Q&A: American Kleptocracy with Casey Michel

Journalist and Hudson Institute adjunct fellow Casey Michel is the author of a new book, American Kleptocracy. The book explores how the US economy has become an “offshore” haven in recent decades, attracting hundreds of billions of dollars in illicit finance tied directly to corrupt regimes and extremist networks.

Financial Crime Digest spoke to Michel about the two individuals woven throughout the book - Equatorial Guinean Vice President Teodorin Obiang and Ukrainian oligarch Ihor Kolomoisky - the history of American money laundering, enablers, and prospects for reform.

Teodorin Obiang and Ihor Kolomoisky are the two case studies you chose to explain the recent history of kleptocratic money laundering in the US. Why did you pick these two figures?

Obviously there were dozens, hundreds of other cases that I could have chosen, and hit on similar themes. But these two bookend a broader phenomenon I’m attempting to describe – they inhabit different poles of the spectrum of how these oligarchic, kleptocratic figures use American financial systems and anonymity to lauder wealth.

Take Obiang – one of the investigators on his case described him as the “poster child” of kleptocracy. He has 30 cars, the Malibu mansion, the private jet, all the trappings of conspicuous consumption – elite-level 1% wealth. He’s a Gatsby-like figure, more money than he knows what to do with. That’s one end of the spectrum. On the other end, Kolomoisky ploughed his allegedly ill-gotten gains into places you would never in a thousand years connect to international money laundering. The American Midwest, the Rust Belt, commercial real estate, factories, steel plants. It was highlighting that these illicit gains can burrow themselves frankly at this point anywhere across the United States of America. And then beyond that, what does it mean for those local economies in the Midwest, in the Rust Belt, those jobs have been lost - factories going to rot, towns that have emptied out and lost business.

The Kolomoisky story is highlighting that it’s not just dictators and their families using luxury jets and mansions as playthings with no effect for the rest of us. It allows us to examine what this means for those declining economic regions.

And while the Obiang financial networks were relatively straightforward, the Kolomoisky network has been just endlessly fascinating, especially in trying to determine how he would use, move, hide, launder, mix and match his money. It really was a breath-taking operation in many ways. Not least that Kolomoisky and his colleagues were overseeing one of Ukraine’s primary banks, and allegedly transforming it into one of the country’s biggest ever Ponzi schemes. I don’t envy the American prosecutors who had to forensically disentangle it. There was one analyst I spoke to who surmised that because there was such a high volume of convoluted money movement in the Kolomoisky network, that it beggared belief that a team of people could do that – the theory was that he employed machine learning to set up this system of money movement between accounts in Ukraine, Cyprus, Delaware, Germany. That’s certainly the next frontier in terms of where things are heading.

Could you take us back and explain a bit of the history – how did the US get into this situation?

This has been decades in the making. When the Soviet Union collapsed, combined with the subsequent privatisation schemes, it was at the height of a deregulatory thrust in the West. There were policies that made it easier for establishing anonymous shell companies, trusts, real estate purchases that emphasised removing barriers to financial flows. But obviously this is by no means limited to the post-Soviet region – this is a phenomenon you can witness around the world.

You then have different US states pursuing their own economic infrastructural policies – they still have sovereignty as it pertains to corporate management, oversight and formation, and the information that is required on that front. And there was every incentive, especially in the latter part of the 20th Century, to begin crafting the kinds of shell company industries, policies, and lack of oversight that encouraged the inflow of brand-new wealth that emerged from postcolonial states, post-Soviet states, post-Communist states. It’s not limited to the US, we see similar dynamics in the UK with its overseas territories, and in Switzerland, the South Pacific. What’s unique is the US as a federal polity has 50 sovereign entities – plus territories and tribal nations – that can all set up their own pro-kleptocracy, pro-anonymity, pro-illicit wealth laundering services, without federal oversight.

It’s not just the provisions of anonymity and ease of places like Delaware, Nevada and Wyoming allowing clients to establish shell companies, regardless of where [the clients] are located. Delaware has been in the leading position for pro-corporate reforms, legal infrastructure and financial secrecy provisions for nearly a century.

New Jersey was in the position before, then Delaware swooped in in the early 20th Century. The Chancery Court is absolutely part of that – there’s no US state that has anywhere near the depth of case law that allows attorneys representing clients to navigate the legal architecture in Delaware. That gives great confidence to law firms and companies, and an incentive to incorporate in Delaware. Even with Congress passing the Corporate Transparency Act earlier in 2021 finally ending anonymous shell company creation – Delaware is going to be fine. They have so many other elements of pro-corporate legal architecture, they will be fine. The Delaware Secretary of State came out a few years ago in favour of ending anonymous shell companies – he could read the tea leaves. Nevada and Wyoming may take more of a hit.

Things really began picking up pace in the 1990s. Especially the US banking sector began focusing on bringing in as much money as possible regardless of the source. It was really remarkable looking at what US banks could get away with in the 90s. Anyone could bring in any amount of shrink-wrapped bills, no matter if you were the dictator’s nephew or a narcotrafficker. You could bring any amount of money into any American bank, and they’d be perfectly happy to service it.

These trends under the deregulatory ethos through the second half of the 20th Century catapulted America into one of the leadership positions for laundering services.

And then you have the Patriot Act in 2001 – despite questions around enforcement and resourcing, arguably it’s the single greatest piece of anti-money laundering counter-kleptocracy legislation the US has ever passed. It took a clean sweep to the US banking sector. It forced them to begin asking questions about who they were servicing, and imposed penalties on those who worked with the proceeds of foreign corruption. It was an unprecedented clampdown on the US banking sector in 2001/2002.

However, it sowed the seeds of its own demise, because of exemptions under the legislation for private equity, hedge funds, escrow agents and several other industries – to say nothing of the lack of oversight for US lawyers and accountants. The illicit wealth still came into the US, it was just no longer targeting the banking sector. By the 2000s you had real estate, other parts of the financial sector, the art market and auction houses that were open for this inflow of illicit wealth looking to be anonymised and laundered.

Can you explain the significance of Democratic Senator Carl Levin in securing those initial reforms and subsequently pushing counter-kleptocracy legislation? And how we still have these exemptions and cracks in the system today?

It’s difficult to overstate the legacy Senator Levin had on the anti-money laundering, counter-kleptocracy fight in the US. He was a man who could see what was coming, and it was unfortunate that more policymakers did not listen to him earlier. He co-sponsored the first bill to ban anonymous shell company formation in 2008. He sponsored it alongside then-Illinois Senator Barack Obama, but unfortunately it didn’t go anywhere. If there’s a hero of the book, it’s Senator Levin. Reading the investigations that he led, the book wouldn’t have been possible without that.

He knew exactly what form these illicit networks were going to take, and the role of American tools therein. He was one of the main forces in inserting language in the Patriot Act to clean up American banks – requiring them to set up internal money laundering oversight, criminalising using proceeds of foreign corruption, no longer working with shell banks. It was the wild west before that, in the 1990s.

The Patriot Act forced all of these regulations on the US banking sector. 20 years on, they can broadly be considered a success. There are issues with enforcement, with funding, and general technical compliance, but at a 10,000-foot level they can be considered a success.

But the exemptions, oh my goodness. They came into force in 2002/2003, with a framing from the Treasury Department that they were “temporary”. You could see the rationale at the time – it wanted to study the impact of the new regulations on the American banks. They didn’t want to cut off industries at the knees. The problem is these temporary exemptions are now two decades old. They are permanent, even though they call them temporary – it’s a farce. American real estate –?commercial and residential – has exploded into a font for all manner of laundering services.

One of the fascinating things for me on the Kolomoisky network, it was a manufacturing plant in Harvard, Illinois. In a tiny town, this was their economic crown jewel. Kolomoisky’s team comes in, purchases it, doesn’t do anything with it, it began to degrade and implode. They offloaded it in 2016 to what ended up being another alleged network of transnational money launderers. You can see how these assets bounce between different networks.

We don’t have nearly as many case studies on private equity and hedge funds as we do on real estate. But what we do have is an indication that these oligarchic figures are increasingly turning to private equity and hedge funds for their laundering needs. To take private equity, an example in the book is a Russian oligarch who bankrolled a private equity fund that oversaw the company running the voter registration database in the state of Maryland. This is after the 2016 interference operation. As far as we know, no votes were tainted – but because of the secrecy provisions allowed [under the exemptions], an entire state’s voting operation was run within a private equity firm bankrolled by an oligarch close to President Putin.

These funds have exploded in the past decade or two. When the exemptions were first issued after 2000, there was not nearly that scope or the expectation of that. US investigators are paying increasing attention to private equity and hedge funds, and I would not be at all surprised if in the next few years we finally see regulatory oversights imposed in these sectors. Maybe not real estate just yet, but it would not surprise me given the magnitude of some of these case studies.

Let’s say I’m the archetypal kleptocrat looking to launder money through the US. Who are my allies in this process?

You’re going to look at a range of enablers, who are under no anti-money laundering requirements, either due to a lack of regulatory oversight in general, or due to the exemptions we previously discussed. Real estate agents, private equity and hedge fund managers, art gallerist and auction owners. All those whose businesses incentivise the inflow of anonymous or suspect money into those industries themselves.

But there is one industry that is first among equals when it comes to the best friends of the kleptocrat, and that is US law firms. We saw this most clearly in the most recent Pandora Papers. Real estate agents will help you buy a house, accountants will help you manage your funds, art gallerists will help you offload a painting. But the lawyers have so many services they can provide. They can set up a shell company, set up a trust accounts so you don’t have to do it yourself, set up the real estate purchase, or the purchase at the auction house. They know which escrow agents or art houses will be more amenable to questionable funds. They can push for greater lobbying or secrecy provisions – they were one of the key outspoken voices opposing beneficial ownership information and the ending of anonymous shell companies in the US for years.

I’m sure you’ve seen the Global Witness investigation into US law firms. The head of the American Bar Association was more than happy to advise an anonymous African minister about how to set up and move his funds. They often act as lobbyists, use their services to intimidate civil society groups or investigative journalists, and by the way they can often protect their communications by hiding behind attorney-client privilege. And doing all this without any due diligence requirements whatsoever, they provide so much of this kleptocratic playbook. They are a one-stop shop for all kinds of kleptocratic needs.

The ENABLERS Act, which was recently introduced in Congress, promises to make reforms to stamp out some of this activity. What are the prospects for this proposed piece of legislation?

Yes, this bill was recently introduced on a bipartisan basis, and will finally impose basic AML requirements on those so-called “enabling classes” of professionals – escrow agents, trust providers, shell company providers, real estate agents, US lawyers, etc. Those professional classes that act as the gatekeepers to American financial secrecy, that incentivise and encourage and oversee the inflow of dirty money.

It is now being considered, and it is in many ways so overdue. We know based on what we saw with the banking sector that those basic anti-money laundering and counter-kleptocracy provisions can succeed in spades. It is much welcome, but I don’t know if it will pass for any number of reasons. Trade lobby groups pushing back, partisan rancour in Washington, but if nothing else it is a clear planting of a flag about where things are going. We have this counter-kleptocracy caucus in Washington right now. We’ve never seen anything like it in Washington and it’s become a braintrust for pushing bill after bill to patch up loopholes and exemptions and lack of regulatory oversight. To patch up all the holes in the US anti-money laundering infrastructure. The ENABLERS Act is the latest and most remarkable salvo in this. It’s an indication that there will be, in the not too distant future, the imposition of basic money laundering requirements on accountants, lawyers, real estate professionals, escrow agents. It’s the perfect bill to do that.

Private equity and hedge funds argue that they are not instantaneous money laundering vehicles. You don’t go in on Tuesday and come out on Thursday with clean money. And they are exactly right. But what regulators and legislators are saying is that kleptocrats are not looking to the funds for that purpose. They are looking for long-term investments, over years.

In recent days there has been reporting about a proposal to form an inter-parliamentary alliance against corruption between Members of Congress and counterparts in London and Brussels. What can we expect from this?

I can’t say much about it, but suffice it to say, watch this space. Don’t be surprised if you hear of an announcement of a formal formation very soon. This is an absolutely necessary step for several reasons. At the 10,000 foot level it’s about shoring up alliances and organising around beating back illicit finance or opposing these loopholes and exemptions across jurisdictions.

Building those bridges, forming alliances, that’s how frankly this issue is finally resolved. I’m in America and writing for an American audience, but this is by no means a US phenomenon. You see the same dynamic in Australia, the UK, and Europe. It’s a global race to the bottom, and it’s going to take a transnational unified imposition of these policies and we’ll see how it builds out with this international network of caucuses. That is the kind of policymaker infrastructure that will make the spread of best practices, lessons learned, case studies. The US can clean up its own house, but it needs a transnational coordinated approach. In that sense, I’m optimistic about where things are heading in the US, but also about where things are heading internationally as well.

Roger Hamilton-Martin, Financial Services Journalist

[email protected]

This Q&A was featured in the November issue of the Financial Crime Digest.?Read the full issue here for free.?

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