Ferreting Out Kleptocrats’ Buddies: The Ukrainian Solution Part I

Every kleptocrat needs a buddy.  Someone to serve as an intermediary between the corrupt official and the bankers, real estate agents, and others in London, New York, and elsewhere happy to profit from handling dirty money.  A kleptocrat can’t just walk into a bank or real estate office in the United Kingdom, the United States, or other preferred offshore haven with a pile of money to invest.  As a public official, the antimoney laundering (AML) laws would oblige the banker or real estate agent to ask searching questions about how the kleptocrat came into the money and the law would likely also require them to report the transaction or proposed transaction to the authorities.  A buddy, particularly one who has remained out of the public limelight, is the perfect solution.  So long as they don’t know a potential customer is close to a senior public official, the banker or real estate agent meets their obligation to ascertain the source of the would-be customer’s funds by asking a few pro forma questions.

To plug the buddy loophole, the AML laws require banks and real estate agents to determine if anyone wanting to do business with them is a “close associate” of a senior official — a “politically exposed person” in the inelegant term coined by AML specialists.  If a potential customer is a PEP, the bank or real estate agent must ask the same searching questions about the origins of the individual’s funds that they must ask of a senior official.  Recognizing that bankers and real estate agents can’t be expected to know whether a foreign national wanting to do business with them is a close associate of a senior official in 190 plus countries, AML regulators allow them to rely on one of the several PEP lists peddled by commercial firms.  So long as the potential customer doesn’t appear on whatever PEP list they use, the banker or real estate agent need not conduct a detailed inquiry (“enhanced due diligence” in AML-speak) into where their money came from.

So how well do these commercial PEP lists do at identifying kleptocrats’ buddies?  Continue reading

Guest Post: Encouraging Signs for a Possible U.S. Legislative Crackdown on Anonymous Companies

Gary Kalman, the Executive Director of the FACT Coalition, contributes today’s guest post:

A little over a year ago, the International Consortium of Investigative Journalists (ICIJ) released the Panama Papers, a treasure trove of information and a window into the world of financial secrecy. In some ways, much of what the Panama Papers revealed was already well known. Previous estimates put the amount of money hidden in offshore secrecy havens somewhere between $8 trillion and $32 trillion. In 2015, The New York Times published an impressive five-part series on the use of anonymous shell companies to purchase prime real estate in New York City. Prior to that, the U.S. Justice Department filed a lawsuit (which they just won on June 29th) to force the forfeiture of New York property secretly owned by the government of Iran in direct violation of economic sanctions. And so on. Yet it is hard to deny the captivating intrigue of the specific stories in the Panama Papers involving Russian kleptocrats, world leaders, athletes, movie stars, and others.

The big question is: more than a year later, did anything change? As I recently observed, there are indeed encouraging signs around the world, particularly in Great Britain, several EU member-states, and some developing countries such as Ghana. What about the United States? After all, with U.S. transparency laws ranging from weak to non-existent, there is little need to go to Panama to launder one’s dirty money. While Delaware gets the most notoriety, no state collects information on the true (“beneficial” owners of corporations. In fact, in its recent assessment of the U.S., the Financial Action Task Force, an international anti-money laundering body, noted that for all the progress the U.S. has made, the lack of beneficial ownership transparency remains a glaring weakness. And in the past, when some U.S. legislators – most notably former U.S. Senator Carl Levin (D-MI) – pushed legislation to require states to collect beneficial ownership information, the proposed bills never received so much as a hearing.

That may be about to change, and anticorruption advocates should take note. Continue reading

The Road Ahead in Anti-Money-Laundering (AML): Can Blockchain Technology Turn the Tide?

One of the most exciting developments in financial and information technology in the past decade is the emergence of so-called blockchain technology. A blockchain is a database of information distributed over a network of computers rather than located on a single or multiple servers. The first and most famous practical application of blockchain technology is the electronic currency Bitcoin. Bitcoin and similar cryptocurrencies using blockchain technologies offer users the equivalent of anonymous cash transactions, and have been linked to illicit transactions in drugs, weapons, and prostitution as they. It is therefore no wonder then that blockchain technology is sometimes viewed as a problem, or at least a challenge, for those interested in fighting financial crime and corruption.

But blockchain technologies have other uses, many of which could in fact aid in the fight against these crimes. In an earlier post on this blog, Jeanne Jeong discussed how blockchain technology could be used managing land records. Another use for blockchain that has occasionally been mentioned (see here and here), but not yet sufficiently pursued, is anti-money-laundering (AML). Currently, banks spend about US$10 billion per year on AML measures, yet money laundering continues to take place on a vast scale. The goal of laundering money is to “wash” illegally obtained money (e.g. through corruption) into “clean” money, making the origins of the money untraceable. Blockchain technologies have five features that could make AML efforts both more effective and less costly:

Continue reading