The economic sanctions imposed by western countries on Russia in the aftermath of its invasion of Ukraine include the freezing and even the seizure of assets owned by Russian oligarchs in western countries. Bank accounts, prized real estate properties and luxury yachts are now out of the reach of their owners. The West considers this class of mega-rich Russians to be an extension of the state apparatus that has enabled the Putin regime to control the economy and influence domestic public opinion. The sanctions against the Russian oligarchs imply that their riches are ill-gotten and unworthy of protection under the rules of the international free-market system.
That is the West’s position now. But Western countries and their wealth management industries held different views until quite recently. In fact, the international financial system, mostly following Western rules and practices, bears responsibility for abetting the creation of an international system of kleptocracy. Before the Russian oligarchs started to make their mark in the international scene, the West was already living comfortably with tax havens in far away islands, Swiss secret bank accounts, and even within their own jurisdictions, and had no problem with their banks and tax-related advisers that specialize in aiding their own wealthy citizens with tax avoidance, and even evasion.
The extent of the international network of advisers and clients engaging in secretive financial and tax avoidance and evasion schemes was laid in full view thanks to the leaks of the Panama Papers in 2016 and the Pandora papers in 2021. These papers revealed how offshore entities created by mostly western firms sealed the identity of world leaders, politicians, business people, kleptocrats, fugitives and drug lords as they stashed their money in tax havens around the globe.
I will draw from two articles published in The Atlantic to give a sense of the problem of kleptocracy and how it erodes democratic and free-market institutions. Franklin Foer in “How Kleptocracy Came to America” (March 2019) shows how the U.S. failed to block the flow of dirty money to its shores. According to Foer, the American Government, including Congress, got an early warning about the looting of the Russian treasury in the 1990s from Richard Palmer, a CIA operative. Palmer described how well-connected Russians were siphoning billions of dollars abroad in the chaotic days of the transition to capitalism during the Yeltsin years. Congress ignored Palmer and Russian money kept coming to American banks with no scrutiny. And when Russia’s reformist prime minister Yegor Gaidar asked for help to track the money he was rebuffed by the White House.
In a 2018 study, Berkeley economist Gabriel Zucman and his co-authors estimated that the wealth of Russian oligarchs stashed abroad equaled the wealth of all Russians kept in Russia itself. According to a 2019 estimate $1 trillion was leaving the developing economies each year either through laundering or tax evasion.
A lot of this money flows into the choice real estate markets of New York City, Los Angeles, Miami and London. The boon to the real estate industry is so huge that when the Patriot Act was passed after September 11 for the purpose of stanching the funding of terrorist and drug groups, the real estate industry lobbied successfully to exempt itself from the disclosure rules. Thus, illicit money could flow into the U.S. anonymously through shell companies. Foer writes that Global Witness, an NGO fighting dirty money, found that in some U.S. states it was easier to set up a shell company than to get a library card.
The noose around foreign money tightened a bit after the 2007 financial crisis but it still left gaping holes. For example, When the Obama Administration asked Congress permission to share U.S. bank information on foreigners’ holdings with other countries it was turned down. And when in 2014 the OECD countries agreed to enforce the same practice, the U.S. refused to sign on. Ironically, U.S. refusal to share information with other countries does not stop it from demanding others to share financial information with U.S. authorities.
In a more recent article, “The United States Has a Dirty Money Problem” (The Atlantic Jan/Feb 2022), Anne Applebaum offers more insights into the workings of the international kleptocracy and the role of tax havens. For example, just two tax havens, Jersey Island and Cayman Islands, hold assets that account for almost 10% of the global GDP.
Anne Applebaum notes that there are several reasons why countries do not close down the kleptocratic system. First, many of the practices used by foreign kleptocrats have been used by wealthy citizens and industries in the West. Banks, real estate, and the supporting professional trades in western countries are loath to losing lucrative sources of revenue. Second, kleptocracy utilizes sophisticated practices and tools that only a few law enforcement civil servants can master. Even when they do, they are intimidated by the opposing interests.
Another reason is that investigating journalists and the news media lack the resources to take on corruption cases. And activists who stand up to domestic corruption, like the Russian opposition figure Alexei Navalny, are persecuted and silenced by the authorities.
Finally, the international kleptocracy has developed the expertise and connections to mount full war against reforms. So much so that the Western industries and politicians that stand to benefit often come to their defense. Anne Applebaum warns that the international kleptocracy tries hard to corrupt democratic institutions, politicians, government bureaucracies and the independence of the press.
The truth of the matter is that the West could have stymied the growth of the powerful Russian oligarchs if it had not enabled the culture of permissiveness toward plutocrats, including its own, that gave rise to the international world of kleptocracy.
When we enable powerful interests to accumulate wealth through illicit tactics, we allow them to boost their political influence and to partake in the market system with advantages denied to ordinary citizens. The West ought to shut down the whole world of kleptocracy, not just its Russian branch.
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