’s own and do not necessarily represent the views of any other organization.