Countering Russian kleptocrats: What the West’s response to assault should look like

www.transparency.org 

In the wake of Russia’s attack on Ukraine, the international community is scrambling to deter President Vladimir Putin and his cronies – and to help end the military aggression as soon as possible.

Among other measures, European Union member countries, Canada, United Kingdom and the United States have all announced targeted sanctions against Kremlin-linked individuals and businesses – many of whom are suspected of large-scale corruption.

In a kleptocratic system such as today’s Russia, going after the elites can be meaningful. The vast wealth that Russian kleptocrats have amassed – and continue to enjoy – has helped President Putin tighten his grip on power and exert illicit influence over the affairs of other nations, as well as emboldened his geopolitical ambitions.

And while forceful and hard-hitting, such sanctions do not always hurt as much as they’re meant to, considering that targeted individuals usually conceal their money and influence. So these measures will achieve little unless authorities are able to track down the assets purchased with dirty money – that they should have never welcomed in the first place.

It should not have taken the tragedy of this scale to prompt governments in the West to wake up to the dangers of enabling kleptocracy; we are seeing its devastating consequences now in Ukraine. To prevent future suffering, decision-makers in advanced economies need to urgently fast-track key anti-corruption policies. Many of these should have been adopted a long time ago.

Russian kleptocrats and their yachts

Corrupt officials and business people usually don’t own yachts and luxury goods in their own names. Instead, they make such lavish purchases through anonymous companies which are often registered in secrecy jurisdictions.

This week, Financial Times reported that Credit Suisse – Switzerland’s one of largest banks and subject of the recent Suisse Secrets investigations – tried to avoid information leaking out about loans to oligarchs who were later sanctioned by asking investors to destroy documents related to their assets, including yachts and private jets.

It is then not surprising that German authorities have yet to seize the Russian billionaire Alisher Usmanov’s super yacht, reportedly worth US$600 million. Officials stated that its ownership needs to be clarified as the yacht is registered in the Cayman Islands and owned by a holding company with a complex ownership spanning different jurisdictions.

Some progress has been made in France, however. On 2 March, customs officers seized a yacht reportedly belonging to Igor Sechin – former deputy prime minister and CEO of state-owned oil company Rosneft, who was included in the EU sactions list. The authorities in France confirmed that Sechin had been identified as the main shareholder of an entity that owns the yacht. This connection was originally exposed by a Russian investigative journalist, Roman Anin in 2016. Last year, as the Russian authorities scaled up their crackdown on civil society and independent media, Roman was interrogated for his reporting about that very yacht.

How countries in the West enabled kleptocracy in Russia

Corrupt officials prefer countries with strong rule of law and good governance to park their ill-gotten gains. This is especially true for corrupt officials and businesspeople from Russia. Transparency International Russia found that in the years 2008 to 2020 current and former officials have had 28,000 properties in 85 countries, including in EU member states.

The vast majority of Russian-owned foreign assets, however, are shrouded in secrecy. It has been estimated that the offshore wealth owned by Russians is equal to the country’s entire household wealth.

Thanks to financial data leaks, courageous investigative journalists and civil society activists have been able to track down some of this money and follow its movement across borders. Investigations such as the Panama Papers, the Russian and Troika laundromats, and the Pandora Papers have helped expose the extent of kleptocracy in Russia. The Pandora Papers investigations, in particular, have shed light on the alleged riches of Russian President Vladimir Putin – believed to be held for him by his inner circle.

These scandals have laid bare Russian kleptocrats’ reliance on the global financial system and intermediaries, such as banks based in leading democracies, to sustain and increase their illicit wealth.

The revelations from the past decade have helped Transparency International and other advocates to advance crucial anti-corruption policies in key countries and globally. But the speed of progress has been unacceptably slow.

Law enforcement authorities and courts in Western countries – where money is most often laundered, invested or parked – often do not have the technical resources, access to the right type of information, or lack rigour in clamping down on dirty money.

No checks or balances

Corruption is endemic in Russia. With a score of just 29 out of 100, Russia is the lowest-ranking country in Europe on Transparency International’s 2021 Corruption Perceptions Index.

Public institutions in Russia are almost completely captured by the executive government, failing to hold power accountable. State-sponsored propaganda shapes the public discourse as independent media and civil society exposing corruption and other abuses face increasingly harsh measures of repression – further limiting social checks on power.

Amendments to Russia’s “foreign agent law” have extended its use to target journalists and activists investigating government corruption. The government also used the COVID-19 pandemic to further tighten control and ban protests.

Kleptocrats should have nowhere to hide, no one help

The disregard to the rule of law and international norms demonstrated by Russia is an important reminder of the need to keep power in check. Transparency International and our national chapters across the world have been repeating, year after year, that the loopholes of the global financial system enable abuse of power and are a threat to democracy. Today, more than ever, this is a reality.

It is about time that countries in the Western fast-track important policies and finally act on issues where they had been dragging their feet.

We urge them to prioritise the adoption of key policies and strengthen enforcement in the following areas:

  1. Identify and freeze the assets of corrupt officials and complicit elites. The recently established Transatlantic Task Force is a step in the right direction. The Task Force should consider broadening its membership to include other key financial centers, map networks of nominees, proxies and family members and utilise and share available data on company and asset ownership, suspicious transactions reports, among others to trace assets. In the future, the task force should evolve into an effective model to deal with cross-border corruption and hold kleptocrats to account everywhere.
  2. End anonymous companies. Establish central, public registers with verified information of the real owners of companies, including on foreign companies.
  3. Increase transparency of trusts. Require the registration of trusts, requiring all parties to the trust to be disclosed and recorded in a register accessible to authorities as well as to the public.
  4. Improve transparency and checks in the real estate sector. Companies investing in the real estate sector should be required to disclose their beneficial owners and this information should be available in a publicly accessible register. Businesses and professionals involved in real estate deals, such as real estate agents, lawyers, notaries, should be required to identify the beneficial owner of customers, screen for politically exposed persons, and report suspicious transactions to authorities. Supervision should be the responsibility of independent and well-resourced public agencies instead of self-regulatory bodies.
  5. Open the black box of hedge funds, private equity and other investment funds. Investment fund managers should be required to undertake checks on customers and report suspicious transaction to authorities. All beneficiaries of investment funds, the real natural persons who are the end-investors, should be accurately identified, disclosed and recorded in registers.
  6. Increase transparency in luxury goods ownership. Information about the real owners of yachts and private jets should be recorded by governments and disclosed to the public. Luxury good dealers should conduct anti-money laundering checks.
  7. Ban EU golden passports and regulate golden visas. Citizenship-by-investment schemes should be phased out and passports issued to Russian oligarchs under these programmes should be revoked. Residency-by-investment schemes should be regulated and adequate checks should be put in place.
  8. Hold professional enablers to account. Banks, corporate service providers, lawyers, accountants and real estate agents that have been enabling Russian oligarchs and other kleptocrats to set up companies, move suspicious funds and purchase assets should be held to account. Dissuasive sanctions should apply to firms and senior management.
  9. Stronger mechanism for seizing, confiscating and returning assets. Going beyond sanctions, countries should ensure they have civil and criminal mechanisms to seize and confiscate assets, including, for example, unexplained wealth orders or non-conviction based forfeiture. Confiscated assets should be returned to the victims of corruption.
  10. Support civil society organisations, independent journalists, activists and whistleblowers. Especially in countries facing democratic decline or suffering from authoritarian kleptocracy, the support to civil society and whistleblowers is essential to turn the tide. Countries should invest in programmes combining investigative journalism with civil society advocacy for systemic change and provide support to anti-corruption fighters through learning exchanges, improvements to security protocols and use of diplomatic leverage to deter threats against them.

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