How We Can Stop Global Money Laundering

Alexander Lebedev

Alexander Lebedev

economy, Americas

The reality of the modern money laundering business is that it has beco­me part of today’s “financial capitalism.” We must change this reality.

How We Can Stop Global Money Laundering

As economies become more interconnected and globalized and the borders between countries and jurisdictions effectively disappear, the complexity of financial trans­actions is reaching new levels. The fundamental difference between the current stage of glo­balization and the previous one that unfolded in the late nineteenth and early twentieth centuries consists of both the direction of capital flows and the entities they originate from. If one looks back, then one might realize that between 1870 and 1913 the major European nations (Great Britain and France) invested abroad 6.5 and 3.7 percent of the­ir GDP respectively. In the case of Great Britain, this amounted to approximately 34 percent of its total capital investments). However, there was virtually no money from “peripheral” countries that was deposited in British and French banks, and there were only a few dozen properties that were ow­ned by investors from these countries. Moreover, if there were cases of wealthy overseas entrepreneurs or noblemen bringing money to the most developed nations of the time, they were well-known, with their properties being perfectly do­cumented. 

In our day, everything has changed in this regard: every year $800 billion to $2 trillion, or roughly 10 percent of the combined GDP of the European Union, ar­­rives to global financial capitals like London, New York, or Zurich from “developing” countries, many of which are label­led so by mista­ke. Most of this money comes through various “off-shore” jurisdictions that were created after the famous decision by the Bank of England in 1957 that authorized the holding of the deposits in pounds outside Britain, with its owners unknown.

In recent decades, a completely new industry has emerged which is focused entirely on processing these funds and putting them in safety outside the countries where they were “harvested.” It includes the investment bankers who attract the money and either deposit it or place it into different investment funds and SICAVS (open-ended, collective investment schemes); the lawyers which oversee a large network of offshore and shell companies, trusts and SPVs which regulate in accordance with current regulation; the crowds of nominal directors and legal owners; the real estate agents and luxury developers who sell the overpriced assets to the super-rich; the producers of exclusive goods from jewellery and watches to luxury cars and megayachts; and even the government officials who elaborate different “citizenship-for-invest­ment” programs. The sco­pe of this group is rather small; I would argue with great certainty that it doesn’t ex­ceed twenty thousand people all around the world. 

The impact of this new industry on the global economy is enormous. Today, about a third of all multinational corporations’ FDI goes through different tax havens which results in massive tax avoidance; the fi­gures for the corporate sector are unknown, but the most conservative assessments for tax evasion amongst individuals reach $1 trillion per year. The investment funds and large banks which claim to be completely transparent, are often sued for violating different money-laundering acts or sanction regimes—and if are accused and fined, the average fine they agree to pay has sky­rocketed from $22 million in the mid-2000s to $1.6 billion in 2014–2015. The largest fine, at $9 billion, was paid by BNP-Paribas when it settled its dispute with the U.S. Justice Department in June 2014. But how can the legal banking business repay such substantial amounts and manage to stay afloat? What operati­ons aren’t uncovered that allow such funds and banks to prosper? People should not be fooled about their nature as more than $230 billion was laundered in 2007–2015 by the Estonian subsidiary of Danske Bank, which represented a nation with a GDP that is eight times smaller than this sum, and which is proudly ranked eighteenth in the 2018 Global Transparency Index and sixteenth in the Doing Business 2018 survey

Around thirty-five thousand houses and apartments in Lon­don, as it was recently revealed, are owned by compa­nies whose real beneficiaries remain unknown, and in New York City, close to 250,000 apartments in residential buildings are unoccupied, with at least half being bought in the name of offshore companies. I’m not addressing the issue of where the world’s superyachts or business jets are registered—more than 80 percent of these “luxury toys” carry flags of countries with low taxes.

All of this depicts the reality of the modern money laundering business that has beco­me part of today’s “financial capitalism.” Many left-wing writers argue that it de­vastates the peripheral nations—and I agree with that argument—but what’s much more im­portant, I believe, is to mention that this new reality harms developed nations just as similarly as developing nations.

The “traditional” arguments include the main thesis about “plundering” the peri­pheral countries from where the money originates and of “enrichment” of already wealthy nations where the money is direc­ted—but such a statement is not suffi­cient. First of all, the inflow of dirty funds from the global “South” distorts the normal functioning of European and American business. The cities to which the super-rich flock are becoming too expensive for the locals and their econo­my often becomes disrupted and is pushed to the brink of crisis. More and more city dwel­lers are sque­ezed into suburbs, and the local authorities must invest more money into afforda­ble housing. In London, these allocations rose to £3.15 billion which are to be spent on new ninety thousand affordable homes between 2017 and 2020. The financial system is overloaded by launde­red funds and bubb­les become more widespread and common. 

As I mentioned earlier, in some cases, illicit dealings with money flows from the global periphery lead to claims and pe­nalties by the authorities, which in turn only push the bankers to take a higher-ris­k business strategy to cover the losses. The governments of European count­ri­es are facing dilemmas with the new capital inflows: on the one hand they should encourage them but on the ot­her they feel obliged to defend their political and judiciary system from corrupti­on. But with three-fifths of the United Kingdom’s richest residents being either foreign nationals or foreign-born (as are thirty-five out of fifty-five billionaires residing in London), it becomes more problematic from year to year.

But there is another side of the issue which is much less studied. As poorer nations become more corrupt and their politicians and businessmen try to channel their capital to Europe, the quality of life in these countries decreases even further, and desperate peo­ple start to emigrate. Of the top ten countries that have seen the highest levels of emigration into the EU in the 2010s, eight (Pakistan, Ukraine, Iran, Nigeria, Bangladesh and Syria) are found at the lowest ranks (from 117 and 178) in the 2018 Corruption Perception Index. So by accepting hundreds of millions of dollars into European banks, the European authorities must pay dozens of billions of euros to accommodate new migrants while also facing growing social tensions caused by this inflow. 

Moreover, I would add that emigration from the peripheral nations, which is caused by the corrupt governments, jeopardizes their development since it deprives them of their best human capital, which has resulted in ma­ny cases in ethnic and civil conflicts which often descend into full-scale civil war (this was the case of the Democratic Republic of the Congo after Mobutu Sese Seko, one of the world’s corrupt dictators, fled to France where his fortune was kept, in 1997). Western countries are then forced to spend additional billions to provi­de food, medical care, and even armed humanitarian assistance to the nations ruled by the most renown kleptocrats. This is a very high price for the joy of allowing several thousand people to manage money laundering operations from their luxury offices in London or Zürich—and I would also argue that this joy contributes to an “import of corruption” from the global periphery to the core (I am reminded of the well-known story of a Scottish-based “laundromat” that allowed the Azerbaijani political elite to squeeze billions of dollars from its country and to use it, inter alia, to co­ver legitimate lobbying for Azerbaijan and its state-owned companies in European capitals).

But why does the fight against this evil appear so ineffective? Why are the people that stripped their states of their taxpayers’ money, presided over the largest delibe­rate bank failures, or those engaged in looting the na­tural resources of their co­untries, all still living in Europe without experiencing any consequences? I think at least fo­ur systemic problems exist that make this possible.

 First, I would argue that the main focus these days is made on one issue—on the so called “problematic jurisdictions” which the West’s authorities believe are either engaged in offshore banking or lack the necessary financial regulations. Many lists of these countries were drafted in recent years, with the American “Financial Action Task Force” (FATF) and the European Union’s list being the most well-known. As of Jan. 1, 2012, the first one comprised forty states and territories, and the second as of March 2019 has sixteen. Both do not include, for example, either Russia nor China. Russia was successfully removed from the FATF list back in 2003 and has never appeared on the European Union’s list—even tho­ugh it’s a common point that the Russians are among the lar­gest final beneficiaries of companies that own real estate in the UK, Spain, and some other European countries. China never appeared on both lists while the offshore companies controlled by the Chinese are among the most active buyers of expen­sive mansions in the United States. At the same times, there are many countries on the list that might harbour terrorists and jihadis, but do not possess either the funds to be launde­r­ed nor the modern banking systems that would allow to transfer these money into the European banks. The excessive attention to the “intermediate” countries rather than to the places from where the money really originates is, I believe, the first tre­mendous challenge the fight against money laundering faces today.

Second, the control over the allegedly dirty money in the “recipient” countries is quite weak. I would say that the very term “due diligence” shouldn’t be used for the description of what’s going on in Europe and in the United States. One can remember the most famous cases—like the case of Arthur Andersen insisting on Enron’s firmness five months prior to its bankruptcy; the case of Moody’s, Standard & Poor’s and Fitch drawing the AAA ratings to the “subprime” mortgage-backed securities in the wake of the 2008 crisis; the case of Wachovia which laundered close to $500 billion of drug cartels affiliated money in 2000s, etc. If it co­mes to purchases of the expensive real estate, as one can see, remaining in the shadows is even easier. The “investments” into the wealthy countries are welco­med by their governments—today, even the EU nations effectively sell citi­zenships or permanent residencies in hun­dreds of ways with the cheapest ones (as in Malta, Cyprus or Bulgaria) requiring not mo­re than Є1.2-2.0 million to attain citizenship. The British, who introduced “unexplained wealth orders” as part of the Criminal Finances Act of 2017, used this tool to prosecute only one person since the orders went into force—and I would remind that there are thirty-five thousand real estate units in Lon­don with a value of around $70 billion, which were paid for by unknown sources and belong to undisclosed owners. A total revision of the banking ac­counts owned by foreign residents and/or com­pani­es, as well as the real esta­te bought by such entities should be under way—but in most cases the lo­cal authorities prefer only to le­vy additional taxes on such objects rather than find the sources of mo­ney that bought them.

Third, I would say that there’s a fascinating multitude of laws and regulations that are applied to tracking money flows in different countries. No pan-Eu­ropean register of real estate exists; the banking regulations in Switzerland differ greatly from those in the EU countries; special regimes like the Liechtenstein-based trusts or Sociétés civiles d’immobilier founded in Monaco or Luxembourg are used for acquiring objects throughout Europe; British law is different from the continental one and will become even more different after Brexit is finalized. At the same time, all these jurisdictions are considered “safe”—so if someone sells a mansion in the UK or transfers funds from his Swiss bank account there will be no formal procedures in place to verify money’s origins. Without all these rules being standardized, if not unified, any progress in combating money laundering practices seems to be a pipe-dream—but I would say that in recent years the legislation is becoming rather more diversified than normalized. 

Of course, in some cases there might be expectations—like the one that happens today with the Russians who become extremely “toxic” if it comes to opening new banking accounts or acquiring property; but I would argue it happens not so much be­cause of the spread of corruption in Russia or since Russia’s “presen­ce” is too obvious in Europe, but exclusively due to the sanctions against Russia that were introduced because of the violation of international law and interfere­nce into other nations’ domestic affairs.

Fourth, there is another issue which deals with the growing problem of “state capture” on the world’s periphery. I’m addressing the very simple fact that most countries, if their authorities suppose some money parked in their banks or used for acquiring some property there, used to ask the authorities of those states where either the money or its owner originated from, and about his criminal records or/and the nature of the mentioned funds. If the originating country is not only corrupt, but acts as a state totally “captured” by its ruling elite where money is ea­sily exchanged for power, and vice versa, its authorities would prove the absence of any wrongdoings. Some authors argue that these days the political eli­tes in many countries have completely merged with the business ones, and call such nations a business-states—so in all these cases the Western judiciary looks almost impotent in ad­dressing the most vital money laundering cases. The renowned international bo­dies, like, e.g., Interpol, are also acting on the same basis and will not hunt anyone in case the national bureaus initiate the search. So I would say once again that if some wealthy person from a deeply corrupt state with good political con­nections launders money in Europe or the United States, there is highly unlikely she or he will be accused of any wrongdoing (even if regimes collapse, nothing may change—e.g., Ukrainian authorities after the Euromaidan did virtually nothing for chasing the funds of corrupt officials from the previous government owned in the European countries).

So what is to be done in such circumstances?

I would argue that what we need is an institution that is able to confront money lau­n­dering activity and all types of corruption globally, or at least for the sake of all developed countries where dirty money are accumulated and invested. Therefo­re, we need an international organization that can either establish new rules for fi­gh­ting illegal financial operations or at least use the existing ones on its own, without needing to as­k governments for approving its actions. If one takes all these points into ac­count the only option that suits them all will be to create an International Finan­cial Court since the judiciary is the branch of authority that acts independently from the executive. Such an International Finan­cial Court might possess several crucial features.

To start with, the court can be established by several nations and blocks which consider themselves as “transparent” and “doing their best” to fight financial fraud. The European Union, the United Kingdom (in case Brexit finally happens), Japan, Canada, and some Asian countries relatively free from corruption might become the founding signatories to its statute (another approach may be based, for exam­ple, on invol­ving all the OECD nations into the new venture—and if the count­­ries that benefit the most from these schemes, like the United States or Britain, will oppo­se the measure, it could be introduced either by France or even by some of the pe­ripheral countries). The major idea behind this move is that the court may first make its rulings based on natio­nal legislation (e.g., the British law about Unexplained Wealth Orders), but these rulings will have an equal power in all the states that ratified the court’s statute. In the long run, therefore, the anti-corruption and anti-money laundering practices of all the “transparent” and “decent” nations will move closer to one another and may eventually even merge into one code of conduct. There is a long story in the West telling us how effective the courts had been in implemen­ting laws and treaties that were adopted by executive authorities. The Fourteenth Amen­d­ment to the U.S. Constitution declaring equal rights for African Americans in 1868, was de facto enacted by the 1954 Supreme Court ru­ling in the Brown v. The Board of Education case, while the provisions of the Tre­a­ty of Rome which established the European Communities in 1957 beca­me fully im­plemented only after European Court of Justice’s landmark Cassis de Dijon ruling of 1979. The courts, I would argue, have a powerful say in putting into acti­on the laws and rules that already exist but are easy to be avoided, and this is the major reason why I am advocating for a new international judicial institution to combat these problems.

What makes the new anti corruption vehicle so different from any other international organization?

First of all is its independent character. The  International Finan­cial Court might be able to nominate in­dependent counsels, prosecutors and investigators not reporting to the national law enforcement agencies, with their powers co­vering the territory of all parti­cipating states. Its rulings, as I already noted, should have uni­versal reach—that means that, in due course, they will be implemented into the national legislation. Both features greatly enhance the court’s reach and authority.

The next crucial point is the system of claims behind the cases the court investigates and deliberates. These claims might be filed by any private or corporate person who considers itself a complainant or aggri­eved—and in this case the set of actors might be very wide, beginning from any taxpayer in the country where money originates or from a client of any bank ruined by its owners. The claims would be directed towards any citizen of the country where the money goes whose ri­ghts have been violated by the decreasing level of decency in his country’s governing authorities caused by the inflow of “dirty funds.” This me­ans the propo­sed option is able to overcome the negligence of the national investigators who, for different re­asons, might be disinclined from launching an inquiry into the nature of unexplained funds or its uses inside the receiving nations’ financial do­mains.

Yet what may become the court’s greatest advantage is its powers to block and arrest the funds and assets owned or controlled by the citizens of the countries which did not become signatories of its Statute, but whose funds and assets are on the territory of its member na­tions. This very fact might undermine the fundamental principle of safety that today motiva­tes corrupt individuals and entities from around the world to hide their property ab­road: just imagine how senseless such a move will become if an anti-corruption activist’s documented claim sent from the country where the money was stolen, can cause the seizure of funds in the country where either the real estate was ac­quired or the bank deposit was opened. Even though the court may not become a well functioning institution overnight, it can be anticipated as a crucial danger by anybody engaged in corrupt and illicit financial operations around the world, therefore, greatly curb the inflows of “dirty money” from the peripheral nations to the developed ones.

Moreover, and this is extremely important for the revitalization of the global civil society, the anti-corruption activists across the globe would, for the first time, get a proper global partner whom they might appeal. Organizations like the Organized Crime and Corruption Reporting Project, not to mention less renown national groupings who will submit a substantial number of duly verified claims, might get special representation with the court. Furthermore, people con­cerned with growing corruption around the world will get additional reasons for uniting and working together since they will get a clear addressee for their work. I believe that this issue cannot be overestimated: In most countries plagu­ed with rampant corruption, citizens remain passive first of all because they are discouraged by the lack of response from both the national regulators, law en­forcement agencies, and even from international investigators since corrupt officials possessing either accounts in Panama or real estate in London don’t feel any pressure inside their own countries.

The last advantage of the International Finan­cial Court might beco­me its records which—unlike the records and databases of either In­terpol or nati­onal law enforcers—will be open to the public and electro­nically accessible from any place in the world. This would contribute to the emer­gence of the first truly global database of corrupt officials, doubtful jurisdic­tions, banks involved in processing “dirty money,” as well as the law offices and attorneys most closely linked to money laundering operations. Such an open database may, as I believe, erode the very foundations of the secrecy that allows the international corruption and money laundering to flourish in today’s world.

To make one final observation, I would contend that governments in all nati­ons across the world will face very powerful pressure from their citizens to sign the International Finan­cial Court’s statute and to become the part of that global body. In the case that the largest global powers—the United States, China, and Russia—are not participating in the International Criminal Court, it will be much more difficult for those authorities to explain to their subjects why they should remain outside the new system, especially if they are pretending they are doing their best to eliminate corrupt practices inside their own borders. It might be framed as the debate over war crimes—which in many nations are believed to be a “natural part” of the respective countries’ “real sovereignty” (a term widely used in Russia and coined by former Deputy Defense Minister Andrei Kokoshin)—but the negative attitude to corrup­tion and the misuse of power transcends national borders and ideological fractures. Thus, the dissenters in many parts of the globe will get a very simple “foothold,” on which they might hope to make things change.

Alexander Lebedev, a Russian entrepreneur and philantropist, is the primary share­holder of the National Reserve Corporation in Moscow and the financial backer of both The Independent and The London Evening Standard in London.

Image: Rueters

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