Congress Wakes Up, Finally Decides to Tackle Kleptocracy

For much of the past few years, there has been a growing awareness of the threats that modern kleptocracy poses to the United States. This is especially true in the aftermath of Russia’s election interference and influence campaigns in 2016, when it became clear that the West needed a better understanding of the rise of kleptocratic authoritarian regimes, and their interactions with – and reliance upon – democratic governments for the types of tools these regimes require to survive.

Thanks to an expanding array of work from researchers, academics and journalists, we’ve gained unprecedented insight into the internal workings of these kleptocratic regimes, from Russia to Malaysia to Kazakhstan. From the massive tranche of information released in both the Panama Papers and Paradise Papers, to the book-length treatment these kleptocrats have recently received – seen most especially in things like Oliver Bullough’s Moneyland and Jason Sharman’s Despot’s Guide to Wealth Management – awareness has spread among activists and policymakers.

Likewise, solutions have begun to be implemented, to finally end the anonymity with which these kleptocrats thrive, allowing them to clean and store their ill-gotten gains through Western financial systems. Many of those solutions have, thus far, taken root not in the United States, but in Europe. From beneficial ownership registers in the United Kingdom to unprecedented court decisions in France, even to Swiss authorities making it easier to repatriate stolen wealth to ravaged populations elsewhere, European governments have provided potential models worth emulating.

Fortunately, Congress seems to finally be awakening from its stupor when it comes to passing necessary legislation to combat modern kleptocracies. And it couldn’t come a moment too soon. After all, the U.S. – thanks in no small part to its massive, and ludicrously lax, anonymous shell company industry – has become arguably the world’s greatest offshore haven. States like Wyoming, which pioneered the anonymous LLC, have already attracted business from some of the most crooked post-Soviet figures over the past few decades, while states like South Dakota have blossomed into international tax havens on the back of its anonymous trust industry. Thanks to these states – and congressional inaction – the Tax Justice Network now ranks the U.S. second in the world for global financial secrecy. It is sandwiched between Switzerland at the top of the list and the Cayman Islands in third place.

For years, Congress dithered, cowed by lobbyists and officials who’d rather rake in fees and business. But if recent action in Washington is any indication, Congress has finally awakened to the dangerous threat posed by unchecked kleptocracy and corruption. And if a recent explosion in anti-kleptocracy and anti-corruption legislation detailed below is any indication, U.S. lawmakers are finally willing to do something about it.

It’s worth noting that none of the pieces of legislation below have yet passed; all are still churning through the legislative process. All, though, are moving forward. And even more importantly, all have attracted bipartisan support. Republicans and Democrats alike have signed on to these pieces of legislation, often electing to co-sponsor them together – not only providing a boon to their chances of passage, but also a respite from the recent partisan rancor that seems to infect every other policy area.

Here’s a brief overview of some of the bills in question – capped by the most important piece of anti-kleptocracy legislation the U.S. has ever seen, and which is long overdue:

  1. Transnational Repression Accountability and Prevention (TRAP) Act

The TRAP Act aims directly at one of the favorite tools of kleptocratic regimes the world over: filing INTERPOL notices against dissidents and pro-democracy activists, many of whom have been forced to flee abroad. Regimes from Russia to China have notably abused the privilege of filing official INTERPOL notices time and again. But they’re not alone: Countries like Tajikistan or Kazakhstan have found common cause, burnishing INTERPOL notices against dissidents wherever they may be hiding.

The new legislation, though, would not only limit how INTERPOL requests are used within the U.S., but would further require that the Department of Justice, Department of Homeland Security and State Department to provide Congress with reports regarding autocratic regimes’ abuse of INTERPOL. As the Helsinki Commission, an independent commission of the federal government focused on human rights and pro-democracy policies – and one of the primary drivers of a number of these bills – put it, the TRAP Act would allow the U.S. to “use its diplomatic clout internationally to protect the rights of victims and denounce abusers.”

  1. Justice for Victims of Kleptocracy Act

The Justice for Victims of Kleptocracy Act, introduced in September, builds on one of the areas in which the U.S. has been a leader in terms of anti-kleptocracy directives: freezing and seizing assets links to kleptocratic regimes and officials. From Venezuela to Uzbekistan to Equatorial Guinea, the U.S. – thanks to things like DOJ’s Kleptocracy Asset Recovery Initiative – has seized billions linked to crooked politicians moving their money through the U.S., with the hopes of eventual repatriation.

Some of that money – such as the hundreds of millions linked to the daughter of the former president of Uzbekistan – remains tied up in negotiation. But the Justice for Victims of Kleptocracy Act would allow DOJ to keep a public tally of just how much money has been stolen and recovered by assorted regimes around the world. As Rep. Tom Malinowski (D-N.J.), one of the bill’s co-sponsors, said, “There is no better way for America to stand up for people suffering under repressive regimes than recovering the money their leaders have stolen and letting them know about it.”

  1. Foreign Extortion Prevention Act (FEPA)

For years, the Foreign Corrupt Practices Act (FCPA) has acted as one of the linchpins for U.S. anticorruption efforts, targeting Americans paying bribes to foreign governments and officials. But the FCPA, originally implemented in 1977, suffered one fatal flaw: It only targeted the supply-side of the bribe-exchange, rather than those demanding the bribes in the first place.

No more under this bill. FEPA, introduced earlier this summer, would allow American officials to specifically indict foreign officials and entities who solicit bribes from Americans, with potential fines and jail-time as a result. It would also bring the U.S. up to speed with similar legislation elsewhere, such as in Switzerland or the U.K.

Of course, jurisdictional issues remain; governments for whom the foreign officials work would be unlikely to extradite the indicted official, after all. But even without that official seeing the interior of an American courtroom, FEPA’s advantages are clear.

“Even if a kleptocrat cannot be immediately extradited, a U.S. indictment serves as a play-by-play of the crime committed that can be used to support additional measures – such as sanctions – and can force transnational criminals to think twice before traveling abroad to spend their ill-gotten gains,” said Rep. Richard Hudson (R-N.C.), one of the co-sponsors. “Currently, a business being extorted for a bribe can only say ‘I can’t pay you a bribe because it is illegal and I might get arrested. This long-overdue bill would enable them to add, ‘and so will you.,’” said Rep. John Curtis (R-Utah), another co-sponsor of the bill.

  1. Countering Russian and Other Overseas Kleptocracy (CROOK) Act

One of the biggest struggles the U.S. government has faced in recent years – as with any number of issues – comes down to flexibility. Namely, being able to act quickly enough when domestic changes in other countries, either via election or revolution, present new opportunities to cement anti-corruption policies abroad.

The CROOK Act would change that. The legislation, if passed, would create a new anti-corruption fund, overseen by the State Department, that would specifically provide resources to finance new governments seeking to root out corrupt networks, or pushing anti-corruption legislation. The current text of the bill would allow the fund to specifically “assist countries that are undergoing historic opportunities for democratic transition, combating corruption, and the establishment of the rule of law.” The bill would likewise create specific anti-corruption points of contact in American embassies, helping steer anti-kleptocracy efforts.

The best part? The bill wouldn’t need to create new revenue streams for financing this new anti-corruption fund. Rather, the CROOK Act would allocate some 5 percent of future FCPA enforcement actions – already running to millions of dollars annually, which head directly into the U.S. Treasury – to finance the fund, effectively using bribery convictions to fund further anti-corruption efforts elsewhere.

  1. Kleptocrat Exposure Act

For many of the foreign officials using and abusing kleptocratic networks, anonymity is a must. Anonymous shell companies, anonymous property purchases, anonymous trusts – all of the transactions must be cloaked, in order to hide the financing from critics and investigators alike.

The Kleptocrat Exposure Act, though, would shine a spotlight on (at least part of) that anonymity. The bill, introduced by Reps. Steve Cohen (D-Tenn.) and Steve Chabot (R-Ohio), would allow the State Department to reveal which foreign officials (or their family members) had been barred from the U.S. on account of corruption.

“Global criminals and corrupt autocrats – or kleptocrats – seek to spend their ill-gotten gains in the United States, where they can indulge in luxury, pursue positions of influence, and exploit the rule of law, which protects their stolen wealth. Our country should not be a shelter for these corrupt individuals,” said Cohen.

Similar regulations exist elsewhere, such as in Section 7031(c), which have already allowed the State Department to highlight the barring of corrupt officials abroad. But the Kleptocrat Exposure Act would actually amend the underlying statute, enabling the U.S. visa bans, with the Secretary of State then able to publicly reveal all those barred.

  1. The Corporate Transparency Act (in the House) and Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act (in the Senate)

These two bills – the ILLICIT CASH Act in the Senate, and the Corporate Transparency Act in the House – present a culmination of years of effort, activism, and struggle to finally eradicate the U.S.’s greatest gift to modern offshoring, and modern kleptocracy: anonymous American shell companies. Thanks to the fact that company formation remains regulated and overseen by state-level governments, rather than Congress, states like Delaware, Nevada, and Wyoming have perfected the art of offering anonymous shell companies to any and all who may want one, regardless of their source of income. They’ve even exported their models elsewhere, as we’ve seen with Delaware’s impact on tax havens like Nevis or Panama. At last check, it remained easier to obtain an anonymous shell company than it was to get a library card across the U.S. And these anonymous shell companies have been used for any range of nefarious activities, from the Iranian government using them to skirt sanctions to Viktor Bout, the most notorious gun-running of the past few decades, using them in his global arms-trafficking network. And then there was Michael Cohen, Trump’s former lawyer, who allegedly used a Delaware LLC to help funnel hush-money payments to Stormy Daniels.

Thankfully, the heady days of U.S.-based anonymous shell companies may be behind us. Thanks to the work of pro-transparency activists, as well as massive scandals like 2016’s Panama Papers – which saw a Panamanian law firm, Mossack Fonseca, direct clients to states like Nevada and Wyoming – there’s unprecedented momentum toward finally creating a beneficial ownership registry for companies formed in the U.S.

Not only has the Corporate Transparency Act already become the first anti-anonymous shell company bill to make it out of a House committee, but the move to end anonymous shell companies has already gained surprising supporters, including high-ranking officials out of Delaware. (The leading Democratic primary contenders have all called for the elimination of anonymous shell companies, as well – including, for the first time, former Vice President Joe Biden, who represented Delaware in the Senate for over three decades) The ILLICIT CASH Act would further provide new resources for Treasury’s Financial Crimes Enforcement Network (FinCEN), including the creation of a team of FinCEN financial expert investigators.

It’s unclear what final form these bills will take as they move forward. (The Corporate Transparency Act, for instance, may yet be bundled with broader anti-money laundering legislation.) There are also assorted criticisms surrounding the bill’s remedies – some legitimate, some without merit. For instance, some have pointed out that the bills wouldn’t provide a public registry of beneficial owners, as we’ve seen in Britain, but would instead create a registry that would remain accessible only to government officials, throwing up another roadblock regarding potential investigations into American shell companies. Others, though, make spurious arguments that requiring the identification of beneficial owners is somehow an undue burden on business – as if trying to prevent kleptocrats and arms-traffickers from using a Wyoming shell company is simply too much work.

Regardless of the criticism, momentum is on the bills’ sides. And the elimination of anonymous shell companies would present the U.S.’s most substantial efforts to combat global kleptocracy – a massive step in an unprecedented effort that’s only just getting started.

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About the Author(s)

Casey Michel

Writer, Analyst, and Investigative Journalist covering foreign interference and kleptocracy-related developments, former Investigative Journalist with ThinkProgress, former Global Magnitsky/Senior Investigative Fellow with the Human Rights Foundation - Follow him on Twitter (@cjcmichel).