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UPDATE: the World Bank hosts a discussion on the report that is the subject of this post May 30, 12:00 noon EDT. Link to register here.
Today’s guest post summarizes an April World Bank study of money laundering risk assessments. The first step in preventing money laundering is identifying where it occurs and how likely it is to occur. In short, the risks of money laundering. The Bank study evaluated risk assessments eight governments had conducted in accordance with the methodology prescribed by the Financial Action Task Force. For reasons that will become plain, the post’s author has chosen to remain anonymous.
The title from a new World Bank report on money laundering risks could scarcely be blander: National Assessments of Money Laundering Risks: Learning from Eight Advanced Countries’ NRAs. The content is anything but. Authored by Joras Ferwerda of Utrecht University and Peter Reuter of the University of Maryland, the report concludes that not a one of the eight money laundering risk assessments examined, all done as the report’s title advertises by “advanced” countries, is worth a damn. Not a one merits a passing grade from the two professors, both highly regarded money laundering experts. What’s worse, despite close to a decade of experience doing such assessments, the two find that no government seems to have learned a thing from the mistakes of others.
This raises a fundamental question about the existing AML regime. How can it be effective if national authorities lack an understanding of the money laundering risks their countries face?Continue reading
Anticorruption campaigners have long argued that Western governments should be more aggressive in freezing and seizing the assets of kleptocrats and corrupt oligarchs. While targeting illicit assets has been part of the West’s anticorruption arsenal for many years, attention to this tactic has surged in response to Russia’s invasion of Ukraine. Almost as soon as Russian troops crossed the border into Ukrainian territory, not only did Western governments impose an array of economic sanctions on Russian institutions and individuals close to the Putin regime, but also—assisted by journalists who identified dozens of properties, collectively worth billions—Western law enforcement agencies began seizing Russian oligarchs’ private jets, vacation homes, and superyachts.
Many people who are unfamiliar with this area—and even some who are—might naturally wonder about the legal basis for targeting these assets. And indeed, the law in this area has some important nuances that are not always fully appreciated in mainstream media reporting and popular commentary. Continue reading
Contrary to recent reports (here, here), Russian oligarchs’ yachts harbored in the Maldives are by no means safe from confiscation. As a party to the United Nations Convention Against Corruption (UNCAC), the Maldives has made bribery, embezzlement, and money laundering crimes under its domestic law (here). Pursuant to article 46, it pledges “to afford [other UNCAC parties] the widest measure of legal assistance in investigations, prosecutions and judicial proceedings” to enforce their laws against bribery, embezzlement, and money laundering.
These provisions put the oligarchs’ yachts at risk of confiscation in two ways.
One, Maldivian authorities could initiate an action under the domestic antimoney laundering law. Given the evidence on the public record, there is certainly reason (what American law terms “probable cause”) to believe that the yachts were acquired with the proceeds of a crime, likely embezzlement from the Russian state. (Remember, there need not be a conviction for embezzlement in Russia or elsewhere to launch the related prosecution for money laundering.) The yachts’ presence in the Maldives appears to be more than sufficient grounds for its courts to assert jurisdiction under article 13 of the penal code and therefore to issue a “freeze” order which would prevent the yachts from pulling anchor until a final decision on a seizure action issued.
Alternatively, Maldivian courts have the power under UNCAC and domestic law to issue a freeze order at the request of another UNCAC party. A country where one was built, for example, could open a case to see whether the shipbuilder was paid with the proceeds of a crime, a money laundering offense, and request that the Maldives prevent the yacht from leaving until its case were concluded.
Some say will say that whatever the law, the Maldives is a small island nation without the guts to stand up to Russia. Not so. During the UN General Assembly debate on the resolution denouncing Russian aggression, the government not only backed the resolution but its ambassador left no doubts where its stood: “The Maldives has always taken a principled stand on violations of the territorial integrity of a sovereign country, [a] position based on a bedrock belief in the equality of all States and unconditional respect for the principles of the United Nations Charter.”
Others will be claim that confiscating the oligarchs’ yachts is not possible legally for ownership is obscured by layer upon layer of shell of corporations headquartered in countries. But those layers can be stripped away by the determined efforts of police and prosecutors, a determination surely stiffened by magnitudes given the yacht owners’ complicity in the appalling events daily unfolding in Ukraine.
Like so many of us, I am shocked and horrified by Russia’s invasion of Ukraine and unforgivable attacks on civilian targets. At the same time, I have been encouraged by the resistance to Russia’s unprovoked aggression—most obviously and importantly by the brave Ukrainians defending their homeland, but also by the response of the international community. The United States, the European Union, Canada, the United Kingdom, and other nations have announced coordinated sanctions against Russia, including cutting off major Russian banks from the SWIFT system and preventing Russia’s central bank from drawing on foreign currency reserves held abroad. In addition to sanctions targeted at Russia’s financial system, Western nations have also sought to use targeted sanctions aimed at oligarchs close to President Putin. The Biden Administration also announced a transatlantic task force to ensure the effective implementation of financial sanctions by identifying and freezing the assets of sanctioned individuals and companies and an interagency law enforcement group called KleptoCapture.
This renewed focus on the corruption of the Russian political and economic elite is welcome. Russia’s deep-rooted corruption is one of the reasons that Putin has been free to engage in such outrageous acts. He relies on the security services and corrupt oligarchs to protect him. Oligarchs also serve as his personal wallet. Yet for far too long, these corrupt oligarchs have lived lives of luxury off of ill-gotten wealth, which they have used to purchase luxury property in places like New York and London. Yet while some oligarchs and Russian political figures were already the subject of targeted sanctions prior to the recent attack on Ukraine. Overall the West had been far too complacent. The Ukraine tragedy seems to have prompted Western governments to pay more attention to this problem. Indeed, the new sanctions are significant in both scope and size, and they welcomed by the Coalition for Integrity and most other anticorruption activists around the world.
But there’s more work to be done. It’s time for Western governments to ask some hard questions about how these corrupt elites were able to use their ill-gotten gains to buy luxury property and assets and enjoy their wealth in places like New York and in London for so long, and about the role of Western “enablers” in hiding the sources of their wealth and shielding questionable transactions from scrutiny. And, to turn to more specific priorities for policy reform in the United States, there are three specific things that the U.S. government should do to crack down further on illicit finance and thereby advance the agenda laid out in the White House’s Strategy On Countering Corruption: Continue reading
Anticorruption advocates have long thought that real estate and money laundering go together like a horse and carriage. At least in the United States. With a little help from a friendly lawyer, a corrupt official or other big time criminal has until recently been able to use an anonymous shell company to hide their money by buying a luxury mansion or pricey condominium. Because the real estate registry listed the company, not the crook, as the owner, the real owner’s identify was hidden. From law enforcement, the media, and civil society.
In 2016 the U.S. government made a start on ending this abuse. It began to require the disclosure of the beneficial owner of any corporation which paid cash for properties in cities where real estate purchases were likely used to hide stolen money. Initially, and as expected, the new rule seemed to have the desired effect: all cash purchases of real estate appeared to drop significantly — indicating a gaping loophole in the antimoney laundering laws had been plugged.
But the first paper published by the Anticorruption Data Collective finds to the contrary. Authors Matt Collin of the World Bank and Brookings Institution, Florian M. Hollenbach of the Copenhagen Business School, and David Szakonyi of George Washington University report the rule had no impact “on the number of, the total price volume, or the share of corporate all-cash purchases in targeted counties.” Indeed, they could find “little difference in the patterns of corporate all-cash purchases versus a ‘placebo’ outcome that should not be affected by the policy.”
Beneficial ownership disclosure is a favorite reform of anticorruption advocates. One that would seem to have an obvious, immediate salutary effect. Why didn’t it here?
The authors offer two reasons, and suggest there could be others. Their paper demands careful attention. One because of the implications for beneficial ownership disclosure rules, and second, and more importantly, because it shows how important it is to carefully assay anticorruption reforms. Their paper is here and comments are welcomed. And GAB looks forward to more work by the Anticorruption Data Collective.
The prosecutions of currency exchanges Helix (here) and Bitcoin Fog (here) show the dark side of virtual currency. As providers of what the Financial Action Task Force terms money or value transfer services, the two accepted a customer’s funds and returned a corresponding sum or product to the customer or third party for a fee.
Helix and Bitcoin both specialized in bitcoin transactions. A customer would buy something on the web and rather than sending the merchant bitcoins directly, the customer sent them through Helix or Bitcoin Fog. That way, the customer did not have to worry about contacting the seller directly, and moreover, if the seller did not accept bitcoins, Helix or Bitcoin Fog would convert the bitcoins into whatever currency the seller accepted.
What caught the U.S. Department of Justice’s eye is that the two exchanges “tumbled” or “mixed” the customer’s bitcoins as part of their service.Continue reading
The papers to be delivered at the Central Bank of the Bahamas third annual international conference on Empirical Approaches to Anti-Money Laundering and Financial Crime Suppression are now available here. The conference brings together a mixture of academics and practitioners to assess what we know and don’t know about curbing money laundering. The conference schedule and instructions on virtual attendance is here.
Papers likely of special interest to GAB readers include –
- Enabling African loots: Tracking the laundering of Nigerian kleptocrats’ ill-gotten gains
- Conceptual Framework for the Statistical Measurement of Illicit Financial Flows
- Complex Ownership Structures: Addressing the Risks for Beneficial Ownership Transparency
- Dirty Money: How Banks Influence Financial Crime
- Does Changing the Rules Change Behaviour? Comparing Regulatory Reform and Behavioral Outcomes in Shell Company Transparency
The art world has gone digital, thanks in large part to the advent of so-called non-fungible tokens (NFTs). NFTs, like cryptocurrencies, use blockchain technology (a disaggregated database made up of immutable blocks of data), which makes it possible to attach a unique authenticating token—sort of like a digital signature—to a digital item, most commonly a piece of digital artwork. The primary difference between an NFT and a unit of cryptocurrency is that one NFT cannot be exchanged for another—they are, as the name implies, non-fungible. That non-fungibility enables creators of digital art to sell NFTs of their work for profit. That’s important, because unlike traditional artwork, it’s extremely easy to create perfect copies of digital artwork. But one cannot simply copy an NFT. Of course, one can copy the image itself, but the copy, though identical to the naked eye, will lack the authenticating token. Why, you might reasonably ask, would anyone pay for an NFT when they can get the original image for free? Critics have raised these and other questions, but it seems that a sufficient number of people derive pleasure from collecting the original artwork, or from supporting the artists, or from the belief that the price of NFTs will continue to rise, that trade in NFTs has become big business. An artist known as Beeple sold one NFT for $69 million. Platforms from cryptocurrency exchanges to the hundreds-years-old art auction house Sotheby’s (and potentially the movie theater chain AMC) have entered into the growing NFT market; in the third quarter of 2021, the trading volume of NFTs exceeded $10 billion.
As in other emerging high-value markets, however, NFTs present a money laundering risk. Indeed, NFTs sit at the intersection of two sectors that are already characterized by high money laundering risk: fine art and cryptocurrencies. Because of the uniquely-high money laundering risk posed by these digital assets, FinCEN should issue NFT-specific anti-money laundering (AML) compliance guidance, and Congress should extend the Bank Secrecy Act (BSA) to apply to NFT marketplaces.
Before proceeding to regulatory solutions, it’s worth elaborating on why NFTs pose a significant money laundering risk. As just noted, NFTs are particularly high risk because they combine two sectors that are already characterized by high money laundering risk, albeit for different reasons:
A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, I interview the American journalist Casey Michel about his new book, American Kleptocracy: How the U.S. Created the Greatest Money Laundering Scheme in History. In our conversation, Casey and I touch on a variety of topics raised by his provocative book, including the dynamics that led to the U.S. and U.S. entities playing such a substantial role in facilitating illicit financial flows (including the nature of American federalism, the broad exceptions to the coverage of U.S. anti-money laundering laws, and the role of U.S.-based “enablers” of illicit finance), the challenges of regulating lawyers and law firms, the role and responsibilities of universities in light of concerns about “reputation laundering” by kleptocrats and others, the impact of the Trump and Biden Administrations in this area, and the challenges of generating and maintaining bipartisan/nonpartisan support for fighting kleptocracy. You can also find both this episode and an archive of prior episodes at the following locations:
- The Interdisciplinary Corruption Research Network (ICRN) website
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KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.