Imagine the Corleone family in charge of an entire country, and you have Azerbaijan. Playing the role of Vito is President Ilham Aliyev. The commanding heights of the economy are divided among his family members and in-laws. A recent investigation by the Organized Crime and Corruption Reporting Project reveals how Aliyev along with his wife, children, and various associates are linked to a byzantine array of offshore companies whose alleged purpose is to pilfer the assets of the state (see also here and here). These are assets that formally belong to the people of Azerbaijan but which the Aliyev clan evidently sees as their personal property to be dispensed with at their pleasure. Over the past 22 years, untold billions in state funds have disappeared from the oil-rich republic into offshore tax havens. The Aliyev family enjoys complete impunity by virtue of its control over a repressive dictatorship that routinely hounds anyone who seeks to expose malfeasance among the ruling clique. The most notable victim is crusading journalist Khadija Ismayilova. Her investigations into the Aliyev family’s corrupt activities ended with her imprisonment and prosecution on the absurd charge of inciting a colleague to suicide. Her trial remains ongoing but its outcome appears preordained.
The Aliyevs are leading players in the spheres of banking, construction, transportation, insurance, mining, oil, and gas (see here and here). Investors beware of setting up shop in countries like Azerbaijan, where your main market competitor may end up being the ruling family itself.
A U.S. federal appeals court ruled Tuesday that internal documents at defense contractor Kellogg Brown & Root (KBR) are protected by attorney-client privilege and do not have to be released to a whistleblower who filed a complaint against the company in 2005. The documents contain information relating to allegations that KBR and various subcontractors defrauded the U.S. government during the war in Iraq by inflating costs and accepting kickbacks. In his monumental book, The Shadow World: Inside the Global Arms Trade, investigative journalist Andrew Feinstein reveals how the U.S. government routinely awarded billions of dollars in wasteful, excessive, and downright dubious wartime contracts to a host of politically-connected defense contractors. KBR and its parent company, Halliburton, feature prominently in his report.
An investigation by Pro Publica reveals how U.S. political organizations pose as “social welfare non-profits” to engage in dubious campaign-finance activities. Not only do they adopt the ruse of promoting “charity” as a tax-exempt cover for blatant fundraising, they are not obliged to identify the sources of the money they are channeling to politicians. Much like Super-PACs and LLCs, they thereby offer yet another avenue for plutocrats and criminals alike to try and influence U.S. politics. Nor are social-welfare non-profits small fry; with over $70m in donations in the current election cycle, they are emerging as “the primary conduit for anonymous big-money contributions,” Pro Publica writes.
My new article in Post-Soviet Affairs, co-authored with Steve Fish of the University of California-Berkeley, has just been published online (vol. 31, issue 6). Below is the abstract:
It has become convention in recent years to treat the building of institutions as the centerpiece of successful economic reform. The case of Estonia challenges this view. Although effective economic institutions eventually arose, Estonia began its transition bereft of the institutions that supposedly serve as the requisites of robust achievement. The institutions only emerged after an ideologically driven core of leaders implemented policies that laid the groundwork. In particular, the imposition of hard budget constraints sidelined political capitalists opposed to the rule of law by severing them from the state subsidies, soft loans, and other privileges on which they thrive. In the absence of a powerful class of political capitalists, Estonian governments were free to forge and continually improve a collection of institutions that sets the country apart among its postcommunist peers. Good institutions are desirable but not necessary for policy reform, and they are better seen as auspicious knock-on effects than as prime movers.
It’s impossible to put a number on the amount that Russia’s leaders have stolen from their own state since the days of Gorbachev, when the looting began in full force. But I think we can agree it’s a lot.
For the criminals atop the Russian government, the problem is not how to steal the money, which is rather easy to do, but what to do with it all once it’s been stolen. They would be foolish to keep it inside Russia, where it would be at risk of confiscation in the event of a change in power and the banking system isn’t very sound to begin with.
But moving the money out of the country leaves it vulnerable to law-enforcement in countries where police and prosecutors are actually honest and can’t be leaned upon (in contrast to Russia).
That means they have to launder the funds. Russia’s kleptocrats have watched Scarface, and so they are aware of the need to create the fiction that their criminal proceeds come from legitimate economic activity.
Money laundering requires two elements to work. First, the schemes need to be sufficiently complex as to bewilder investigators (and, indeed, there are very few law-enforcement agents in the world with the expertise needed to trace dirty money). Second, in the unlikely event that investigators do figure out where and how the money flowed, the ultimate beneficiaries need anonymity.
Enter the offshore system. Offshore banks and law firms provide the specialists needed to move money through multiple shell companies using elaborate financial transactions. The complex transactions shepherd the funds into bank accounts with anonymous ownership, thereby shielding the criminals’ identities. To ensure that foreign law-enforcement cannot possibly recover the money or find out who it belongs to, the bank accounts and shell companies are located in offshore tax havens.
When most people think of “offshore tax havens” they have in mind places like Switzerland or the Cayman Islands. But as Nicholas Shaxson shows in his excellent book Treasure Islands: Uncovering the Damage of Offshore Banking and Tax Havens, the “offshore” label is potentially misleading. Shaxson points out that any politically-stable jurisdiction where foreigners can evade the rules that would constrain them elsewhere qualifies as an offshore jurisdiction. By this definition, the world’s biggest offshore tax havens are the United Kingdom, the United States, and the European Union.
The EU’s role as a major stash-house for dirty money from Russia is revealed in a recent investigation by the Organized Crime and Corruption Reporting Project (OCCRP), which produces some of the best investigative reporting on corruption and economic criminality. In The Russian Laundromat, the OCCRP lays out what is perhaps the biggest money-laundering operation in the history of Europe. Between 2010 and early 2014, over $20 billion was moved out of Russia through the tiny former Soviet republic of Moldova and into the safety of bank accounts in Latvia, an EU member and growing tax haven for criminals. According to the OCCRP, the money was stolen from the Russian government by corrupt politicians or obtained through organized crime activity. Nineteen banks in Russia were involved in the scheme, some of which are controlled by wealthy and influential figures including Vladimir Putin’s cousin.
The amount of money involved may seem huge, but at the end of the day it’s merely a snippet of the total that has been siphoned away since communism began to crumble in the late 1980s. The OCCRP investigation nevertheless provides a crucial window into the mechanics by which corrupt Russian officials have been looting the state all these years.
The system is described in all its gory detail on the OCCRP’s website. Those interested in seeing how money laundering really works are encouraged to check it out. The Russian Laundromat is a case study of how the offshore system serves as a great enabler for corrupt state officials and criminal figures around the globe.
Ever since the Supreme Court’s 2010 Citizens United ruling legalized unlimited spending by corporations and unions on U.S. elections, the American political landscape has become increasingly dominated by much-maligned Political Action Committees (PACs), organizations that pool money to promote or defeat certain candidates.
As Yogi Berra reminded us, “In theory there is no difference between theory and practice. In practice there is.” And so it is with PACs, which in theory are completely transparent, subject to strict rules requiring public disclosure of who is giving them money. That’s all well and good if the donors to PACs are actual flesh-and-blood individuals. But if the donors are instead Limited Liability Companies (LLCs) with anonymous ownership, there’s no telling who is financing our elections.
Most U.S. states mandate that LLCs disclose the identities of their owners. But some, like Wyoming, do not even require any corporate records to be kept within the state’s boundaries. So if Kim Jong-un or the Islamic State want to make a campaign donation, all they have to do is set up an anonymous LLC and in turn have it write a check to their favorite PAC – and maybe let the relevant candidate know through back-channels where his bread is really buttered.
For more on the growing role of LLCs in financing U.S. election campaigns, see this excellent report by the Center for Public Integrity, a watchdog focusing on corruption and abuses of power in American politics.