This article was initially drafted for a Perry World House conference on “The Intersection of Sanctions and Corruption,” which was made possible in part by a generous grant from Carnegie Corporation of New York. The views expressed are solely the author’s and do not reflect those of Perry World House, the University of Pennsylvania, or Carnegie Corporation of New York.
One could argue that all sanctions programs – whether targeted or against entire countries – play a role in deterring or preventing corruption. This can be seen most especially in any of the Global Magnitsky-related sanctions placed on Russian (and other) oligarchic figures over the past decade, and especially over the past few years. Thanks to these targeted sanctions, oligarchs who’d previously benefited not only from corrupt networks domestically, but also from access to financial institutions, legal protections, and access points in democratic countries suddenly saw their networks upended, their assets frozen, and their reputations destroyed. No longer can these figures travel freely through Washington, London, Paris, or elsewhere. No longer can they openly bankroll non-profits such as think tanks or universities, disguising themselves as budding philanthropists. No longer can they push the policies their backers in Moscow (or elsewhere) prefer, circumventing diplomatic networks and damaging democratic policy-making – and laundering as much of their wealth as they can – in the process.
This kind of network-disruption is far and away one of the clearest benefits of these kinds of targeted sanctions programs, which previously worked in similar fashion upending terrorist-financing networks during the so-called War on Terror. Therefore, it should be no surprise that they also work against these networks of corruption.
But networks can, as we’ve seen, be rebuilt. Which is why, for as true as it is that these sanctions programs can deter and prevent corruption, they do so only temporarily. It’s true that sanctioned entities can no longer travel to democratic nations; that they can no longer use large-scale donations to rehabilitate their reputations or directly access foreign financial institutions; and that their assets will remain frozen in democratic countries as a result. All of this is worth celebrating.
When it comes to financial corruption, however, sanctions are no silver bullet. If anything, for these oligarchic figures, they are but a temporary obstacle to amassing wealth. When it comes to deterring and preventing corruption, these sanctions are not permanent solutions, but instead resemble an unending game of whack-a-mole. The reason sanctions aren’t more effective is for one simple reason: democratic nations, perhaps most especially the United States, have failed to pass the requisite policy reforms that will close their doors to the illicit wealth swirling around the world, looking to be laundered and hidden – and used for whatever purposes malign interests, kleptocratic regimes, and dictatorships may need those funds for. That is to say, because democratic countries remain wide open to this kind of financing – and to providing the kinds of tools necessary to augment and expedite these corrupt networks – sanctions alone will never fully succeed in deterring or preventing corruption.
American Kleptocracy
The United States’ receptiveness to illicit finance is a reality that remains surprisingly unrecognized, or at least under-discussed in the world of sanctions and related policy. But it is one that has been obvious for years – and it makes a mockery of any claims that sanctions are an effective tool in combating corruption.
For decades, the United States has stood not only as the greatest leader in the sanctions space – but also as the greatest provider of tools for sanctioned entities and individuals to circumvent the restrictions placed on them. For years, in the United States, foreign corrupt actors have had access to anonymous shell companies, untraceable and impenetrable trusts, and investment markets (especially private equity and hedge funds) without any anti-money laundering, due diligence, or transparency requirements whatsoever. With these shady financial instruments, the United States is providing the key laundering tools necessary for any crooked or corrupt individual or network around the world. The American real estate industry alone has sucked up trillions of dollars in recent years – all while enjoying exemptions from basic anti-money laundering checks, and while transforming into one of the go-to destinations for illicit wealth.
On their own, these industries have provided all the resources – anonymity, ease of access, legal and property rights, and more – needed to work around existing sanctions. Taken together, they’ve made the United States the world’s greatest offshore haven, surpassing other traditional money laundering jurisdictions. (Ironically, not all of this was necessarily the federal government’s fault. Thanks to the structure of the U.S. corporate formation sector, in which the creation of companies is overseen by states, there was little Washington could do for years to combat American shell company formation.) The United States, in other words, provided the primary tools to undercut its own sanctions.
Reforms Rising
None of this is a secret. Indeed, much of this is so well-known that, in the early 2020s, the United States made remarkable progress in finally ending its role as the world’s premier destination for money laundering, sanctions evasion, and pro-kleptocracy services. In large part thanks to the revelations included in leaks such as the Pandora Papers, as well as swelling concerns about the links between corruption and national security, the United States saw its greatest burst of anti-corruption and counter-kleptocracy reform in decades, at least since the days following the September 11th attacks.
The reforms themselves began in early 2021, when Congress approved the Corporate Transparency Act (CTA). Passed with bipartisan support (enough to overcome President Donald Trump’s veto), the CTA was perhaps the strongest counter-kleptocracy policy Congress had ever passed. Instead of corporate formation (that is, shell company) providers being able to set up a company for any and all, perfectly anonymously, these providers were now required to identify the so-called “beneficial owners” of the shell companies in question. This meant that forming anonymous shell companies in the United States would now effectively be illegal – and that, for the first time ever, we would know who was behind them.
The new law wasn’t perfect. Unlike similar legislation elsewhere, American shell company information wouldn’t be public; it would only be accessed by federal and law enforcement officials (and certain foreign counterparts). Moreover, it wouldn’t be accessible to investigative journalists or other researchers – one of the key tools that allowed other corporate registries, such as those in the United Kingdom, to succeed. But even though the information would remain private, the law was nonetheless a massive step forward, both in closing off the United States to the kinds of illicit networks that rely on anonymous shell companies and as a symbol of the United States finally ending its reign as the world’s leading offshore haven.
And the U.S. government didn’t stop there. Under the Biden administration, the White House took the lead in charting a new, counter-kleptocratic path forward for the country. The administration not only issued the first-ever U.S. strategy to counter corruption, but also identified corruption as a core national security concern. More pointedly, the White House announced it would finally close the decades-long anti-money laundering loopholes that the American private equity, hedge fund, and real estate industries had long enjoyed. And on the offensive side of the ledger, the White House created the “KleptoCapture” task force, which would specifically target oligarchic networks, including those attempting to use the United States (and other jurisdictions) to evade sanctions.
There was plenty of room left for improvement, whether in transparency for trusts or expanding anti-money laundering requirements for lawyers and law firms actively setting up offshore networks (and abusing attorney-client privilege in the process). But on the whole, by 2024, the United States appeared to have turned a corner. Not only would it continue as the global leader in targeted sanctions and sanctions enforcement – but it was, for the first time, closing itself off as a destination for sanctions evasion as well.
When American voters returned Trump to the White House in 2024, however, all of that progress collapsed.
Making Corruption Great Again
It didn’t take long for the second Trump administration to begin dismantling the new anti-corruption agenda. During the first month of the administration, the Department of Justice announced it was disbanding the “KleptoCapture” task force (in addition to the Kleptocracy Asset Recovery Initiative, which specifically repatriated funds linked to corrupt networks). Shortly thereafter, the administration announced that it was also punting the forthcoming rules and regulations requiring the private equity and hedge fund to end their roles as money-laundering hotspots. And most significantly, Trump announced that the United States would be pausing enforcement of the country’s shell company registry – and destroying all of the documentation already received. Meanwhile, congressional allies have launched a new attempt to repeal the shell company registry wholesale.
Of course, these decisions came amidst a renaissance for American corruption, from the rank politicization of the Department of Justice to the effective demolition of things such as the Foreign Corrupt Practices Act, which makes it illegal for American companies (and those listed on U.S. stock exchanges) to bribe foreign officials. And, of course, weakening the CTA also came with the remarkable decision to turn the targeted sanctions program into a tool of partisan statecraft, aiding imperialist, authoritarian, or corrupt networks abroad. The Trump administration lifted sanctions against extremist Israeli settlers in the West Bank, including those accused of arson attacks and assaults on Palestinian families. It also removed sanctions against allegedly corrupt figures in Hungary and Bosnia, and it imposed sanctions on figures such as the judge prosecuting Jair Bolsonaro, the former president of Brazil.
These actions ended the United States’ emerging role as a leader in the anti-corruption space. They also confirmed that the United States is instead a leader in the pro-kleptocracy space, fostering networks of corruption abroad, and facilitating corrupt actors’ access to the American economy at home.
Looking Ahead
If there’s a silver lining to any of this, it’s that the policy solutions to unwinding this expanded corruption are already known: transparency in corporate formation and donations to non-profits, re-activation and expansion of all of the now-defunct task forces, the depoliticization of the Department of Justice and elimination of partisan prosecutions, all while the United States restores targeted sanctions against the criminal and the corrupt. The playbook is relatively obvious.
And it will have to be put to work again if the United States wants its targeted sanctions programs to deter and prevent corruption. The least the United States can do is close itself off as a vector of sanctions evasion. Only then can the country begin ensuring that these sanctions are as effective as they always should have been – and as they can someday be.
