How the Financial Systems America Built Enable Oppression Abroad

Bipartisan Legislation in Congress Targets Kleptocracy and Transnational Crime

The police brutality that sparked the current Black Lives Matter protests and the militarized response in some jurisdictions illustrate that systematic repression remains a pervasive problem in the United States requiring transformative change. A similarly disturbing pattern taints the U.S. record abroad, where the American financial system buttresses the repressive tactics of authoritarian regimes. Autocratic leaders guilty of corruption and human rights abuses around the world are able to secure their illicit gains using American financial systems and mechanisms. They can even co-opt American law enforcement to persecute dissidents who seek safety in the United States.

Congress was beginning to address these issues with several bipartisan legislative proposals last year, before impeachment and then the pandemic consumed congressional attention. The current debate over the annual National Defense Authorization Act (NDAA) provides a new opportunity to tackle the complicity of these U.S.-led systems in foreign oppression.

The U.S.-led promotion of economic liberalization, which accelerated after the collapse of the Soviet Union, was intended to produce democratization in many parts of the world. Instead, it created incentives that enable graft, rather than prevent it. Authoritarians take advantage of their countries’ partial economic liberalization to profit from corruption and criminal associations, and then transform their private economic operations into global legal personas that let them retain control of their ill-gotten assets while hiding their beneficial ownership.

The most frequently used mechanisms are anonymous shell companies and luxury properties in the United States and other liberal states. With their criminal proceeds secured beyond the reach of vengeful domestic forces should their hold on power collapse, the potential spoils for challengers are reduced and incumbents can be confident in escape routes to lavish lives in exile. Freed from public accountability, authoritarian regimes are thus empowered to oppress their citizens at home and abroad.

On June 25, U.S. Senators Mike Crapo (R-ID) and Sherrod Brown (D-OH) proposed an amendment to the must-pass NDAA for 2021 that would require companies to report their beneficial owners to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN). The amendment, which borrows language from the ILLICIT CASH Act introduced in the U.S. Senate, is designed to target shell companies used by authoritarians, terrorists and transnational criminals. A similar bill, the Corporate Transparency Act, passed the House 249-173 in October.

Last year, a top FBI official told the Senate Banking Committee in testimony:

In addition to diminishing regulators’, law enforcement agencies’, and financial institutions’ ability to identify and mitigate illicit finance, the lack of a law requiring production of beneficial ownership information attracts unlawful actors, domestic and abroad, to abuse our state-based registration system and the U.S. financial industry.

The tax haven phenomenon is well-known, but the popular imagination focuses too much on remote locales like the Cayman Islands as places where criminal enterprises can stash their earnings. In fact, due to the laxity of its laws, the United States is arguably the world’s foremost tax haven, and an enormous portion of the illicit profits funneled through anonymous shell companies are associated with government officials, their relatives, and their business partners.

In one egregious case, document leaks reported in the New York Times in January showed how Isabel dos Santos, the daughter of Angola’s former president, became Africa’s richest woman by exploiting decrees signed by her father to steal public wealth and then laundering the money with the help of the international financial system. A global network of consultants, lawyers, bankers, and accountants from leading service firms including the Boston Consulting Group, McKinsey & Company and PwC performed indispensable functions facilitating and legitimizing the growth of her private fortune built on captured Angolan state funds, according to the Times. Dos Santos’s pattern of looting the state at the expense of her fellow Angolans and securing the profit in liberal states is the norm for authoritarians worldwide.

Some U.S. laws do provide U.S. law enforcement some capacity to address illicit offshoring in specific circumstances. For example, the Foreign Corrupt Practices Act prohibits U.S. companies from committing bribery abroad. But anti-corruption mechanisms too often ignore the central role of international financial systems. Laundering illicit gains from corruption fueled by kleptocracy – the systematic theft of state resources by government figures – and by transnational crime involves international networks that include criminals, domestic elites, international brokers, offshoring vehicles, shell companies, and reputable financial institutions from Delaware to London.

Last year, a bipartisan effort to tackle American complicity in transnational repression was gaining momentum. Organizations across the political spectrum, from Transparency International to the Hudson Institute, united behind several pieces of potent legislation under consideration that would build on existing policy tools.

One such existing tool is the Global Magnitsky Act, adopted in the United States in 2016 to allow the U.S. Treasury Department to impose financial sanctions and travel bans on foreign individuals involved in corruption or human rights abuses. It has become one of its most effective tools for deterring oppression abroad, and has been replicated in Canada, the U.K., and other European countries.

But the kleptocrats and repressive autocrats that Treasury identifies and prohibits from traveling to the United States are still granted anonymity. To address this, U.S. Representatives Steve Cohen (D-TN) and Steve Chabot (R-OH) introduced the Kleptocrat Exposure Act, with the backing of five other members of Congress on the U.S. Helsinki Commission on which Cohen serves. The measure would authorize the State Department to publicly disclose individuals whose U.S. visa applications are denied due to corruption or human rights abuse. Such transparency would help financial institutions and companies screen prospective international business relationships for potential money launders, kleptocrats, and transnational criminals.

The Helsinki Commission, made up of U.S. members of Congress who support compliance with the principles of the Organization for Security and Cooperation in Europe, is also concerned with loopholes that allow the abuse of Interpol’s “red notices” and “diffusions.” Intended to help bring international fugitives to justice, these mechanisms are frequently abused by authoritarians in China, Russia, Turkey, and elsewhere to harass, detain, and in some cases facilitate the extraordinary rendition of dissidents or even their family members. While the U.S. cannot reform Interpol’s many loopholes alone, the Helsinki Commission’s proposed legislation on this issue, the Transnational Repression Accountability and Prevention (TRAP) Act, would minimize the complicity of U.S. law enforcement bodies in the harassment of persecuted individuals fleeing repression in their home countries.

The extension of domestic repression to target dissent across borders is far from an isolated problem, and it depends on the financial security that U.S. financial systems provide for authoritarians. The most immediate way for the United States to address its complicity in oppression abroad may therefore be establishing a beneficial ownership register with the Crapo-Brown amendment to the NDAA. Critics of the proposal say it would impose a heavy regulatory burden on small businesses. In practice, however, it would require minimal reporting about small companies’ beneficial owners, while providing FinCEN far greater enforcement capability to prevent the abuse of American financial systems by repressive kleptocrats and transnational crime.

In urging the Senate to take up the House’s Corporate Transparency Act, U.S. Representative Tom Malinowski (D-NJ) said, “There is no better way for America to stand up for people suffering under repressive regimes around the world than by cutting off their corrupt leaders’ ability to launder money through shell companies and real estate on American soil.”

With the U.S. government’s failure to respond effectively to the abundance of calamity facing America today, political will feels more elusive than ever. This scarce resource needs to be used domestically to address systemic racism and inequality, but the U.S. role in other forms of oppression abroad must not be forgotten.

IMAGE: The head offices of Unitel as seen on January 28, 2020 in Luanda, Angola. In 2000, the dos Santos government issued a hugely valuable mobile telecommunications license, one of the country’s first, to Unitel; among its owners and founders was Isabel dos Santos. Businesswoman Isabel Dos Santos is the daughter of the former President of Angola – Jose Eduardo dos Santos. Forbes Magazine put her fortune at $2.1 billion, making her the richest woman in Africa. How she made her fortune has come under scrutiny as international media using information from the Luanda Leaks have revealed how, during his presidency, her father sanctioned her acquisition of stakes in Angolan industries including banking, diamonds, oil and telecoms. In December 2019 the Angolan Courts froze Dos Santos’s stakes in Angolan companies as it bought a case against her regarding funds owed to the state oil firm. (Photo by Luke Dray/Getty Images)

 

About the Author(s)

Ian Lynch

Independent foreign policy analyst. Follow him on Twitter (@Ian_J_Lynch).