This is going to be my last newsletter for a while because I need to focus on writing my next book (about the fight against money laundering), so I’d like to start by thanking you for reading my weary and cynical thoughts every week, and to apologize for the fact I’m not going to keep sending them out.

Looking back at the last couple of years, I see that one of the key themes that I’ve been banging on about is the question of why Western governments fail to do anything (much) about corruption, despite the clear and obvious evidence that it makes all bad things worse. Is it incompetence — or corruption? Is the problem just too hard for honest people to solve? Are politicians themselves on the take, and thus personally invested in perpetuating the situation?

Or is it both of the above, plus something else entirely? 

I had a meeting recently with a think tank employee who was tasked with coming up with some policy ideas for a senior British politician to announce at a party conference. As you are no doubt aware, Britain has a bit of a dirty money problem, so I was delighted to sit down with them. For anyone who’s read this newsletter before, you’ll have noticed that I regularly talk about the need to adequately resource law enforcement, so that’s what I led with. I described how ordinary police forces can’t investigate fraud because they lack trained officers, and how the national-level agencies fail to prosecute kleptocracy for the same reasons. If the politician wanted Britain to stop being “butler to the world,” what they really needed to do was announce a vast increase in funding and pledge to maintain funding levels for the foreseeable future.

“That’s not going to get them any headlines though, is it?” the think tanker replied. “We need something new.”

I did try to suggest some legal changes, but my heart wasn’t really in it because I’d suddenly spotted what the problem was, and it seemed to have resonance far beyond the U.K.

Our governments are like couch potatoes who are determined to get fit. They are unhealthy, they know it, and they know what the solution is: exercise. In furtherance of that strategy, they buy a treadmill. This gets them a good headline, and they like it. So they buy more fitness equipment: a stationary bicycle, a StairMaster, a rowing machine, a pair of running shoes that will improve performance, athleisure wear that wicks away sweat, some of those leg warmers that Jane Fonda wore in her workout videos, and so on. Every time they buy something, they say that it’s proof of their commitment to get fit, and headline writers praise them for it.

But at some point, they’ve got enough fitness equipment. That’s when they need to start exercising, but that’s also when the whole calculation changes. Because exercise is difficult and it’s not going to win any positive coverage. In fact, it could well do the opposite: If enforcement agencies bring the kind of long and complex prosecutions required to combat financial crime, they’re likely to make mistakes, and then the politicians will get criticized, and that’s no fun at all. It’s far safer to announce a new legislative initiative, and leave the sweating to someone else at some point in the ever-receding future.

Is there a word for this? Short-termism isn’t right, but I can’t think of another term for a feedback loop that actively militates against long-term action being taken. I am, however, an optimist (even when pessimists win, they lose, as someone probably once said) and intend to remain one. Financial crime is a tax on our societies, enriching criminals and immiserating everyone else. Corruption is a force multiplier for kleptocrats. Tax evasion is weakening our public services. It is so obvious that tackling these linked curses should be a priority that, at some point, even politicians will realize it.

CRYPTO

Last week, I interviewed journalist Zeke Faux about his new book, “Number Go Up,” which is a very good account of the mirror dimension that is the crypto-verse. He was every bit as amusing as his book, and I recommend it to you. One particularly entertaining point that he made was how when he first pitched the idea of the book to publishers, cryptocurrencies had not yet suffered the so-called crypto winter. As a result, he was relying on the collapse happening while he researched the book. Spoiler: It did.

• “Faux demonstrates his incisive grasp of the story with the very first words of his prologue: ‘“I’m not going to lie,” Sam Bankman-Fried told me,’ he writes. ‘That was a lie,’” as this entertaining Los Angeles Times review puts it.

It’s always nerve-wracking researching a book about current affairs because of the concern that whatever phenomenon you’re describing will be solved by the time you’ve finished writing it. When I was researching “Moneyland,” I was convinced the problems I’d identified were so pressing that politicians would resolve them long before I made it to print. Funnily enough, Nick Shaxson has told me that he felt the same thing when he wrote his own book about offshore finance — “Treasure Islands” — which was published seven years earlier.

So when I say I’m an optimist, do I mean that I think money laundering will be solved by the time my book is finished and the world will be better? Or do I mean that it won’t and people will therefore want to read my book? Good question. Thanks.

RISKS

What might get in the way of the problem of money laundering being solved? A long answer to that question would take up an entire book (perhaps I should write it), but the short answer is just two words: Donald Trump. That’s not to say progress in tackling the mechanisms of corruption is impossible if Trump is reelected. After all, the Corporate Transparency Act was passed by Congress in January 2021 — although, admittedly, with a veto-proof majority — when he was still president, opening the way for U.S. shell companies to become less opaque.

The significance of his reelection for the global fight against kleptocracy is different: Tackling financial crime will be a complex, laborious, lengthy effort, with multiple countries having to be charmed, cajoled and bullied into taking part. The only country capable of leading that effort is the U.S., and Trump is utterly incapable as both a politician and a human being of making that happen.

The European Union is currently poised halfway between making corporate ownership data public or leaving it private. Any U.S. backtracking would embolden European enemies of the plan, thus fatally weakening attempts to create a global standard.

• “Thanks to the decades of secrecy that such opaque entities have provided, unscrupulous individuals from across the world were able to find safe haven in the EU – circumventing sanctions, evading accountability and committing further crimes with impunity,” said this open letter to the European Commission from earlier this year.

Fighting financial crime should not be a party-political point, in that all democratic states should be dedicated to keeping their economies and societies free of dirty money. However, there is a world of difference between Trump’s incoherent mess of an approach, and that of Joe Biden’s White House, with its careful anti-corruption strategy.

• “Corruption robs citizens of equal access to vital services, denying the right to quality healthcare, public safety, and education. It degrades the business environment, subverts economic opportunity, and exacerbates inequality,” says the foreword of the “United States Strategy on Countering Corruption.”

This thoughtful article from Charles G. Davidson and Ben Judah makes clear how corruption is also a threat to democracy, which depends not just on the system being fair, but also on everyone believing that the system is fair.

• “Financial secrecy has swollen in recent years as elites have abandoned their duty to pay their fair share. A metastasizing culture of tax avoidance by corporations and the wealthy has weakened national values, institutions, and goals across the West while fueling levels of inequality that wreck national cohesion, drive spiraling resentment, and stoke anger. This is empowering the enemies of democracy at home and abroad,” Davidson and Judah conclude.

Transparency is necessary but not sufficient, and passing laws is not enough, as is evident here in the U.K. An immediate response to the Russian assault on Kyiv last year was the passage of a law making public the owners of shell companies that hold U.K. property, with the aim of ending a loophole long enjoyed by the oligarchs that have invested in London mansions. More than half of such properties in the London borough of Kensington and Chelsea still do not reveal their owners, and there is no sign of enforcement action being taken against them.

• “There is no point building a dam halfway across a river. These gaps are threatening the efficacy of the entire Register,” said Andy Summers, associate professor at the London School of Economics Law School.

Nowhere, of course, is this of greater significance than in Ukraine, where long-term victory over Russia is a tall order in the best of circumstances. Without ending corruption, it will be all but impossible, not least because corruption allegations would make Western aid harder to justify.

REASONS TO BE OPTIMISTIC

I’ve just been in Texas for a few weeks, reading documents relating to the creation of the Bank Secrecy Act, which was passed in 1970 as the world’s first anti-money laundering legislation. At the time of its passage, Richard Nixon — hardly a paragon of cleanliness in public office — was president. After its passage, banks fought against its implementation all the way to the U.S. Supreme Court. Police agencies lacked enthusiasm for it and took years to actually get around to using it. And yet it survived and went on to become the cornerstone of federal and global attempts to clean up the financial system.

The lesson I took from my days with the boxes upon boxes of papers — among them memos between participants, scribbled notes from members of Congress, transcripts of committee hearings, letters from grateful constituents — is that careful, thorough, well-intentioned efforts change the world. They may not earn headlines like the purchase of a new piece of fitness equipment does, but all they require is for a sufficient number of people to be prepared to put the hours in, and they will come to pass.

And that reminds of what Daria Kaleniuk, the tireless Ukrainian activist, said years ago when I asked her how she kept going in her battle to end corruption despite ceaseless official obstruction (and worse). The aim isn’t to make the world perfect — just to make it better.

• “I don’t think about ending corruption completely. We are currently at 4% of where I want us to be, and my ambition is to get to 5,” Kaleniuk said.

WHAT I’VE BEEN READING

Speaking of tireless activists, I really enjoyed Naomi Klein’s “Doppelganger,” which is as passionate and thoughtful as you’d expect one of her books to be. It starts from the rather slight observation that she kept being confused with Naomi Wolf, before exploring the weird synthesis between the far right and the New Age left that has taken place since the pandemic. 

Apart from that, I was late to Lea Ypi’s “Free,” but I highly recommend it as a funny, fresh and thoughtful take on politics, growing up and Marxism.

I hope to revive this newsletter when my book is done, but until then, thanks for reading.

The post Why politicians are such couch potatoes when it comes to corruption appeared first on Coda Story.

I’d like to think, because of the work I do, that I’d be immune to the gravitational pull of money, but I’d probably be lying. On the rare occasions when I’ve met someone wealthy — and they’ve been multimillionaires, rather than centibillionaires, and thus nowhere close to the lower reaches of the Forbes list — I can’t help noticing that slight tug as my brain says: “Just think of what could be achievable if I could persuade this person to invest in one of my pet projects.”

Which is all to say that, although I’d hope I could resist the lure of the vast mass of Saudi money if I was confronted by it, in reality, I’m not sure I wouldn’t throw myself in and start doing lengths like Scrooge McDuck. That’s certainly what everyone else seems to be doing. So, it’s time to check in once more on Neom, the blandly-named but horrific new city that Saudi Crown Prince Mohammed bin Salman has decided to build in the desert because he can:

• “Con Air” director Simon West is set to film a historic drama, “Antara,” in Neom.
  
• Sindalah has partnered with prestigious JLS Yachts as Neom’s first superyacht destination gears up for opening. “With 86 berths for yachts up to 50 meters and additional serviced offshore buoys for superyachts up to 180 meters, the Sindalah marina will become a new hub for the global yachting calendar,” the press release reads.
  
• A tunnel contract is up for grabs at Neom’s port city, Oxagon: “The tunnel will link the offshore elements of Neom’s floating port city Oxagon in the Red Sea with the Neom Connector – a high speed railway that will connect Oxagon with its linear city, the Line.”
  
• Neom is touted as a potential host for the 2034 World Cup.
  
• The NEOM McLaren Formula E Team has unveiled a motorsport livery designed using generative artificial intelligence.
  
• South Korean robot maker takes part in supermassive Saudi development Neom.
  
• Neom, the $500bn megacity, which organizers claim will be 33 times the size of New York City, is due to include a 105-mile straight-line city.

I could go on, but you get the point. A lot is happening, and it is all bewildering. There is a film production hub, a new harbor for superyachts, a high-speed railway, a new port city, a sports venue and a new city that will run for 100 miles in a straight line. A couple of months ago, I was in the Marshall Islands, which is a series of atolls in the Pacific Ocean, where the capital city — Majuro — is long and thin, making it extremely time-consuming to get anywhere and thus incredibly impractical. The Marshallese had no choice about its shape, however, because the island is the rim of a submerged volcano, rarely more than 656 feet wide at any point, and Majuro could only be built where the land was. The Saudis, however, are choosing to build a city in a way that is guaranteed to ensure the longest possible journey times, for no apparent reason. I could understand someone designing it in Minecraft, but why are real-life engineers willing to participate in such an absurd idea?

And that’s just the start of it. Why are engineers building a skiing venue, which will host the Asian Winter Games, at a time when — thanks to climate change — even the Swiss are struggling for lack of snow? Why have other engineers decided to build a waterfront for a region of Jeddah that has no waterfront? Why are soccer players who used to wear rainbow armbands willing to play in a country where homosexuality is illegal?

• “I think people know what my views and values were before I left and still do now. And I think having someone with those views and values in Saudi Arabia is only a positive thing. I can’t promise anything, but what I can do is sit here and say I have my values and beliefs,” English player Jordan Henderson said.

That seems like a quote that sums up nicely why people, from golfers to mixed martial artists,  choose to work in Saudi Arabia — it’s all about the gravitational pull of colossal amounts of money.

• “A lot of people who said, ‘We will not work in Russia because of Putin,’ are now working in Saudi Arabia,” said Austrian architect Wolf Prix, who helped to design the linear city and is, at least, consistent in his willingness to accept money, since he has also designed an opera house in Russian-occupied Crimea. “I’m not glorifying anyone who acts in an authoritarian way…Once and for all: Architecture is art and art knows no sanctions or borders,” he has said.

It’s a noble-sounding philosophy, but it’s not exactly Paul Simon performing with Ladysmith Black Mambazo, is it?

There are many good reasons to support the urgent creation of renewable energy systems, and not least among them is the need to stop giving money to tyrants who happen to sit on vast fossil fuel reserves. Last year’s profits for Saudi Aramco — $161.1 billion — were the largest ever reported by any company.

If the Saudi royal family was no richer than any other government, then perhaps any artists who “know no sanctions or borders” might choose to side with the three people who have been sentenced to death in Saudi Arabia because they objected to Neom being built, rather than with the government building it. Their names are Shadly Ahmad Mahmoud Abou Taqiqa al-Huwaiti, Ibrahim Salih Ahmad Abou Khalil al-Huwaiti and Atallah Moussa Mohammed al-Huwaiti.

• “Despite being charged with terrorism, they were reportedly arrested for resisting forced evictions in the name of the NEOM project and the construction of a 170km linear city called The Line,” a specially convened group of U.N. experts said. “We urge all companies involved, including foreign investors, to ensure that they are not causing or contributing to, and are not directly linked to serious human rights abuses,” they added.

TAXES

This is potentially exciting: The Financial Accounting Standards Board, which lays out how accountancy rules work in the U.S., has decided that American companies should publicly declare not only how much they pay in taxes but where they pay it, rather than providing that information solely to the tax authorities.

The measures have been under discussion for seven years, with many companies opposed to the idea of revealing any more than they already do, but pressure from investors appears to have finally got a slightly watered down version of the standards over the line.

• “Time and time again investors have made it clear that they need a closer look into the tax practices of the companies in their portfolios,” said Ian Gary, the executive director of FACT. “Now, after years of deliberations and revisions, FASB is finally delivering some of these much-needed reforms for investors and the public.”
  
• “We believe more aggressive management of tax issues could, at times, provide evidence that a company’s management team and board may have a risk tolerance that is greater than we would prefer given our long-term (often 6-8 year) average holding period,” said one investor in comments quoted by the Wall Street Journal.

Country-by-country reporting was first suggested by campaigners two decades ago as a solution to the way multinational companies were able to use accountancy tricks to move profits from high-tax countries and thus dodge the taxes that pay for public services.

• “To truly eliminate profit shifting and stop trillions from being stashed in tax havens, we must make robust, public country by country reporting a requirement for all multinational corporations everywhere,” the Tax Justice Network says.
  
• “At the core of the demand for country-by-country reporting is a contention that globalization is not working for the benefit of everyone. Some nation states and large parts of the world’s population have lost out as the power of the global corporation has risen, including its power to not pay tax in the right place at the right rate and at the right time,” said Richard Murphy, the accountant who first came up with the idea.

Although initially dismissed as an impractical dream, the idea has gradually become reality around the world, and producing a non-public report to be shared with tax authorities is now a requirement of the OECD. In the European Union, rules will apply, from next year, obliging companies to publicly report taxes separately for each member state, as well as for jurisdictions the bloc labels as “non-cooperative.” Other countries are inching toward public reporting of their companies’ taxes as well. Does it work? Well, not yet.

• “Our results collectively suggest that U.S. Multi-national Enterprises continue to engage in tax-motivated income shifting after U.S. CbCR adoption,” one paper finds.

But perhaps, like communism or Brexit, that’s because it hasn’t been tried properly.

SINGAPORE

It’s all going on in Singapore, where a large money laundering ring has been busted and an investigation continues. It’s not exactly a surprise to anyone that dirty money is flowing through Singapore, but I was interested by the details of the passports held by the suspects.

• “Ten foreigners aged between 31 and 44 were arrested, from Cyprus, Cambodia, Dominica, China, Turkey and Vanuatu,” Reuters reports.
  
• “Turkish national Vang Shuiming, 42 …. also has passports from China and Vanuatu,” according to the Straits Times.

• “A 40-year-old Cypriot national … jumped out of the second-floor balcony of his bungalow and was found hiding in a drain,” ABC writes.

What do all of those countries, except China, have in common? They are all places that sell (or have sold) passports under citizenship-by-investment schemes. Such golden passport schemes are controversial, but their proponents argue that countries should be able to award citizenship however they like, that robust due diligence programs ensure criminals are excluded from obtaining identity documents and that such schemes help to correct the unfairness inherent to different passports offering different travel privileges.

And yet, I do not know of a single country that has sold passports, which hasn’t ended up selling them to criminals.

Kristin Surak, an academic from the London School of Economics, has a book coming out this month on this very topic, and if you’re interested, you should read it. Her key conclusion is that, no matter how many such scandals we see, golden passports are not going away.

• “In some Caribbean microstates, citizenship by investment constitutes as much as 30 percent to 50 percent of GDP, making the programs extremely important economic resources for development,” Surak says. “In essence, this is an issue of capitalism, which needs nation-states in order to operate. States are necessary because they back up legal jurisdictions and laws protecting ownership and private property. And states get their power from bounding, claiming, and limiting populations. As long as the intertwined relationship between capitalism and nation-states persists, we will see the demand for golden passports grow.” 

WHAT I’M READING

I’m plowing my way through “The Secret History of the Five Eyes,” which traces the origins of U.K, U.S., Australia, Canada and New Zealand’s intelligence cooperation to the years preceding World War II, then races through various scandals, cock-ups, conspiracies and disasters up to the present day. I’m keen to see how the five Anglophone nations cooperate against money laundering, and this is tangentially relevant, though — to be honest — it feels a bit like this book would need to be about 20 times longer than it is to have a hope of fitting everything in.

The post Why Saudi money is so hard to refuse appeared first on Coda Story.

People keep asking me what I think about Yevgeny Prigozhin’s death, but I don’t really feel like I have anything to say except that it heralds nothing good. An autocracy where leading insiders are killed in horrible ways is neither stable nor predictable, and that is the worst kind of autocracy. That Vladimir Putin felt the need to kill Prigozhin so grotesquely suggests that Putin is increasingly nervous and twitchy.

It feels like a long time ago, but the Russian president used to have a reputation among Westerners as a preternaturally gifted three-dimensional chess player; a master strategist who saw around corners. It was an impression that I never held, having seen Putin being unimpressive in person too many times. But now to everyone he must seem like a toddler hitting the chessboard with a mallet.

Many oligarchs will currently be feeling the kind of nerves that Roman patricians will have felt during the reigns of the more depraved emperors. Putin will be hoping that the assassination of Prigozhin will keep them all in line. There is, though, perhaps a small silver lining hidden within that comparison. Unlike first-century Rome, 21st-century Moscow is not a global center of civilization, wealth or culture. Several other places could provide just as attractive a home to those oligarchs should they decide to leave.

Western governments should be reaching out to those Russian insiders who are not war criminals and offering them a way out if they break with Putin, condemn the war, assist Ukraine and help Western law enforcement agencies to track down the Kremlin’s assets. Sanctions were always supposed to split the Russian elite, which is something that would help undermine the Kremlin’s ability to wage war. And something we should always bear in mind.

CBDC: IT’S A FOUR LETTER WORD

Along with cryptocurrencies, central bank digital currencies (CBDCs) have always seemed to me like a solution in search of a problem. We already have digital payment systems that work perfectly well, so what exactly is the point of the Federal Reserve, the Bank of England or the European Central Bank recreating them with software systems of their own? Central banks have said that they’re keen on maintaining the security of the financial system, as well as ensuring that everyone has access to a payment mechanism, but it does all seem a little vague (judge for yourself here, or here, or here).

So, thanks to the Financial Times for this fascinating piece looking at the issue from the perspective of Beijing, which is well advanced in its quest to create a fully digital yuan.

• “The aim is not to depose the dollar but to chip away at its dominance — and, crucially, to create enough space for China’s economic survival if the U.S. one day targets it with the type of sanctions it has imposed on Russia.”

Finally, CBDCs make sense to me. Duh.

Before February 2022, the Kremlin thought that the Russian Central Bank’s giant war chest of foreign exchange reserves would insulate its economy from any Western sanctions if it launched a full-scale invasion of Ukraine. Western countries’ decision to freeze those reserves came as a nasty surprise, which has only been made nastier by suggestions that Russian reserves be invested and that the income generated be used to support Ukraine. (Question to knowledgeable readers: Why was more than half of the frozen 300 billion euros in Belgium of all places?)

China’s foreign reserves dwarf those owned by Russia — they were worth $3.2 trillion in July, according to official statistics; $4 trillion if you include Hong Kong; and $6 trillion if you include “hidden money”. So the prospect of them being frozen by Western sanctions is an alarming one for Chinese policymakers. And that’s why the “e-yuan” is so potentially powerful, since it would form the backbone of an independent payment system entirely outside the control of Western governments, and thus immune to sanctions.

Aha, sanctions again.

A fanatic is someone who can’t change his mind and won’t change the subject. (It’s a line attributed to Winston Churchill, but then so many are that it’s anyone’s guess who first said it.) I fear that my opposition to the Western habit of using sanctions as the primary tool against kleptocracies is inching dangerously close to fanaticism. 

However, I do think that this is a perfect demonstration of the dangers inherent in relying on sanctions as much as we do. Controlling the global financial system is a priceless resource for Western countries (above all for the United States, thanks to the role of the dollar as the world’s reserve currency), and it is a power that should be protected and used only in extreme circumstances. If Western governments use sanctions too much, that will just encourage non-Western countries to develop separate financial systems of their own. Relying on sanctions as the primary tool feels like overprescribing antibiotics to fatten up pigs. A time will come when we’ll really need them, and they won’t work anymore.

Among the many problems that an e-yuan would cause would be to defang U.S. law enforcement, which has in the past relied on the fact that corrupt transactions are often denominated in dollars to claim jurisdiction and thus prosecute cases that would otherwise have been ignored by everyone else.

Among such cases were the charges brought in 2014 by the FBI against the billionaire Ukrainian gas tycoon Dmytro Firtash. Although prosecution hasn’t yet gotten underway because he is still battling extradition from Austria, he has at least been removed from Ukrainian politics for most of the last decade. His focus has instead been largely on his own legal troubles. Earlier this year, he retained the Texas politician-turned-lobbyist Ben Barnes to try to negotiate a plea deal. Firtash denies any wrongdoing, but appears to be hedging his bets in many directions. According to Deutsche Welle, he also apparently sought to gain diplomatic immunity via an appointment to a Belarusian mission in Vienna, to prevent his extradition.

As I’ve said many times in this newsletter, the Ukraine crisis should provide Western countries with the impetus they need to properly invest in investigating and prosecuting financial crimes. The FBI’s investigation into Firtash lasted years and is an example of what a properly resourced agency can achieve. What does an insufficiently funded law enforcement system look like? It looks like one where a major agency is forced to drop an investigation after a decade of work because of “insufficient admissible evidence”.

Even as sanctions have become the primary tool used by Western governments to restrain kleptocratic networks like those run from the Kremlin, we should remember that they are a tool of foreign policy, not law enforcement. As such, it is completely fine for sanctions to be canceled, modified, expanded or removed if governments decide they should be. For instance, I think Arkady Volozh, the Israel-based founder of Russian search engine Yandex, should be rewarded for condemning the Russian aggression against Ukraine, because removing the sanctions against him would encourage other billionaires to switch sides – which is what we want to happen.

Yes, it might feel icky, and I’m sure there would be anger in Ukraine and elsewhere if anyone were removed from the sanctions list. But the aim has always been to change behavior, not to bring criminal prosecutions. If the behavior changes, then the sanctions should be scrapped (on the understanding that they can always be reimposed), in the interests of ending the war as quickly as possible.

On that note, this is a smart column from Josh Rudolph on how aid-giving Western governments should demand that Ukraine take stronger anti-corruption measures.

• “Congress should ease the political pathway toward additional security assistance by imposing anti-corruption conditions that back Ukrainian investigators, prosecutors and judges in their battles against oligarchs and corrupt officials. Ukrainian civil society would be grateful and Putin would have a conniption.”

MONEY LAUNDERING

As I’ve mentioned before, I’m currently researching a book on money laundering. One topic that has gained very little attention from, well, anyone really, is trade-based money laundering (TBML), an unwieldy term for a slightly paradoxical phenomenon: the movement of value around the world through commodities, rather than through the financial system. Think of it as barter for cartels, but infinitely complex and absolutely vast.

• “TBML is likely one of the largest forms of money laundering. In addition, as countries have strengthened their controls to combat other forms of money laundering, various U.S. government reports and officials, as well as knowledgeable sources have stated that there are indications that criminal organizations and terrorist organizations have increased their use of TBML to launder their funds,” a Government Accountability Office report states.

The reason I mention it is because  respected British think tank RUSI has published a report summarizing a discussion it hosted with industry and law enforcement professionals over how to address the problem, which is handy as the U.K. is due to host a global TBML summit later this year.

Part of the problem with TBML is that, unlike money laundering via the financial system, it is hard to analyze since the trade system is fragmented, non-standardized and opaque. The data is therefore of poor quality and participants are not particularly interested in cooperating with the authorities. You could sum up the report by saying that no one knows what’s going on, how to find out what’s going on, or sufficient money to invest in building structures that could try to find out what’s going on.

This is unfortunate since TBML is increasingly how representatives of regimes shut out of the formal financial system move their wealth around the world, whether that’s Iran or North Korea or Chinese oligarchs trying to evade Beijing’s capital controls. And, to make this even more complex, TBML is not just one thing, as the RUSI report lists four separate manifestations of the phenomenon that are so different that they almost deserve their own names.

• “The physical movement of goods with over- and under-invoicing to move the value across borders.”

• “Entirely fictitious shipments, with no goods moving across borders, simply a ‘trade’ transaction used to obfuscate the movement of funds (‘ghost shipments’).”

• “Black Market Peso Exchange (BMPE) and analogous systems, which involve no cross-border transactions or movements of cash, but the integration of cash into high-value goods markets and the shipment of goods across borders as a representation of value.”

• “Service-based money laundering: cross-border payments for fictitious services, with no movement of goods.”

This is important. There is no doubt that Russian money launderers will be shifting value around the world via deliberate over and underpricing of commodity exports, in order to buy the weapons and high-tech components they need to kill Ukrainians. Targeting TBML is central to targeting the Kremlin war machine. In short, if we want to understand kleptocracy, we simply have to understand how oligarchs move their wealth. So if you happen to control access to research grants, please divert some towards academics who are attempting to understand what’s going on in the trade system.

WHAT I’VE BEEN UP TO

This section is normally about what I’ve been reading but, full disclosure, what with the kids at home for the holidays, a whole lot of work to catch up on, endless interviews to transcribe, and friends staying for the long weekend here in the U.K., I’ve read almost nothing in the last week. I did, however, cook a really good chana masala on Saturday night, which involved reading the recipe in Grace Regan’s “Spicebox” cookery book. I highly recommend it, particularly if you serve it with onion bhajis.

The post Why China’s e-yuan is a shield against Western sanctions appeared first on Coda Story.

It is good news for the Western coalition seeking to strangle the Russian economy, that a judge upheld the U.K. sanctions imposed on Eugene Shvidler. Shvidler, a billionaire who has held senior positions in oil company Sibneft and metals giant Evraz, was designated by the U.K. last year because of his close relationship to Roman Abramovich. Had Shvidler won, it could have unleashed a torrent of similar appeals, at a time when the anti-Kremlin coalition needs as much help as it can get.

The judgment is careful and thorough and worth reading in full. (Although some observers may question the wisdom of the judge’s statement that “this is an area where the Courts have to defer to the judgment” of the foreign minister, considering that the minister in question in early 2022 was Liz Truss, who later that year became the most disastrous prime minister in British history.) 

A U.S. and U.K. citizen, Shvidler was the first sanctioned individual to bring a legal challenge against his designation. Had he been successful, it would have been a major threat to the ability of the U.K. to run its post-Brexit sanctions regime and thus to the integrity of the West’s attempted blockade of the Russian economy. Shvidler’s lawyers at Peters & Peters intend to appeal though it’s hard to see much grounds for them to be optimistic, since they seem to be mainly asking for sympathy.

• “The impact of this on him and his family is extreme and far-reaching,” said Michael O’Kane, one of Shvidler’s lawyers. “If this judgment stands, it will make it virtually impossible for any person sanctioned by the Foreign Secretary to bring a successful court challenge.”

It is easy to sympathize a little with the plight of Shvidler’s family: two of his children lost their places at British private schools at important stages in their education and had to move to the United States, which means they rarely see their British-based mother, who lacks U.S. citizenship, and who is now herself struggling to obtain legal or banking services in the U.K.

However, the difficulties that Shvidler himself faces, though no doubt distressing for him, go straight past being #firstworldproblems to become a whole new hashtag of its own. Here, summed up, are his #oligarchproblems:

• “He can no longer access financial institutions he has used for many years; his registered agents in the British Virgin Islands have given notice of their intention to resign; his two private aircraft have been grounded, and he has been unable to pay the expenses necessary to ensure his private yacht is safe and seaworthy,” the judgment notes. Shvidler has also “had difficulty maintaining and insuring his properties in the UK,” forcing him “to make redundant a number of members of his household staff.”

How bad do you feel for Shvidler on a scale of 0 to not-very-sympathetic?

Reading the judgment did, however, reinforce my opinion that sanctions are simply no substitute for a rational, long-term, well-resourced approach towards the challenges to democracy posed by oligarchy, kleptocracy, financial crime and dirty money in general. Shvidler sat on the board of Evraz, where Abramovich is the largest shareholder. Also on the board sat Sir Michael Peat, previously principal private secretary to HRH the Prince of Wales. Evraz was listed on the main London Stock Exchange and, as a director, Shvidler was the nominee of a company registered in the British Virgin Islands. He had entered the U.K. as a “highly skilled migrant” in 2004, becoming a citizen six years later and giving millions of pounds in philanthropic donations to educational institutions. He was in short very welcome in the U.K. Until suddenly he wasn’t.

It all feels a bit like inviting someone to live with you, then refusing them access to the fridge because you’ve suddenly decided you don’t like a friend of one of their friends.

Throughout this period, all of the information that the U.K. government relied on to add Shvidler to the sanctions list in March 2022 was known. It was no secret that he was close to Abramovich, since he was vice president for finance at the oligarch’s oil company back in the 1990s. It was no secret either that Abramovich was close to Putin, who appointed the oligarch as governor of a remote Russian region. And it was no secret what kind of leader Putin was: his regime flattened Grozny, jailed opponents, had Alexander Litvinenko murdered, allowed insiders to steal vast fortunes, invaded Georgia in 2008, annexed Crimea in 2014, then invaded Eastern Ukraine and shot down MH-17 later that year, among many more crimes.

Of course, it’s good that Western governments responded to the full-scale invasion of Ukraine by attempting to isolate the Russian economy, and undermine Putin’s ability to wage war, but we should learn from this that we should never have stood by and watched Putin build his kleptocratic regime in the first place. Or allowed the oligarchs to so deeply infiltrate the West. The fact there was so much wealth available to be sanctioned is a sign of failure, not of success.

The Shvidler judgment is akin to being allowed to prolong the imprisonment-without-trial of someone arrested inside a fortress. It should not be grounds for self-congratulation, but should instead provide the impetus to urgently repair the fortress walls, to train people to defend those walls, to install equipment to prevent tunnels being dug beneath the walls, and to check if anyone on our side is taking money from our enemies. None of this is being done.

Incidentally, although Peters & Peters failed in their legal challenge on behalf of Shvidler, last month they did better for another client — Lev Khasis, formerly first deputy chairman at Sberbank, who has been removed from the sanctions list. The British government provided no reasons for why he had been de-designated, but it has previously been reported that Khasis fled Russia around the time of the full-scale invasion in February last year. According to the Miami Herald, he’s living in his $3.4 million condo in Miami.

…AND IN RUSSIA

Russia has launched a criminal case against its richest man, Andrei Melnichenko, for supposedly corruptly colluding with a government minister in his purchase of a power plant. This is confusing on the face of it, since government ministers in Russia are more than happy to corruptly collude with billionaires, but appears to be all part of the shifting dynamics of the war economy. Melnichenko has also been targeted in the West, and is sanctioned in Europe, in Canada, in the U.S. and in the U.K., so he may now be feeling a little squeezed.

I would not be surprised to see the case settled in return for Melnichenko handing over some share of his assets to the Kremlin, but it will be interesting to keep an eye on this one, as a pointer to whether oligarchs are able to retain their charmed positions despite being sanctioned. If Melnichenko can continue to hold his assets outside Russia — he has moved to the UAE, since being forced to leave Switzerland, according to the New York Times — then he is at least theoretically still able to act independently of the Kremlin.

ANTI-CORRUPTION COURT

What is stopping Western governments from adequately tackling dirty money? One of the key reasons I hear from officials and others is that the problem is so hard that, if adequate efforts were made to tackle it, they wouldn’t bring results until long after the politician who made them would have left office. Politicians want “announceables” — things that make good press releases — they don’t want to put in years of effort only for someone else to get all the credit.

People whose opinion I respect think an International Anti-Corruption Court (IACC) is the answer to this problem, since it would remove the fight against financial crime from the domestic political arena, and entrust it to a mighty multinational apparatus. And the suggestion is now winning support in the U.K., on top of previous backing in the Netherlands, Ecuador, Canada and among some U.S. lawyers.

• “Labour will join calls for the establishment of an international anti-corruption court. Designed to prosecute the most egregious acts of corruption. The kleptocrats, the most corrupt businesspeople and those who enable them. Labour is determined to clean up the London Laundromat at home and defeat kleptocracy around the world,” said David Lammy, who will be U.K. foreign minister if — as currently looks likely — the Labour Party wins next year’s general election.

The model is the International Criminal Court, which has brought cases and launched investigations into the most egregious violators of human rights in Central Africa, South America, Ukraine and parts of Asia. The IACC’s backers argue that a similar international court would provide equivalent accountability in places where governments are complicit in abusing their citizens via corruption.

But I think that comparison is flawed. The crimes associated with grand corruption are different to human rights abuses, which take place in a defined place in a single country and can thus be prosecuted like traditional crimes. Corruption is not like that. Kleptocratic networks are diffused all over the world, beginning in Russia, Angola or dozens of other countries, spreading through the Far East and the Caribbean, ending in the Gulf, North America or Europe. Some of these countries have robust courts and honest politicians, and some of them do not, but the money flows seamlessly between them. An International Anti-Corruption Court will make no progress in countries ruled by the corrupt and is not needed in countries that are not. In fact, backers of the project implicitly make this case, in their arguments.

• “London and U.K. overseas territories — from the Caribbean to Gibraltar — are infamous money-laundering hotspots, and our government should adopt a leading role in gathering global support for the IACC. The U.K. must also do much more to regulate lawyers, bankers, real estate, accountants and other financial advisers aiding money launderers, enforce laws against foreign corruption and enhance transparency,” wrote a former government minister in a column in the FT. 

What’s to stop the U.K. or the U.S., or any other country which provides a haven for dirty money, tightening and implementing existing laws even without an IACC?

I worry that an IACC is in fact just another “announceable.” It sounds good in a press release but will achieve little more than delay and busywork for people who could be doing something more useful. What is needed is patient long-term investment in enforcing laws against corruption and financial crime to reduce the space available for kleptocratic networks to flourish; and for politicians to be willing to do that work, even if they do not get the credit for it.

WHAT I’VE BEEN READING

I have been on holiday for two weeks, swimming in lakes, stomping up mountains, sleeping in a tent and generally having a great time. I deliberately left my screens behind, except for my kindle, which I had packed with books to read. Sadly, however, one of my children decided he wanted to read it too and, loath to be seen to discourage him from reading, that left me with almost nothing to read for the entire holiday.

When I did get my hands on my Kindle, I read a couple of murder mysteries by P. D. James and I started The Omnivore’s Dilemma by Michael Pollan. Then my Kindle vanished once more, and I went back to cooking supper for the kids over the campfire, and hanging up their wet towels to dry. One day they will have kids of their own and I will have no sympathy. I’m looking forward to it.

The post Oligarchs take cover, in the West and in Russia appeared first on Coda Story.

There is an interesting case in Wales (where I’m from), in which a drug smuggling gang used the crypto exchange Coinbase to launder their profits. This provides further evidence for the commonly expressed concern about the role that cryptocurrencies play in helping criminals to hide their profits.

• “In an attempt to hide the substantial amounts of money from law enforcement, friends and family were recruited to move crypto currency from account to account,” said Millie Davies of the Crown Prosecution Service.

Meanwhile, over in the United States, Senator Elizabeth Warren has called for stricter regulation on crypto exchanges to prevent fentanyl smugglers from using them to launder their illegal revenues. She quoted a report published last month by Elliptic and another one by Chainalysis, which concluded that tens of millions of dollars’ worth of fentanyl or precursor chemicals appear to have been paid for with cryptocurrencies — an impressive piece of investigation. Considering the damage that fentanyl is doing to the U.S., it’s unsurprising that Warren should be focusing on this challenge.

However, I’d like to keep things in perspective. Analyses of the U.S. drug market suggest it is worth $150 billion a year to the criminal gangs. Therefore — with the best will in the world — interrupting the laundering of a few million dollars’ worth of crypto is neither here nor there, in the grand scheme of things.

So what is important? As of last month, there were $2.34 trillion worth of U.S. banknotes in circulation — a sum that has nearly doubled over the past decade, just as it had, more or less, doubled in each of the previous two decades. At a time when the use of cash in everyday, legitimate transactions is in steep decline, there can only be one explanation for why demand for paper money is so healthy. It remains ever more central to the gray and black economies, particularly since more than 80% of it exists in the form of $100 bills. The inescapable conclusion is that the U.S. Federal Reserve is merrily printing out the money that allows criminals to circumvent other agencies in the U.S. government, thus indirectly helping to contribute to the 100,000 American deaths resulting from fentanyl overdoses last year alone.

The overprinting of banknotes is not solely a U.S. problem. In June, 1.56 trillion euros worth of banknotes were in circulation: This is slightly below the peak for 2022, but it’s still a spectacular volume of cash to be floating out there somewhere, particularly since so much of it is — you guessed it — in the form of 100 and 200 euro bills. But the problem is more pressing in the U.S. than elsewhere, thanks to the unique international role the dollar plays. 

Therefore, I would like to suggest, with the greatest respect, that Elizabeth Warren and her colleagues look a little closer in their own backyard if they wish to target criminals’ assets. Crypto may be shiny and new, but when it comes to money laundering, cash is king. If you want to make a serious dent in the profits of fentanyl smugglers, the Fed needs to be much less enthusiastic about how many $100 bills it prints. If the gangs had to move their proceeds in twenties, they would need to move five times as much paper around, which would make it five times easier for the authorities to see what they’re up to. Big bills are the problem and always have been.

GREAT PIECE ON CORRUPTION

There’s a Carl Hiaasen book in which a journalist is trying to work out which Florida politicians are corrupt by tabulating how they vote on real estate redevelopments, on the principle that, if they’re on the take, you’ll be able to see their criminal relationships by seeing which developers they help out. (If you don’t read Carl Hiaasen, by the way, then I recommend that you start, with “Bad Monkey.”)

Hiaasen is a wickedly funny writer and, in this case, the joke is that all the politicians are crooked, and they deliberately take turns voting for or against various deals, in various combinations, precisely to prevent anyone working out what they’re up to.

There is a similarly vertiginous feel to this remarkable article in the Economist’s 1843 magazine by Nicolas Pelham, recounting a colossal Iraqi bank heist.

• “Withdrawing $2.5bn in cash in less than a year would be a logistical challenge in any country, let alone one whose highest-value banknote – the 50,000 dinar bill – was equivalent to about $35. If all the stolen notes were stacked on top of each other, the pile would rise higher than Mount Kilimanjaro. Trucks had to be used to ferry the heist money about,” Pelham writes. 

Iraq has two broad geopolitically aligned power blocs, pro-Iran and pro-U.S., as well as multiple factions, all of whom jostle for control of various government entities and their financial flows. The article begins with attempts to understand which factions, and from which bloc, are responsible for this remarkable heist but gradually dissolves into a realization that perhaps everyone’s involved.

I have thought for a long time that we need a new vocabulary for how we talk about corruption, since the word has to cover everything from state capture to the tiniest of bribes. Imagine that doctors only had the word “cancer” to describe everything from leukemia to melanoma, and all points in between. That would severely impede their ability to precisely understand what was happening, and the imprecision of the word “corruption” has a similarly limiting effect. In fact, the word “corruption” may be worse, since it suggests that governments are inherently honest until they are corrupted by bad people: in the same way that fruit is corrupted by mold or data is corrupted by a hardware error.

In reality, honest governance is the exception rather than the rule. The kind of complex networks of family, friendship and obligation revealed in this article — which cut across institutional structures and state borders — are pretty standard in much of the world. If we don’t understand that, we’ll never understand how to push for more honesty in public life.

GREAT RESULT ON CORRUPTION

James Ibori was the governor of Nigeria’s Delta State from 1999 to 2007, and in that period he oversaw the looting of its oil wealth in spectacular quantities. Dubai extradited him to the U.K. in 2011, and he was sentenced to 13 years in prison for fraud and money laundering a year later. He served half of that sentence and returned home, and finally we have a confiscation order, after a four-week trial in London, of the sterling equivalent of $130 million.

• “The judge has determined that Ibori has at least 101,514,315.21 pounds [in] available assets and has made a Confiscation Order in that amount, noting that a failure to pay that order in full will result in him being subject to an additional eight years in prison.”

In a separate but related case, Ibori’s U.K.-based lawyer (who was also convicted of money laundering in 2010) was ordered to pay 28,191,787.15 pounds. Here’s an irrelevant but interesting question: Why are the court orders so curiously specific? If anyone knows why they are given to the penny, rather than rounded up at least to the nearest pound, could you let me know?

Ibori continues to argue that he did nothing wrong.

• “The next steps will be to take my fight for justice to the highest courts in the UK,” he said in a statement.

I have two points to make here. The first is to give credit to the U.K., which — quite rightly — gets severely criticized for its feeble efforts to keep dirty money out of the economy. The investigators and prosecutors in the Ibori investigation did a good job, considering these are complex and laborious cases to lay out in court. The second point is to note the mismatch between the baddies and the goodies. Corruption is quick and easy, requiring just connections, chutzpah and perhaps a truck to carry the cash in. But honesty takes time, money and effort, even in relatively well-resourced jurisdictions like Great Britain or the United States.

Whenever I feel like I’m forgetting this, I look up Pavlo Lazarenko to see what he’s up to. Lazarenko was the prime minister of Ukraine from 1996 to 1997, fled to the United States in 1999, was arrested, prosecuted and jailed for extortion, money laundering and wire fraud, was released in 2012 and indicted in Ukraine shortly afterwards. But, after decades of legal effort, the United States has still not been able to confiscate his assets. He stole perhaps $200 million in a short-lived but extravagant spree in the mid-1990s and — more than two decades later — lawyers are still arguing over how best to confiscate the funds. (There was a court ruling on one tiny branch of this monstrous legal tree as recently as this June, and others will surely follow.) The case has now gone on so long that he and his lawyer have had several children together.

This is the case I always think about when I hear politicians speak confidently about confiscating Russian oligarchs’ frozen property and sending it to Ukraine. Lazarenko was, in wealth terms, a minnow compared to some of his Russian counterparts, and he was stupid enough to fly to one of the only countries likely to prosecute him for his corruption. Yet his wealth has still not been returned to the people it was stolen from.

This is why it is so important to build strong institutions, robust regulations and an honest culture so that money doesn’t get stolen in the first place. And this is also why we shouldn’t be satisfied with governments sanctioning oligarchs and freezing their wealth. If a fortune has been stolen, that means damage has already been done. It would be far better to prevent the damage from being inflicted in the first place.

There is a lot of detail about what precisely that damage looks like in this excellent report from the National Endowment for Democracy on the role of Russian and Chinese kleptocratic networks in Central Africa. It describes how Russia’s Wagner Group undermines the rule of law in the countries where it operates in order to make theft easier and prop up its political allies.

• “Systemic change will require rolling back long-standing practices in democratic societies such as golden visas, anonymous shell companies, flags of convenience, shadow banks, and jurisdictions that provide a safe haven for kleptocrats – and it will likely mean disrupting relationships with illiberal allies,” the report concludes.

British authorities are saying that Ibori’s stolen wealth will be returned to Nigeria and “reinvested into public services,” which is, of course, very welcome. But I doubt anyone (except his lawyers) will see a penny of it for many years. The same is almost certainly true of the Russian oligarchs’ assets. 

WHAT I’VE BEEN THINKING ABOUT

There’s something about sports that gets people spending money and suspending judgment. I can remember very clearly the surge in goodwill toward Roman Abramovich among ordinary Muscovites when he bought Chelsea Football Club, and it was amply returned by the Brits when his wealth transformed the team into a colossus. Since then, the amount of money in sports has only grown, and the oligarchic competition has only gotten more intense, leading inevitably to an interesting geopolitical edge to the competition for top players.

Lionel Messi went to Miami, where his stardust is benefiting the whole U.S. league, no doubt disappointing the Saudis, who bought Cristiano Ronaldo. Ronaldo took a swipe at his old rival by saying that the Saudi league is better than its U.S. counterpart, but I think the real test will be where Kylian Mbappé ends up. He’s still in his prime and will want to win more trophies before he cashes in completely. Money has been upending football for decades, allowing European clubs to eclipse the South Americans, then allowing English clubs to eclipse everyone else, thus making the Premier League into a true international tournament in which oligarchs can square off against each other like one of those mash-up movies (“Alien vs. Predator,” “Godzilla vs. Kong,” hedge fund boss vs. petrobaron, private equity vs. sovereign wealth fund).

But if money is in charge, why should it stop there? Can Saudi money capsize football as it did golf? You’d be a fool to bet against it. Personally, I find this stuff far more interesting than watching 22 men chasing a ball. But then I prefer rugby anyway.

The post You want to tackle the fentanyl crisis? Print smaller bills appeared first on Coda Story.

A friend of my cousin has a brick-sized bundle of pre-revolutionary Russian rubles, which he gets out and shows off occasionally. The story goes that the friend’s ancestor made a sizable business deal with a Russian aristocrat during World War I and got paid in cash. But then, well, one thing led to another, the monarchy fell, the aristocracy was scattered, the Bolsheviks came to power, and there were some significant alterations to Russia’s constitutional arrangements and economic policy. And those rubles have sat in the safe ever since, not worth the paper they were printed on.

Occasionally, visitors ask if they could have a banknote as a souvenir, but he has preferred to keep them together, perhaps because a lump of them together serves as a reminder to be careful who you do business with. However, some years ago, he did separate out a single 200-ruble bill, which he framed and hung in the downstairs toilet, with these words printed on the glass: “In the event of the restoration of the Russian monarchy, break glass.”

Now, in 2023, the Kremlin has decided to expropriate the assets of Carlsberg and Danone and to distribute them to people who I would call loyalists — except the concept of “loyalty” shouldn’t really require being bribed with spectacularly cash-generating assets such as these. A nephew of Ramzan Kadyrov is now really big in dairy products, and an associate of a close Putin ally is back in charge of Baltika breweries, which he helped to run in the past.

This feels like a full circle for me. I used to drink Baltika beer when I first moved to Saint Petersburg in 1999: It only cost 12 rubles a bottle, unlike imported brews or the local super-premium beer, and although it didn’t taste of much, you could at least rely on it not to leave you feeling like death in the morning or, in a worst-case scenario, turn you blind. In 2000, Carlsberg — presumably attracted by that same combination of reasonable pricing and stolid reliability — bought a stake in the company, which it eventually took over outright. It was not a glamorous business deal, but it was the kind of investment that typified the predictable business climate Vladimir Putin sought to create and that underpinned the prosperity of Putin’s first decade in charge.

But then came February 2022. Carlsberg pledged to divest itself of its Russian assets after Putin’s full-scale invasion of Ukraine and signed a deal to sell Baltika in June 2023, with Danone having done the same in October 2022. These sales would have come at a significant discount to the assets’ true price but look at it from the oligarchs’ point of view: Why get companies for cheap when you can have them for free?

• “It shows that Russia is prepared to take countermeasures against Western companies in order to curry favour with the new elites. The redistribution of wealth is reminiscent of the 1990s, when the oligarchs emerged,” said Maria Shagina, a senior research fellow for economic sanctions at the International Institute for Strategic Studies (IISS).

The Kremlin had already made it exceptionally hard for companies from unfriendly countries to realize anything like the value of their investments in Russia and, even if they could, they had to pay a hefty exit tax. There is a technocratic logic to that plan, particularly at a time when so many Russian assets are frozen in the West, but you can see why the oligarchs don’t like it. Kremlin insiders want cash flow. And with the economy squeezed by sanctions while an increasingly large portion of state spending goes to the military, their grift has lost much of its profit. The few surviving consumer firms are going to look increasingly attractive when it comes to squabbling over what’s left of the Russian economy.

There is an argument — made here by Ekaterina Kurbangaleeva — that this policy of expropriation could help Putin restore his compact with Russia’s middle classes, who could gain ownership stakes and management roles in these formerly Western-owned companies. That seems to me absurdly optimistic and suggestive of a Kremlin focused on the next year, rather than one that’s mainly worrying about how to get through the next month.

The Prigozhin revolt is indicative of an elite that badly wants its tummy tickled, and the oligarchs have always been the constituency Putin worries about the most. Faced with the option of plumping out Russia’s squeezed middle or just chucking money at anyone with a private army, there’s only going to be one winner.

Incidentally, if any oligarchs out there are looking for companies to expropriate, Yale Professor Jeff Sonnenfeld has compiled a helpful list of everyone who’s said they’ll leave Russia but not quite gotten around to it yet, including Heineken, Unilever, Philip Morris International and Oreo maker Mondelez. Considering that this war has been going on for more than 500 days and that any taxes paid in Russia support the war effort, I’m not sure I’d have much sympathy for any of these firms if they lost everything.

In response to their particular travails, Carlsberg has said it will take “all necessary actions,” while Danone will take “all necessary measures,” to which my response is…Good luck with that. In the meantime, they could separate out one title deed from the bundle of ownership documents for their lost assets and hang it, in a glass frame, in the executives’ toilets to read: “In the event of the restoration of sanity in Russia, break glass.”

BUT WHAT ABOUT?

But what about the oligarchs’ assets in the West, I hear you ask. Surely, this aggressive and possibly illegal act of theft means we should do the same to Russians’ mansions, yachts, financial assets and so on? Well, quite a lot of wealthy Russians would argue that Western governments have already gone beyond the law in their sanctions policies, including Russian-born businessman Eugene Shvidler, who is currently challenging U.K. sanctions in the London High Court.

Shvidler, who has British and U.S. citizenship, appeared by video link to say that the sanctions had shattered his reputation, forced two of his children to leave their English schools and made it impossible for him to conduct his business. The U.K. government defended the sanctions, which were imposed because of Shvidler’s close relationship with Roman Abramovich.

• They will “incentivise him to put pressure on Mr Abramovich to encourage President Putin to cease or limit” the war, the government’s lawyer said, while sending a message that “there are negative consequences to having implicitly legitimised the government of Russia’s actions.”

The result will be closely watched by other sanctioned businessmen and, if Shvidler is successful, I suspect a flood of legal appeals will follow.

Anyone who has read my newsletters in the past will know I have my reservations about sanctions. In my opinion, they are a useful adjunct to a concerted diplomatic and law enforcement response to a challenge, but they shouldn’t be the whole response. Besides, if we engage in permanent sanctioning, we are undermining the basis of the Western “rules-based” order, which is supposed to be what makes us admirable in the first place.

• “Sanctions have become the all-purpose tool of statecraft, meant to convey opposition to everything from military invasions to human rights abuses to nuclear proliferation to corruption, irrespective of whether they help or undermine long-term U.S. interests. They are a means of virtue signalling that allow politicians to show that they are doing something when faced with a given issue,” as this forceful piece by Christopher Sabatini puts it. It’s definitely worth a read.

I sincerely hope all Western governments are thinking about how to move on from sanctions, though I worry that they aren’t. The U.K. and the U.S. have just launched a “strategic sanctions dialogue,” which suggests that they intend to keep relying on this tool, rather than investing in the laborious but important work they should be doing instead.

So, on that note, I was glad to see that Britain has lifted its sanctions on Oleg Tinkov after he spoke out forcefully against Russia’s war and lost many of his assets in the country as a result. If oligarchs are to be sanctioned for doing the wrong thing, there should at least be the theoretical possibility of them being de-sanctioned if they do the right thing. I hope this gives other tycoons courage to oppose the war. We need to lure Russian oligarchs away from Putin, and that means offering them an exit.

Incidentally, Tinkov made that Russian super-premium beer I referred to earlier. “Tinkoff,” spelled in the French manner for added sophistication, began its life at a bougie microbrewery in Saint Petersburg, which opened in 1998, though I could rarely afford to visit it at the time. Its commercials (which are definitely NSFW or for watching in any vaguely sensitive environment) are a pretty stark example of how sophisticated marketing wasn’t in Russia in those days: Superyachts, sports cars, naked women, beer!

UNCLE SAM STOMPS ABOUT

The U.S. Federal Reserve has fined Deutsche Bank $186 million for “unsafe and unsound practices,” which date back to the German lender’s role as the primary correspondent bank for Danske Bank (on whose behalf it cleared $267 billion). Since the Danske Bank scandal remains the biggest money laundering scheme ever uncovered, it’s not surprising that Deutsche’s role as a major enabler should have attracted attention.

What’s interesting here is that the Federal Reserve is intervening in what is, by any measure (apart from the use of U.S. currency), a European affair: A German bank was clearing money for a Danish bank’s Estonian branch, originating in accounts whose ownership was obscured behind British shell companies. That’s not to say that the Europeans are doing nothing. Germany’s BaFin made a stern warning last year, on top of previous stern warnings made in 2019 and 2018, and perhaps Deutsche Bank will listen to them at some point. Denmark opened cases against a handful of Danske Bank individuals, although it subsequently dropped the charges and fined the bank itself 470 million euros (about $520 million). But that was only after the Americans fined it four times as much. The point is, when the Americans do something, they really do something, and that something tends to stay done.

This is why the Foreign Corrupt Practices Act (this is a good resource on all FCPA matters) remains a cornerstone of global efforts to stop corruption and why I like the sound of the recently proposed Foreign Extortion Prevention Act, which would make it a crime for a foreign official to demand a bribe from an American. At present, U.S. law only criminalizes the paying of bribes (unlike similar legislation in other countries), and this would give it far greater heft.

• “(It) would protect Americans from bribe demands, create a level economic playing field for American companies operating abroad, and incentivize foreign governments to clean up corruption in their own backyards,” notes this coalition of anti-corruption organizations that is pushing the idea.

Unleashing the U.S. Department of Justice on kleptocrats is a good idea, and I hope it gains momentum.

WHAT I’M WATCHING

Most of my time is taken up with researching money laundering and the struggle against it for my new book. Since a lot of this dates back to the peculiarities of Florida in the 1980s, I have been watching “Miami Vice” (for research purposes only, you understand). Huge hair, an alligator named Elvis, baddies with attitudes, designer stubble, fast cars…This show’s got it all, and there are still many episodes for me to watch.

In a more serious moment, I really appreciated the sober approach to corruption taken by the first installment of the Carnegie Endowment’s Behind Closed Doors podcast, and I am looking forward to the remaining two episodes.

The post How the Kremlin rewards loyalty with beer and dairy appeared first on Coda Story.

For the last two decades, Ukraine’s relationship with NATO has been fraught. Back in 2002, Leonid Kuchma, Ukraine’s president at the time, gate-crashed the NATO summit. He did this despite being disinvited in light of the allegations that he had overseen the decapitation of journalist Giorgiy Gongadze (may he rest in peace) and smuggled weapons to Iraq. Kuchma’s surprise appearance forced the presidents’ places to be alphabetically arranged in French — rather than the more-standard English — to avoid the awkward sight of him sitting next to the leaders of the United Kingdom and United States. In 2008, Ukrainian President Viktor Yushchenko attended another NATO summit, still riven by post-Iraq War splits, winning a promise that his country could join the alliance but with no suggestions as to when.

Thanks to these humiliating-for-Ukraine episodes, I was surprised when — at an advisory council meeting for the Anti-Corruption Action Center, Ukraine’s most influential NGO, back in 2019 — the founders said they would be pushing for Ukrainian membership in NATO as part of their mission to advance political integrity in Ukraine. I am a member of the council, and I wasn’t alone in worrying that the policy might distract from the center’s core mission and cost it the support of NATO’s many skeptics.

Back then, it was still possible to see Ukraine’s two wars — the domestic one against corruption and the external one against Russia — as separate. Since February 2022, however, all such arguments are meaningless. Tackling bribe-taking is as much a part of winning the war as mine clearance, and defeating Russia is as crucial to a healthy political culture as sacking crooked judges.

And this has made me realize how very prescient Daria Kaleniuk, Vitaly Shabunin and their AntAC colleagues were in arguing for NATO membership at that meeting four years ago. You cannot tackle Ukrainian corruption without confronting the Western enablers who have helped oligarchs and politicians loot Ukraine and stash the proceeds in Britain, France, California and elsewhere. It is simply too easy to use Cypriot shell companies to manipulate state contracts and receive bribes and too difficult for under-resourced investigators in Kyiv to find the evidence to prosecute the guilty. The only way to crack down on corruption is to stop its Western enablers, and the only way to stop its Western enablers is to persuade Western politicians to do so. Which has proved all but impossible to date.

So what’s NATO got to do with it?

If Ukraine were to join NATO, its security would be aligned with that of the NATO countries where kleptocratic wealth tends to end up, like the U.K., the U.S., France and Spain, as well as the NATO countries through which kleptocratic wealth passes, like Turkey, Germany, the Baltic states and the Netherlands. These states would therefore gain a security imperative to prevent Russia-aligned oligarchs from destroying Ukraine’s political stability, which would give tackling corruption far more urgency than it has ever had before. It shouldn’t, but it would.

The intriguing aspect of the recent comments by British Defense Secretary Ben Wallace and U.S. National Security Advisor Jake Sullivan — suggesting that Ukrainians should show more “gratitude” to their Western helpers — is that these apparently throwaway remarks perfectly encapsulated the West’s failure to understand our own role in immiserating Ukraine. Even these two men, who know more than almost anyone about Ukraine’s security needs, failed to appreciate the crucial role the West has played in the looting of Ukraine, which has in turn undermined its security, since 1991. If everyone understood the true situation, they’d know that the question of Ukrainian gratitude shouldn’t come into it: It is us who owe Ukraine.

I understand that NATO membership is not an antidote to domestic corruption (see the horrors of this year’s Turkish earthquake) or to authoritarian governments (see grim political developments in Hungary and Poland), but it is notable that there are no properties belonging to oligarchs from NATO member states on our London kleptocracy tours. NATO membership seems to prevent citizens from one member state from stoking kleptocracy in another too enthusiastically.

And that is something that, for its long-term prosperity, Ukraine needs almost as much as it needs 155mm artillery shells for its short-term victory.

Ukraine’s NATO membership is not just crucial to helping protect its territorial integrity and binding it to the Western family of nations but also to preventing the kind of grand corruption that kept it tied to Russia for so long. It’s up to everyone who cares about tackling oligarchy, and tackling the causes of oligarchy, to make the case for Ukraine to join NATO as soon as possible. And it’s in our own interests too: Only a non-corrupt Ukraine can truly defend Europe’s eastern border.

• “An army plagued with corruption, such as soldiers accepting bribes, governments misusing military expenditure, and officials making decisions influenced by personal gain, will not be able to win a war — and it will not be able to deliver on deterrence. It will be perceived as an enemy that can be easily defeated,” Transparency International’s Ara Marcen Naval wrote.

It’s not easy, but the first step to defeating corruption — just like the first step to winning a war — is for politicians to commit to it.

CORPORATE TRANSPARENCY

However, if you want to see an example of the gap that exists between a country’s politicians saying they want to get serious about kleptocracy and their country actually getting serious, have a look at this document, prepared for a hearing of the U.S. House of Representatives’ Subcommittee on National Security, Illicit Finance, and International Financial Institutions. Submitted by Jim Richards, a spectacularly knowledgeable anti-money laundering professional, as evidence for the members of Congress who are looking into the Corporate Transparency Act, it voyages deep into the weird, fractal world of implementing this landmark piece of legislation, first adopted in 2020.

The CTA was initially backed by both parties, the Trump and Biden White Houses, the U.S. Chamber of Commerce and many many others as a crucial step toward insulating the economy from dirty money. Nevertheless, Richards predicts that the implementation of the law will be delayed, beyond its proposed start date of January 2024, because of the difficulties in getting it through the machinery of state.

• “With less than six months to go before the promised launch date of FinCEN’s Beneficial Ownership Information (BOI) database, FinCEN has yet to publish a final rule on how that database will be accessed, it has yet to provide guidance to the fifty states’ secretaries of state on whether and how they will support the efforts of their 35 million state-created entities that will need to submit BOI, it has yet to publish a proposed rule — let alone a final rule — on how financial institutions will use this new BOI, and it hasn’t finished building and testing the actual database. Other than that, everything is on schedule and ready to go,” Richards notes with irony so heavy you’d need a forklift to pick it up.

There is much to criticize here but, as Richard says, the worst thing is FinCEN’s failure to keep the rest of us informed about what’s going on. This is a very important piece of legislation, which will finally bring U.S. corporate transparency into the 21st century, give law enforcement agencies the ability to see behind the country’s appallingly opaque shell companies and deprive criminals of one of the most secure hiding places for dirty assets. It must be done, and it must be done right, as this separate report for the subcommittee from Transparency International makes clear.

FinCEN officials regularly (and rightly) complain about the underfunding of their agency, which has barely two-thirds of the personnel of its Australian counterpart, AUSTRAC, even though it serves an economy 10 times the size. Despite the many tasks being put before it, FinCEN looks likely to get 12.7% less money next year rather than the extra resources that it needs.

However, as Richard states, FinCEN is perversely responding to this lack of resources by producing rules and regulations so complex “only a New York lawyer can figure (them) out.” Underscoring the complexity, Richards’ critique alone is 41 densely-typed pages long, and it lays out a bewildering list of rules, notices, regulations and rulemakings still outstanding.

• “If the reason(s) why FinCEN is struggling to meet its mandate are resource constraints, it would be doing the opposite of what it is doing: It would be putting out two simple, incremental rules (and proposed rules), while acknowledging that it must keep things simple since it doesn’t have the resources to do any more than what Congress intended. And the complexities of the reporting rule and proposed reporting form, and the proposed access rule, make FinCEN’s resource situation even worse: complex reporting and access forms and rules mean they need even more detailed guidance and even more people manning the help line(s). They are compounding their resource issues,” Richards notes.

To which I would add: Complexity creates loopholes. It is far harder to find discrepancies in simple rules than in complex ones. Professional enablers love complexity, which only they can afford to understand. And complexity is not just expensive for FinCEN but for all the financial service companies that will need to abide by its rules. The more expensive implementation is, the less inclined private firms will be to comply fully. I hope there is someone in Congress sufficiently interested in this issue to push FinCEN into rethinking. Keep it simple please, people.

If you’d like to know what happens when you get it wrong, read this blog about long-overdue efforts to undo the catastrophic side effects of ill-thought-through reforms to the implementation of the U.K. companies law.

THE HAVES VS THE HAVE YACHTS

Back in March, I alerted you to a yacht-shaped bargain — the Alfa Nero, sitting unclaimed in Antigua and being auctioned off by the government. This particular 267-foot marine masterpiece was sanctioned by the U.S. a year ago in response to Russia’s full-scale invasion of Ukraine and had been gathering seaweed ever since, so the Antiguans decided to flog it off.

Google founder Eric Schmidt heard about the sale (perhaps from this newsletter — if so, hi Eric!) and bought the yacht for $67.6 million back in June. But now Yulia Guryeva-Motlokhov, the daughter of sanctioned Russian oligarch Andrey Guryev, has challenged the sale because she is apparently the sole beneficiary of the Guernsey-based trust that holds 100% of the shares of the British Virgin Islands-based company that owns the currently-Antigua-based yacht.

• “We would not be filing an appeal unless we had good and sound reasons to bring the appeal. We think the action of the government in taking possession of the yacht and selling the yacht is wrong on all levels,” said her attorney, Dr. David Dorsett.

The highest-risk months for hurricanes in Antigua are August, September and October, so — if the weather is particularly severe over the next little while — the delay in moving the yacht triggered by this legal challenge could prove very costly indeed. The last time I was in the British Virgin Islands, a couple of years had passed since Hurricane Irma but there were still drifts of smashed yachts in every cove. It doesn’t matter how much a yacht costs or how many helicopters it can land on its afterdeck: In a battle with a rock, there will only ever be one winner. There’s a metaphor in there somewhere.

WHAT I’VE BEEN READING
I was lucky to obtain an advanced copy of “A Death in Malta,” a book by Paul Caruana Galizia, an award-winning journalist and the son of Daphne Caruana Galizia, who was murdered in Malta in 2017. It is at once a tribute to his mother, whose own journalism infuriated the sleazy political elites of her homeland, a history of Malta and an account of the author’s and his brothers’ quest for justice. It’s touching and infuriating and urgent, and I recommend it to all of you.

The post How NATO can help beat back corruption in Ukraine appeared first on Coda Story.

I have just been for a fortnight’s jaunt to the Pacific, in which I sought stories I can tell in the new book I am researching. It was by turns fascinating, fun and frustrating, and I look forward to sharing some of the tales with you. I spent a week in the Commonwealth of the Northern Mariana Islands, a little bit of America that feels extremely far from the United States, and a week in the Marshall Islands, which feels extremely far from anywhere.

The journey back was delayed by United Airlines, which cost me a couple of days and resulted in my jetlag colliding with a long-scheduled, weekend-long party at my house, and I am feeling more than a little vague. Apologies therefore in advance that this newsletter is shorter than normal (and if it doesn’t make much sense).

TRUST TAKEOVER

Around 2 a.m. on Saturday, while sitting around a fire, I had a conversation with some friends about dodgy money and, specifically, about the best place to stash it. And, yes, this is the kind of thing I talk about at parties. (I’m pretty sure they were asking my opinion just for interest’s sake rather than because they wanted investment advice, since if any of them were a billionaire, they’d probably be at a more glamorous venue than my garden, but for the avoidance of doubt, seek advice from a regulated professional, etc., etc., rather than from a scurrilous muckraker like me.)

I thought about it for a while and said that the answer was probably South Dakota, thanks to the state’s trust legislation, which creates an unrivaled shield around money placed therein, protecting it from governments looking to tax it, creditors looking to confiscate it and journalists looking to scrutinize it — the three threats to a billionaire’s peace of mind.

However, on sober reflection and in the cold light of a new week, I think I should have pointed out that the question is based on a misleading premise, which is that money is located somewhere concrete rather than just suspended in the glittering cloud that is the offshore financial system — nowhere and everywhere at the same time.

And, on that note, I was interested to see while I was away a merger between a star of the old-fashioned British offshore wealth management setup and a leader in the new/thrusting U.S. equivalent, with Jersey’s JTC buying the South Dakota Trust Company, which did more than anyone to create the South Dakotan industry.

The names quoted in the press release alone — JTC’s Nigel Le Quesne, with his English first name/French surname combination, and SDTC’s Pierce H. McDowell III and Al W. King III, with their middle initial/terminal numeral combination — are almost ludicrously stereotypical as representatives of Jersey and South Dakota.

But don’t be distracted by that. The important bit, in my opinion, is at the bottom, with the list of jurisdictions that JTC is now regulated in: British Virgin Islands, Cayman Islands, Guernsey, Jersey, Luxembourg, Mauritius, the Netherlands, South Africa, Switzerland, the Isle of Man, Abu Dhabi, The Bahamas, Dubai, the United States (as well as, separately, Delaware and South Dakota), the Republic of Ireland and the United Kingdom.

This is not unusual. All major wealth management companies will have a similar global presence. But what does it mean?

Well, while on the plane between Seoul and London, I watched last year’s Oscar winner “Everything Everywhere All At Once,” which features Michelle Yeoh as a (literal, rather than metaphorical) laundromat operator who learns how to tap into the skills of herself in millions of parallel universes, so she can suddenly do kung fu, sing or wave signs around, in the service of saving the multiverse and getting on better with her daughter.

In the more far-fetched realm of wealth management, having a presence in dozens of jurisdictions does a similar job. The moneymen at major companies have a complete overview of what’s possible all over the world so that when laws or political circumstances change, they can pick up skills from parallel jurisdictions as quickly as Yeoh can learn to play the piano with her feet and move their clients’ money accordingly. They slip it out of Switzerland ahead of a regulatory change, adding a BVI company here, an Irish/Dutch combination there, all of it reducing the chance of the cash being taxed, confiscated or scrutinized. In fact, “Everything Everywhere All At Once” would be an excellent mission statement for a billionaire’s private office. 

This interesting bit of analysis from Ruchir Sharma, based on this year’s Forbes Rich List, shows the consequences of a world where — no matter what kind of government you live in, whether it’s “big” like in France or “small” like in the U.S. — the rich always come out on top.

• “Socialist tendencies may backfire by concentrating rather than spreading wealth. Increasing regulation favors big tycoons, who have the lobbyists and money to navigate an expanding thicket of rules. And since 2000, while governments have pumped money into their economies to keep growth alive, much of it wound up fueling the rise in financial markets instead,” Sharma notes.

If billionaires’ wealth can be kept safe from predation, it will compound in perpetuity, meaning that the rich will get richer and the poor will become more numerous, giving the rich greater lobbying power and thus more sway over the regulation of their wealth.

For those of us who think this is a recipe for defunded governments, denuded democracy and — with time — a creeping return to feudalism, what can we do? It’s easy to see this as too hard a problem and to focus on something more straightforward like nuclear fission. But that would be foolish, there are good ideas out there if you look carefully.

The U.K. Parliament is currently debating a law to properly regulate Britain’s fetid swamp of a corporate registry, which has long provided structures used in fraud, tax evasion and kleptocracy. Under a new amendment proposed by a former government minister in the House of Lords, the transparency rules would also apply to trusts, meaning trustees would have to reveal who benefits from the wealth they look after, thus closing crucial loopholes. Ministers are pushing back, by claiming that the proposal would be costly for the British economy, but that is an illogical permission.

• “That should be put against the cost to the economy of the fraud and economic crime that is happening at the moment at an increasing rate. We have endlessly reminded ourselves that 40% of all crime in this country is now economic crime. I know from my time in government that the loss to fraud in government alone each year — this is the bottom-end estimate by the National Audit Office — is 30 billion pounds, and a lot of that is facilitated through the holes in the Companies House structure,” Lord Agnew said.

That is the right way of looking at the problem. Yes, tackling the hydra-headed wealth management industry would be expensive, but doing nothing has a cost too because we can be sure that the wealth management industry is very active indeed. Pleasingly, most trusts will be covered by the U.S. Corporate Transparency Act when it comes into effect next year. Although the information will not be public, at least it will be collected, meaning the authorities will know who stands behind the swelling volume of wealth hidden behind legal structures.

While on the subject of the Forbes Rich List: As of the moment of writing, the world is only $100 million away from gaining a 10th centibillionaire, since Larry Page — the founder of Google and the 10th richest man on the list — has a personal fortune of $99.9 billion. That is just a small stock price movement away from membership in the world’s most exclusive club. And, just think, it was only in September 2020 that I marveled in this newsletter about a second person’s net worth coming with eleven zeros. Now that seems positively old hat.

How long until we gain a trillionaire? Less time than I’d like.

WHAT I’VE BEEN READING

I had a lot of time to read while on the many flights I took to the Pacific, around the Pacific and back from the Pacific, of which I think the highlight was Jonathan Eig’s biography of Martin Luther King Jr. By stripping away much of the hagiography around Dr. King, it made him — for me anyway — somehow more admirable. And by situating him in the context of the short generations that separated him from slavery, it made him all the more extraordinary.

Struck by Eig’s prose style and looking for other good books to read, I then read his biography of Mohammed Ali, which is written in a similarly engaging way and has a postscript so touching it made me cry. Finally, I completed an Eig trilogy by reading his history of the development of the contraceptive pill, which is also remarkable.

The post Wealth concealment enters an era of geographical ubiquity appeared first on Coda Story.

It’s not often that I get to trumpet good news, but this is something actually positive. I wrote last month about Carole Cadwalladr, the British journalist left with staggering damages to pay after losing a defamation case. The threat of bankruptcy in the British courts has cowed reporters far beyond the United Kingdom, with libel specialists attacking outlets that expose the financial misdeeds of the rich and powerful in Angola, South Africa, Malta, Ukraine and many other places. British defamation lawyers have been one of the worst threats to press freedom globally for far too long.

The UK government has now announced an amendment to an economic crime bill going through Parliament that will — at least partly — put an end to this.

• “For too long corrupt elites have abused our legal system to evade scrutiny and silence their critics. These new measures are a victory for truth and justice, and a blow to those who try and export their corruption to the U.K.,” said Tom Tugendhat, the U.K. security minister. “They will help expose wrongdoing and bring an end to spurious lawsuits from those who seek to suppress our freedom of speech.”

The legislation will facilitate a more effective public interest debate about the reporting of economic crime and limit the ability of wealthy claimants to use so-called SLAPP cases to crush reporters with the threat of costly lawsuits.

• “Good to see some work being done on Parliament to address SLAPPs, but this is the first step, not the last, and fuller anti-SLAPP legislation should continue to be pushed,” tweeted Eliot Higgins, who has himself been targeted by abusive lawsuits.
  
• “New anti-SLAPPs measures in the Economic Crime Bill are a great win for journalists looking to shine the spotlight on economic crime — no longer will they be silenced. But to be truly effective, these must be broadened out to all defamation lawsuits,” said Margaret Hodge, a member of Parliament who campaigned against oligarchs long before it was fashionable.

I am keeping my toes and fingers crossed that this legislation fulfills its potential. Now, they just need to limit the use of data protection legislation to restrict investigations and extend the protections to cover reporting on any topic, and we’ll start to get somewhere.

OLIGARCHS WITHOUT BORDERS

You could be forgiven for thinking, based on news reporting or government statements from the last 18 months, that the word “oligarch” is a synonym for “a rich Russian.” There is obviously a good reason for this: Western countries have been trying to put pressure on the most influential Russians to use whatever influence they possess to stop their mad king Vladimir from killing more people. If your kitchen is on fire, that’s your priority. You’re not going to worry too much about the state of the living room.

However, the trial starting this week in London — in which Ukraine’s largest bank seeks $1.9 billion, plus interest, from its former owners, the Ukrainian oligarchs Ihor Kolomoisky and Gennadiy Bogolyubov — is a good reminder that the viciously criminogenic combination of offshore secrecy, weak institutions, Western complacency and poor governance have created a class of politically influential tycoons all over the world, not just in Moscow.

Privatbank was nationalized in 2016 with a capital shortfall of $5.5 billion, despite holding 30% of all retail deposits in the country. The bank’s shareholders deny any wrongdoing and say that allegations of misdeeds are part of the tortured political maneuvering central to how Ukraine’s politicians steal from their rivals. The National Bank of Ukraine, however, said the bank had been run fraudulently, with most loans going to its former shareholders, for at least a decade.

• “Central to the coordinated manipulation of the loan book, and extraction of benefit was a shadow banking structure within PrivatBank. The secretive structure processed and facilitated the movement of the proceeds of hundreds of loans worth billions of USD to parties related to the former shareholders and their affiliates,” said a report by the international investigations firm Kroll, commissioned by the Central Bank, which said that Privatbank had the “characteristics of a pyramid scheme.”

The collapse sparked legal proceedings in many places, including in Ukraine, where Kolomoisky’s house was raided in February. The U.S. Kleptocracy Asset Recovery Initiative says it has traced the flow of the funds to commercial properties in Texas and Kentucky and has launched a civil recovery case. Kolomoisky has been sanctioned in the United States, and the two owners have been criticized by a court in Israel, where Kolomoisky has a citizenship.

However, the road has not been smooth for those seeking to recover the vanished billions. Kolomoisky retains some influence in Ukraine — initially, he had ties to President Zelenskyy — and has kept pressure on the authorities.

And skillful legal rearguard action has delayed the London case. An English judge previously said he lacked jurisdiction to hear it, setting aside a worldwide freezing order, only for that ruling to be overturned on appeal. Last year’s hearing was postponed thanks to the war in Ukraine, with a judge ruling that a fair trial would be impossible while the witnesses were under bombardment. Now, we have finally got under way, and Kolomoisky’s lawyers are maintaining their argument that he is the real victim and has been the target of a politically motivated prosecution.

• “The claim forms part of a politically motivated campaign against him that commenced with the wrongful expropriation of the bank from him and his fellow shareholders. He is confident that it will be established that the bank has not in fact suffered any loss whatsoever in respect of the transactions of which it complains,” legal firm Fieldfisher said in a statement to the Financial Times.

Neither of the tycoons is willing to give evidence in their defense, but Bogolyubov has also denied any guilt in the past.

Whatever the outcome of the case — and, to me anyway, it looks ickier than usual that a squad of British lawyers will be paid handsomely to argue on behalf of two oligarchs while ordinary Ukrainians are dying for their freedom — it feels like a relic of an age that needs to pass. Bogolyubov has previously been involved in ruinously expensive Western litigation, having been served with papers at his London mansion, which is just the latest example of how the oligarchs have flitted between Ukraine and the U.K. when it has suited them. Both men used British real estate as a store of value, including to settle a business dispute with the son-in-law of a former Ukrainian president.

We are all desperately worried about this kind of situation when the oligarchs are Russian, but the situation is just as concerning if they are Ukrainian (or, indeed, from anywhere else). Oligarchs use their access to the globalized economy to put assets out of reach of the courts, and now governments have to pay a fortune to try to gain access to them.

There is some speculation that the war in Ukraine signals the end of the country’s oligarchic era. Many of the oligarchs’ most valuable assets have been destroyed in the east of the country, and the tycoons’ ability to make profits from their relationships with Moscow has obviously been rendered valueless.

• “The deoligarchization of Ukraine looks set to be an irreversible process. Regardless of how the war ends, the conditions are simply not in place for the formation of a new class of the superrich: the Ukrainian economy has been too badly damaged by the war for any new oligarchs to emerge, while the ambitions of those who once had it all have been severely curtailed,” notes this analysis from the Carnegie Endowment from September 2022.

That may be true, but it sounds like an analysis based on hope rather than judgment. And, as the great Fiona Hill puts it, hope is not a strategy. The existing oligarchs still have substantial assets abroad, which they could use to buy back influence in a post-war Ukraine that is desperate for capital to restore its shattered infrastructure. Everyone must therefore be on their guard to prevent the oligarchs from slipping back under the cover of helping Ukrainians rebuild their future. And that is why it’s worth watching the outcome of the Kolomoisky-Bogolyubov case. If they lose, it will substantially weaken some of the wealthiest members of the old guard. If they win, the opposite will happen.

OW, MY EARS

I have tried — but, so far, failed — to add the term “kleptobrat” into the mainstream, to refer to the useless child of a kleptocrat. It is a weird but quite widespread phenomenon that a father can be a single-minded and ruthless tycoon, willing to bend rules, persecute enemies, exploit political connections and generally make Tony Soprano look like a pussycat, but his kids will want to be football players, pop stars, Youtubers or models. In fact, perhaps this is an optimistic sign for the future of Russia: All the stolen wealth will be spent on studio fees and influencer endorsements, and eventually the oligarchs will be bankrupt.

Anyway, on that note, the latest investigation from Alexei Navalny’s Anti-Corruption Foundation will make your eardrums bleed, since it includes some truly appalling singing from the son of Russian Defense Minister Sergei Shoigu, who goes by “Sheba” in what surely must be a doomed attempt to become a pop star. The video exposing his antics has millions of views already.

• “Putin’s criminal war has led to thousands of deaths of civilian people in Ukraine and has already affected almost everyone in Russia. At the same time, there are people whose lives have not changed at all: the Putin elites and their privileged children, who continue to live a luxurious lifestyle and chill on luxurious resorts,” the Foundation said.

Sanctions have hopefully made life less comfortable for people like Danila Shebunov, who is the son of Shoigu’s mistress, but it will take more than just asset freezes to end the economic system that allowed people like him to exist in the first place.

While on the subject of the dilettantish children of prominent Russians…Nikita Mazepin, the son of the fertilizer tycoon Dmitry Mazepin, has failed in his latest attempt to legally challenge the sanctions imposed upon him. Nikita, who had a brief career as a back-of-the-grid driver in Formula One, has been unable to race since he was added to the sanctions list. He sought “interim relief” from his U.K. designation so he could travel to Britain and negotiate a contract to drive in next year’s competition, but the judge declined to give it to him. The full case will not be heard until July, however, so his race is not yet run, though I can’t imagine that teams will be falling over themselves to hire him, whatever happens.

COMPLIANCE

There have been some interesting statistics from the British government about the penalties imposed for failure to comply with anti-money laundering regulations. Some 3.2 million British pounds (around $4 million) of fines were imposed in the second half of last year, on 240 different businesses, with the largest share paid by Xpress Money Services, part of the collapsed Finablr group.

It is, of course, good that this is happening, but it all feels a little divorced from reality. The British government estimates that hundreds of billions of dollars are laundered through the U.K. financial system every year, and yet the response is a few million in fines for companies that commit technical violations of the rules.

I was trying to think what this reminded me of, and I realized it was the sight of Ukrainian border guards sitting in the airport in Crimea in 2014, carefully stamping passengers’ passports before a flight to Moscow — while, outside the terminal, unmarked Russian soldiers had taken over the peninsula, the few troops still loyal to Kyiv were blockaded in their barracks, pro-Ukrainian citizens were fleeing their homes and the Kremlin was staging an illegitimate referendum to formalize Crimea’s illegal annexation. Yes, it’s important to take care of the formalities, but when there is a crisis, you need to be a bit more imaginative, energetic and forceful in your response.

Too much of the world’s approach to money laundering is like this.

WHAT I’VE BEEN READING

I’ve just finished Chris van Tulleken’s “Ultra Processed People,” and I highly recommend it to anyone concerned about what we eat and feed our children. The story he tells — of companies creating food additives that are harmful and then obfuscating/confusing/denying — seems to have significant crossover with economic crimes, environmental crimes and much more. Governments have let us down spectacularly over the last few decades, and we have multiple crises to fight, but the public health crisis caused by ultra-processed food is surely one of the most urgent.

The post Why we can’t let non-Russian oligarchs get away with it appeared first on Coda Story.

A friendly source in the citizenship-by-investment business is very rude about Vanuatu’s passport-for-scale scheme because it offers honorary, rather than full, citizenship. (“Honorary citizenship? What’s that? It’s like being honorarily pregnant,” he says.)

However, there do seem to be folks out there taking advantage of what the Pacific archipelago has to offer, according to Robin Kapapa, who runs the country’s citizenship-by-investment program — including the controversial Gupta brothers.

• “Kapapa said that Atul and Rajesh became Vanuatu citizens under the country’s Economic Citizenship Programme in 2019 upon declaring their innocence.”

They continue to declare their innocence. The Gupta brothers are accused of corruption and state capture in South Africa and are currently (successfully) resisting extradition from the United Arab Emirates. But this is the kind of thing that gives a golden passport program a bad name. From February 2023, the European Union suspended its visa waiver program with Vanuatu, citing the risks posed by the nation’s laissez-faire approach to welcoming wealthy people into its warm embrace.

So why would someone want a Vanuatu passport? Here’s a heart-warming (if, possibly, fictional) story from a passport broker’s website about an elderly Indian gentleman who bought one so he could get heart surgery in the U.K. and who got it in just one and a half months for a very reasonable $130,000. In fact, because so many of the broker’s clients were getting citizenship at the same time, the gentleman paid just $5,000 for the final ceremony, two-thirds off the normal price! I confess that I’m puzzled by the notion of getting a group discount on a pledge of allegiance but, no matter, on with the show.

• “In early January, Samar’s application for citizenship was approved. He was able to celebrate this with his children and grandchildren, who had come to visit him in London.”

I’m going to go out on a limb and speculate that most people applying for Vanuatuan citizenship are not kindly Indian grandpas seeking life-saving medical intervention but rather shadier characters. The British government has said that it’s looking at whether countries selling passports should lose their visa waivers. I wouldn’t be too surprised if Vanuatu’s citizens start finding it harder to visit the U.K. before too long. Until recently, the program, which was launched in 2017, was the single biggest source of income for Vanuatu’s government but — without its best visa waivers — the passports are becoming significantly less attractive.

So, how to market them? Well, according to a bizarre press release from Astons that I have just received, you do it by alerting Americans to how much money they could save if they took up Vanuatuan citizenship and moved to Vanuatu. An American’s monthly bills will, apparently, come to about $1,142 a month in the Pacific archipelago — and that’s 24.6% less than the average monthly spending in the United States.

• “This is one reason why so many US high-net-worths are opting to emigrate by securing alternative citizenship via investment. You can get an equally good, if not vastly superior lifestyle, without the massive price tags associated with a luxury lifestyle in the United States,” the press release says, quoting Aston’s “immigration expert” Alena Lesina.

By my calculation, it would take them almost three decades to earn back the cost of the passport, which doesn’t sound all that great. In fact, I am bewildered by the thought processes of whoever thought it was a good idea to market alternative citizenships as a solution to the cost of living crisis, but — to their credit — they did provide data for all the countries that sell passports, allowing you to calculate quite how ridiculous the whole idea is for yourself.

Egypt is the cheapest option, with the average monthly spending of only $127.13. This means that — in the unlikely event that an American with $250,000 to invest in an Egyptian passport was willing to live like an average Egyptian after relocation — it would take them a mere 15 years to earn back the cost of their new passport, via reduced bills. But Dominica is the bargain. A Dominican passport costs just $100,000, which means that, thanks to a cost of living averaging about $206.23 a month, you could earn back the cost of citizenship in not much more than six years. It’s true that Dominica is utterly lovely, but hmmmmmm.

OFFSHORE SHELL PEOPLE AGAIN

Attentive readers of this newsletter (which is to say, I’m sure, all of you) may remember that last October I wrote about some findings from the U.K.’s Centre for Public Data, a think tank that wants public officials to share better statistics about what they’re up to.

Their report revealed, for the first time, that while the U.K. had been gradually cracking down on the misuse of offshore shell companies to obscure property ownership and dodge taxes, enterprising investors had learned to hide their actions behind “offshore shell people” — individuals in tax havens who appear to be putting their names on the deeds so as to hide the real owners’ identities, presumably in some kind of trust.

This meant that, while politicians and the media had been obsessing about oligarchs using shell companies, those same oligarchs had effectively bypassed the government’s restrictions, in very large numbers, without anyone noticing.

Anyway, the Centre’s Anna Powell-Smith has emailed me to say that there were errors in the information provided to her by His Majesty’s Land Registry after the Freedom of Information requests she sent them — which she then shared with everyone else. That is ironic and appropriate, considering the task she has set out to do, but her response has been classy and proactive (and an example of best practice). Thanks Anna.

So, there are in fact 181,701 properties in England and Wales owned by offshore-based individuals, rather than the previously reported 247,016. That’s fewer than we thought but still more than anyone previously realized and far more than there are properties owned by companies.

• “We still believe that HMLR should publish official statistics on this topic – if anything, this error only makes that more pressing,” Powell-Smith’s blog post states.

I agree. Any information that is not secret should be public, and information should be provided in the most accessible way possible, so that companies and people can use it for research, business, education or anything else they choose. A government’s information belongs to the country’s citizens after all, and it’s up to those citizens what they do with it.

Transparency also helps to keep that information accurate. The flaw in this data was discovered by Anna, not by HMLR, and it was her questions that led to officials discovering that they were misrepresenting the situation. This is significant, since Anna’s original report led to questions being raised in the British Parliament, and legislators need the most accurate information if they’re to make the best decisions. Fortunately, the flaws didn’t change the overall picture in her report, but it’s quite scary to think that laws could be passed based on incorrect official data.

Interestingly, Scotland already provides this dataset in an easily accessible form. Out of the 2.5 million properties in the country, 26,953 are owned outside the U.K., and the largest number of owners are American (including a certain Donald Trump, who owns Scottish golf courses), followed by residents of Hong Kong and Australians. Other popular locations include the usual tax havens — Singapore, the UAE, Jersey, the British Virgin Islands — which suggests that investors in Scotland have deployed offshore shell people, too.

One issue in Scotland is that huge estates own much of the countryside, where rich people like to shoot grouse or deer and generally pretend to be noble hunters. So, a single property title can actually cover a significant chunk of the country. And that appears to be the case here, with four of the top five most popular offshore-owned areas located in remote and rural areas along the west coast of Scotland, one of the beautiful (and sparsely-populated) parts of Britain.

Anyway, I’ve gone further down this rabbit hole than probably anyone but me wishes, but I think this is an interesting demonstration of the fluidity and flexibility of the offshore world. When governments attempt to outlaw tricks used to hide ownership or avoid taxes, another trick is invented. It is the reason why politicians need to be as entrepreneurial in their response to oligarchs as those oligarchs are in their response to the laws that politicians pass. And it’s also why accurate information should always be freely available to citizens so they can spot those tricks as Anna did or as Graham Barrow does with shell companies, in real time.

If any of my readers know of countries that publish equivalent information, please send it over! I’d love to take a look and see if the same patterns occur elsewhere.

CASH IS (STILL) KING

Question: How does a modern money launderer hide the provenance of his clients’ profits? Answer: The same way he always did, by using cash.

Authorities in Spain and Italy, both of which have a good reputation when it comes to tackling financial crime, have busted a big money laundering ring and published pictures of wads of cash that they’ve seized. The methodology is exactly the same as in recent busts in the U.K., the U.S. and elsewhere: Drug gangs earn cash, then hand it to money launderers, who pass the cash onto people who want it, paying the gangsters with drugs shipped from overseas. Crucially, the cash circulates only within countries, and value is transferred internationally in the form of stuff — whether phones, drugs, luxury handbags or any other good, legal or illegal. Our defenses are set up to catch electronic money crossing borders, but the international trade system is wide open to abuse.

Inevitably, therefore, criminals are moving illicit wealth around the world via wrongly-priced exports/imports or via smuggling and bypassing the well-monitored financial system in the process. They’d be stupid if they did anything else, and they’re not stupid.

Thank you to a reader in Latvia (you know who you are) for sending over this new and fascinating report from the Hague Centre for Strategic Studies, covering exactly this point. Its analysis shows that criminals are becoming increasingly specialized. Logistics, cyber and money laundering are now separate operations run by gangs that sell their services to each other in exactly the same way as outsourcing firms do in the legitimate economy. The report sees this as a revolution in organized crime, comparable to the development of transnational cartels in the 1970s.

• “Organised crime in today’s interconnected world consists of increasingly fluid, decentralised, technologically savvy and resilient trading networks. These networks leverage a wide range of professional service providers and systemic enablers as part of their operations,” the report states.
  
• “In real terms, this has arguably led to a net amplification of the relative (political) power, economic clout and, correspondingly, overall threat posed by organised crime, most significantly seen in the suffocation and distortion of licit economies and the erosion of formal governance systems and the ‘rules-based international system’ – which is already in rapid retreat at the state level.”

It seems to me that the global money laundering system can best be analyzed by comparing it to the formal financial system. Both are restless, energetic and constantly shrugging off governments’ attempts to control them. I haven’t yet seen a revolving door between government and organized crime analogous to the one between politics and finance, but perhaps that’s something Anna Powell-Smith could look into.

WHAT I’VE BEEN READING

This past week, my younger son and I have been racing each other through Leigh Bardugo’s “Shadow and Bone” trilogy. I like reading the same thing as the kids and am — perhaps unrealistically — quite looking forward to the day when they have an equal interest in financial skulduggery as I do, so we can chat about offshore structures with the kind of intensity with which we currently discuss wizardry. Perhaps I’ll wave “Treasure Islands” in front of them next and see if either is prepared to pick it up.

The post Vanuatu pushes citizenship-by-investment as costs of living rise appeared first on Coda Story.

Last week, I swam in the acronym-infested waters of the compliance industry at a conference hosted by the Association of Certified Anti-Money Laundering Specialists. I was most struck by new artificial intelligence products on display there. One “reg tech” company — SymphonyAI — demonstrated a program that could basically replace much of financial institutions’ compliance departments with something as easy to use as a Gmail account. 

It spots anomalies in financial transactions, spells out why they’re anomalous and writes it all up in straightforward prose, which can be translated into multiple languages, ready to be emailed to your regulator. You can chat with it (“Show me the risky transactions”), ask it questions (“Which transactions involved China?”) and give it feedback, so it learns to tailor its advice to your particular needs. A lot of the focus on AI this year has been to mock it for falling in love with a New York Times journalist or to worry that it might be “sentient,” but this was the first time I’d personally witnessed its human-replacing capabilities.

Another company — Quantexa — has remarkable software that maps companies, their shareholders and directors, financial transactions and other information in clear and easily comprehensible ways, thus negating the kinds of obfuscation used by criminals to hide their transactions. It is remarkable to think this is just the beginning of what AI can do.

Several banks have already adopted versions of AI — including HSBC and ING — in their quest to improve their compliance with anti-money laundering rules after their well-publicized failures to do so. 

At panel discussions, officers from both banks talked about how the AI systems are more effective than their predecessors at identifying anomalous transactions and more efficient in terms of how much they cost to run. 

Previously, banks had to employ large teams in their “first line of defence” to sift the alerts generated when a transaction broke the rigid rules of the old compliance systems, of which perhaps 99% would be false positives. The new “contextual monitoring” AI programs claim to do that filtering automatically, thus generating far fewer alerts overall but more alerts that actually result in transactions being reported as suspicious. This is potentially good, since it means financial intelligence units won’t be so swamped by Suspicious Activity Reports and instead will be able to focus on legitimate alerts from banks.

• “Financial crime is an arms race between the institutions and the bad actors, and the bad actors are always innovating,” one senior compliance officer said. 

But that got me thinking about what AI would mean for money laundering and financial crime more broadly. I’m afraid it left me more worried than reassured.

Of course, new technologies have aided the battle against financial crime many times in the past. Faster communications allow police agencies to exchange information with each other, and the internet allows us to search foreign corporate registries. However, those advances have been just as helpful to criminals. Faster communications allowed tax havens to become major banking centers. The internet made interlocking shields of shell companies cheap and available to everyone. Banking apps made fraud easier.

I see no reason why AI won’t work in the same way. Yes, it will help compliance departments work more efficiently, but it will also help criminals bury their transactions ever deeper in the financial system. Like every tool, it is neutral in its effect but — if previous innovations are any guide — criminals will be more imaginative than their opponents in how they use it. Fraudsters will use AI to devise more ingenious ways to fool their victims. Lawyers will use it to defend kleptocrats. Accountants will use it to hide dirty money. 

• “Criminals are always one step ahead, innovating and evolving their strategies to get past financial institutions and regulators. It’s a never-ending roundabout where as soon as one threat is thrown off, a newer, more challenging one gets on,” says this helpful article from FinTech Magazine.

Technology will not be a silver bullet to tackle financial crime unless it is used as part of a well-resourced, well-designed strategy uniting all parts of the public and private sectors. I sincerely hope that law enforcement agencies will not be — unlike the banks — seeing it as an opportunity to lay off their employees but instead as something to make those employees better at their jobs.

One key aspect of that is for regulators to provide compliance teams with reliable feedback on the Suspicious Activity Reports that they receive so as to train the AI systems that are generating them. Artificial intelligence is only as good as the training it receives — you teach AI to recognize a cat by repeatedly showing it pictures of cats. It won’t get better at spotting financial crime if we don’t tell it when it’s done so. Right now, the Dutch Central Bank has just 70 people tackling dirty money. The Banque de France’s ACPR has only 90. That’s not enough to do the work that’s already demanded of them, let alone to help train our new digital overlords.

On that note, one regular topic of conversation in the queues for coffee at the conference was how European Union politicians would resolve the conflict between the bloc’s attempts to protect data and to fight financial crime. There is no point in having spectacular computer programs to analyze the movement of money if you’re going to deny them the data that will allow them to do so. But we also need to make sure the data is being used in ways that are beneficial. I’m glad it’s not me having to decide where the line should be drawn. Or, as Michael McGrath, of Ireland’s Department of Finance, put it: “We’ve got a job of work.”

YOU SAY MICAR, I SAY MICAR

I have just read an advance copy of “Number Go Up” by the Businessweek reporter Zeke Faux, which is very, very good. If you want a well-researched and authoritative — but also funny, irreverent and readable — account of the crypto business, this is most definitely the book for you. Faux spends time with the bros in New York and Nassau but also treks to Cambodia to see the victims of human trafficking gangs enabled by cryptocurrencies and points out — with a slight note of despair — that while some of the hucksters whose schemes collapsed last year were being prosecuted, there were no equivalent cases against the gangsters.

What little use crypto does have is to the benefit of criminals, so we badly need workable rules governing cryptocurrencies to prevent them from being used to launder wealth. That means a lot is riding on the European Union’s proposed Markets In Crypto-Assets Regulation. Unlike previous EU initiatives, including the anti-money laundering directives, the application of this one will not be left up to interpretation by national governments. Instead, it will be unified across the bloc. It will probably come into effect at the start of 2025.

• “The MiCAR kicks off a new era of regulated crypto markets by establishing a harmonised regulatory framework that will better protect investors and consumers through authorisation and notification requirements and measures against market manipulation, while also improving market integrity and financial stability by regulating public offers of crypto-assets,” according to this analysis.

But (wouldn’t it be great if — one day — I could write about a new initiative without having to use the word “but” at some point?), there is an issue here. Although MiCAR will establish a single approach to crypto across one of the most important markets on earth, it will not establish a single enforcement mechanism. The EU remains a collection of 27 different countries, each of which has its own police force and each of which has a different degree of indifference about tackling financial crime.

• “The decentralised enforcement model foreseen in the regulation is likely to result in forum shopping, as crypto projects will be likely to adopt the member states with the most efficient and crypto-friendly authorities as their home state,” this analysis states, and I see no reason to disagree with it.

There is a potential — if only partial — solution to this in the form of the proposed Anti-Money Laundering Authority, which would act like an EU-wide taskforce to create better coordination and cooperation against dirty cash and hopefully to raise standards to a common high level.

Do not expect action any time soon, however. EU members are now engaged in the time-honored tradition of arguing among themselves over who should get to host the new authority and thus gain the prestige and income that derives from its employees living in their capital. According to Ireland’s McGrath, this wrangling should last until the end of the year at least.

• “Given the delays we are seeing, I personally think the timeline is a little vulnerable,” he said before making a pitch for Dublin to be chosen as the authority’s home base.

Of course, before getting too enthusiastic about regulating crypto, it’s worth asking what that would achieve.

• “So many smart people had spent so many thousands of hours working on cryptocurrency — and yet shockingly little of use had come of it,” Faux writes toward the end of his book.

Since cryptocurrencies therefore primarily exist as a speculative investment, perhaps regulating them in the same way we regulate gambling is the correct approach.

• “With no intrinsic value, huge price volatility and no discernible social good, consumer trading of cryptocurrencies like Bitcoin more closely resembles gambling than a financial service, and should be regulated as such. By betting on these unbacked ‘tokens,’ consumers should be aware that all their money could be lost,” said Harriet Baldwin, chair of the U.K. House of Commons’ Treasury Committee, when launching a new report.

Considering the embarrassing spectacle last year of the British government trying to show how cool it was by proposing (and then abandoning) a non-fungible token that could be traded online, thus gaining all the credibility of a dad at a school disco, it is hard to believe such a common sense approach will gain ground. But then, considering the public health catastrophe unleashed by Britain’s under-regulation of the gambling sector, perhaps this wouldn’t be a good model for holding the crypto industry to account anyway.

WHAT I’VE BEEN DOING

The Hay Festival remains in full swing, and the sun is shining for once. On Sunday morning, I took part in a panel with Fiona Hill, who’s perhaps the best of all Western analysts of Russia and who became famous among non-Russia-watchers for testifying at former U.S. President Donald Trump’s impeachment trial. I am ludicrously lucky that people like her continue to come to the little town in Wales where I grew up to share their thoughts with tents full of interested and interesting people. My advice to you, if you can’t join us this year, is to mark your 2024 diaries now and to come to Hay-on-Wye for the best book festival in the world.

I also appeared (very briefly) on a podcast made by the BBC about conspiracy theories, which I think is thought-provoking and worth a listen. Over two series, from JFK to Brexit, it looks at what motivates conspiracy theorists and what their theories tell us about the societies we live in. Or perhaps that’s just what they want us to think.

The post How AI could help stamp out financial crime — or help accelerate it appeared first on Coda Story.

I was mean about lawyers last week and was planning to lay off them for a while, but this is important. Non-Brits often struggle to understand why it is that journalists are so terrified of libel proceedings in the U.K. Britain is a democracy. The defamation laws aren’t that much more fearsome than in other European countries, and in fact they’re less fearsome than in some.

Now take the case of journalist Carole Cadwalladr. She wrote and spoke widely about businessman Arron Banks’ support for Brexit and became a hate figure for many on the Leave side as a result. She is a friend of mine, and, in my opinion, much of the criticism of her has been viciously misogynistic and grotesquely disproportionate, but I’m going to try to analyze this dispassionately, so please bear with me. Banks felt that Cadwalladr’s reporting about him was unfair and sued her for defamation, as is his right. After a court initially ruled in her favor, an appeal court found in Banks’ favor (in relation to a TED talk), and she now has to pay 35,000 pounds (about $40,000) in damages. That’s a lot of money, but it’s not terrifying.

Then came the costs.

• “The Court of Appeal has ordered that Carole Cadwalladr must pay 60% of Arron Banks’ legal fees to the tune of 1,242,634 pounds. Having already apologized and coughed up 35,000 pounds in damages, the Court has today ruled she must now find another couple of million down the back of the sofa before the end of the month,” boasted the right-wing blog Guido Fawkes last week.

So, what has happened here? Cadwalladr defamed Banks and caused harm to his reputation, damage assessed by a court to be worth 35,000 pounds. You may agree or disagree with the judgment, and reasonable people can do both, but I don’t think anyone would accuse the judges of having done anything other than their jobs. And I certainly wouldn’t criticize Banks, who was holidaying in Italy, for saying he would celebrate this ruling “like it’s the last of Rome.” I’m sure this has been a stressful time for him, too.

But to get to this point, the parties have had to spend hundreds of thousands of pounds on lawyers, in an epic game of legal chicken, which Cadwalladar lost. So she is on the hook for most of his fees as well as her own. And two million pounds is terrifying. That is a warning to every journalist in the country to leave contentious subjects like the influence of big money on politics well alone. If you get it wrong, and you offend someone prepared to take you on, your life as you know it is over. Cadwalladr managed to raise a lot of money from crowdfunding, but not — as it turned out — nearly enough. Not even close.

• “These exorbitant costs — ordered despite the court’s recognition that Carole Cadwalladr’s work was at the time of publication covered by a public interest defense — send a chilling message to investigative journalists everywhere,” said Fiona O’Brien, the U.K. bureau director at Reporters Without Borders.
  
• “The decision will have a profound chilling effect on critical journalism across the world,” said the European Centre for Press and Media Freedom.

A group of media organizations last year put together a model law to prevent the abuse of defamation cases to intimidate journalists. I hope everyone can look at what has happened to Cadwalladr and recognize this is a sign of a system that is broken.

It is simply not justice for lawyers to make millions from a proceeding, when the defamed man makes a mere 35,000 pounds. If you take into account the proportion of the legal fees Banks will have to pay, he’s actually on the hook almost 700,000 pounds out of pocket. It’s easy to speculate about why he persisted with a proceeding that would end up costing him so much money, but it doesn’t take away from the point that it shouldn’t cost anyone that much in the first place.

The viciously polarized rhetoric around Brexit means that there is much boasting about this result, but the real message for me is that defamation proceedings need to be simplified, streamlined and made vastly cheaper. That would empower journalists like Cadwalladr to do more work,and it would empower people like Banks who feel they have been defamed by journalists to bring cases. It would make the whole process quicker and fairer. If justice is expensive, it’s inaccessible, and if it’s inaccessible, it’s unjust.

A century and a half ago, Charles Dickens satirized the law courts so viciously in “Bleak House” you’d think nothing could have survived.

• “It’s about nothing but Costs now. We are always appearing, and disappearing, and swearing, and interrogating, and filing, and cross-filing, and arguing, and sealing, and motioning, and referring, and reporting, and revolving about the Lord Chancellor and all his satellites, and equitably waltzing ourselves off to dusty death, about costs. That’s the great question. All the rest, by some extraordinary means, has melted away,” said one member of Dickens’ Jarndyce family.

And yet here we are. There is a saying that if you want to change the world, you need to find a way for lawyers to make money out of it. We need to turn that around: If we want to free the press, we need to find a way to stop lawyers from doing so.

On a side note: Banks sued Cadwalladr personally, but he was suing her for a speech she made at the TED conference in Vancouver. So, here’s an idea worth spreading: If you invite someone to come and speak at your achingly fashionable event, and you distribute the video of their speech on your web site, and then they get sued for it, you should have their back. If your whole shtick is that you spread ideas, and you invite someone to come and share an idea for you to spread, you don’t get to hide under the table if the idea spreads. So why isn’t TED helping with her costs?

• “The court of appeal found for Banks on one point only: It ruled that when the police concluded its investigation into him a year after I gave the talk, the public interest defense fell away. The court ruled that a notional 100,000 people in the UK saw the talk after this point and it held me liable for those views even though it acknowledged that I did not control TED’s website,” noted Cadwalladr in an update to her crowdfund, in which she confirmed she would be seeking permission to take the case to the Supreme Court.

INTERNATIONAL COURTS FOR AN INTERNATIONAL CRIME?

Speaking of legal proceedings, I wanted to write about something that is getting a bit of attention these days: the idea of an International Anti-Corruption Court. Moldovan President Maia Sandu — who knows a thing or two about the difficulties of tackling corruption — is the latest international leader to back the idea.

• “For situations where reforms move slowly, the processes are not always the right ones, it takes time to build a strong and independent court or prosecutor’s office. I think that in cases of big corruption it is good to have an Anti-Corruption Court at the international level where we can go with evidence and see the big corrupt people punished,” she said, back in March.

Her name is now added to a long and distinguished list of statespeople — including former presidents, ministers and U.N. commissioners — who support the idea, and it’s the policy favored by the governments of Canada and the Netherlands, among others. This is impressive for an idea that was first put forward around a decade ago by a retired American judge, Mark Wolf. He correctly analyzed the flaws in the global efforts against corruption, identifying that it is too easy for people to hide from justice behind national borders while their money flows seamlessly across them.

• “Staffed by elite investigators and prosecutors as well as impartial judges, an IACC would have the potential to erode the widespread culture of impunity, contribute to creating conditions conducive to the democratic election of honest officials in countries which have long histories of grand corruption, and honor the courageous efforts of the many people, particularly young people, who are increasingly exposing and opposing corruption at great personal peril,” he wrote.

An analysis of the state of the debate can be found here. I am obviously in favor of efforts to tackle corruption. The horror in Ukraine has revealed more clearly what has previously been exposed by crises in Angola, Nigeria, Venezuela, Egypt, Afghanistan and dozens of other countries: Corruption helps bad people, harms good people and makes every problem worse than it already is. And there is a parallel here in the discussion of tax policy. Tax justice advocates are increasingly despairing that rich countries will ever agree to do the right thing and fairly distribute revenues around the world and want the United Nations to step in to create a genuinely equitable international forum.

However, as you may be able to tell, I am about to introduce a “but” to the debate. I fear that the IACC is one of those times when we need to deploy the well-known quote from the Sage of Baltimore: “There is always a well-known solution to every human problem – neat, plausible, and wrong.”

It is true that the essence of kleptocracy is its transnational nature. Corruption became supercharged once the corrupt were able to game the globalizing financial system — they used their control of their own countries to frustrate foreign scrutiny and they use foreign-provided secrecy to frustrate domestic scrutiny — and they’ve stolen more than any medieval bishop or prince could have conceivably dreamed of. Anyone who can afford to can thus live by different rules than the rest of us, which erodes trust in society, politics and business. It seems logical that a transnational problem requires an international solution, but I’m not sure that an IACC is that solution.

Once you strip away the bewildering variety of jurisdictions that provide corporate structures to hide financial movements behind, kleptocracy is actually quite simple. Money is stolen in poor countries and is spent in a relatively small number of rich countries: the U.S., the U.K., Canada, Australia, France, Spain, the UAE, a few others. So, if those countries took the problem seriously and prevented that money from entering their economies, the problem would be largely solved.

And, if you look at the secrecy jurisdictions, often the problem could be solved closer to home than it looks. Those shipping registries hiding ownership of the ghost fleets of tankers moving Russian oil might bear the flags of Saint Kitts and Nevis or Liberia, but the actual registries are based in the U.K. and U.S. The U.K. could shut down its shoal of tax havens tomorrow if it wanted to.

It’s great that the Canadians and the Dutch want to take international corruption seriously, but they should start by cleaning up their own financial systems, which are major waypoints in the global movement of dirty money. We already have laws against corruption, and we already have courts. I want to see us using those first before seeing whether we need new ones.

WHAT I’M READING

It is almost time for the literary world to descend on my hometown for the Hay Festival, which is the world’s finest festival of words and ideas. I grew up thinking it was entirely normal for a small town to have U.S. presidents, Nobel prize winners, poets, playwrights, novelists and more turning up to talk to us each May, but now I appreciate what a privilege it is. You should come. Drop me a line if you do.

Anyway, I will be asking some questions of Marianna Mazzucato and Rosie Collington, whose book, “The Big Con,” skewers the global consulting industry forcefully, forensically and — you’d hope — terminally. I really enjoyed reading it.

The post How the British courts bankrupt everybody involved in defamation appeared first on Coda Story.

It is impossible to put a price on the harm Russia has caused Ukrainians in the last year. No amount of reparations, aid or foreign direct investment will bring back a single killed soldier or murdered civilian. However, attempts to estimate how much it would cost just to rebuild basic infrastructure suggests we are looking at a colossal sum.

The United Nations says damage to Ukraine’s heating and power infrastructure alone now amounts to more than $10 billion. Taking into account indirect losses — from people losing their jobs, as just one example — the damage was estimated at up to $600 billion in March, and it’s increasing all the time.

As such, it feels pretty feeble to be celebrating the delivery of $5.4 million — less than a ten-thousandth of that total damage, or, to put it a different way, enough for one Bayraktar drone — to the Ukrainians, but hopefully it’s a sign of greater things to come.

• “While this represents the United States’ first transfer of forfeited Russian funds for the rebuilding of Ukraine, it will not be the last,” said U.S. Attorney General Merrick Garland.

The money belonged to Konstantin Malofeyev, who was charged with violating U.S. sanctions in April 2022. In case you think it looks suspiciously nimble that he was charged just two months after Russia’s full-scale invasion in February 2022, the sanctions in question dated back to the initial invasion eight years previously.

• “Kremlin-linked Russian oligarch Konstantin Malofeyev played a leading role in supporting Russia’s 2014 invasion of eastern Ukraine, continues to run a pro-Putin propaganda network, and recently described Russia’s 2022 military invasion of Ukraine as a ‘holy war,’” said FBI Assistant Director Michael J. Driscoll at the time.

In February, the U.S. Department of Justice unsealed an indictment against Viktor Vekselberg covering $75 million worth of property, while Andrew Adams — the head of “Task Force Kleptocapture” — says the government has identified fully a billion dollars of forfeitable property. If all of that can be sent to the Ukrainians, it could make a significance difference.

Elsewhere in the world, however, progress is less impressive. A sanctions evasion case brought in the U.K. against Pyotr Aven is stuck in legalistic ping pong, bouncing back and forth between courts as lawyers debate whether Account Freezing Orders should or should not have been imposed. The sum involved totals 327,800 pounds (or about $410,000, significantly less than a hundred-thousandth of what Ukraine needs to repair the damage done to its infrastructure and economy), and presumably most of that has already gone to legal fees. (Aven’s lawyers incidentally are from Gherson LLP, the sister firm of Discreet Law LLP, which tried to sue Bellingcat founder Eliot Higgins on behalf of mercenary king Yevgeny Prigozhin.)

The U.K.’s National Crime Agency has scaled back an investigation into another wealthy Russian (identified by the Financial Times and others as Mikhail Fridman, though I haven’t seen any official confirmation of that), and there’s a legal debate ongoing here as well, this time about the validity of the warrant used when officers raided his house. That is a further payday for the oligarch’s legal team (according to the Times, Fridman is also represented by Gherson LLP), which is, of course, excellent news. Lawyers are people, too, each of them has a mother.

Speaking of mothers, it’s been a good few months in the European Union, where lawyer Max Cessieux successfully challenged sanctions imposed on Yevgeny Prigozhin’s mother. She was designated for allegedly having previously held shares in his companies, but the court ruled that she no longer did so, and their familial relationship was not sufficient grounds to hold her responsible for the horrors perpetrated by her son.

It’s been mixed news for sons, however. Formula One driver Nikita Mazepin, the son of Uralkali part-owner Dmitry Mazepin (represented by six different lawyers — “D. Rovetta, M. Campa, M. Moretto, V. Villante, T. Marembert and A. Bass” — which seems like a lot to me), successfully overturned part of his own designation on the EU sanctions list, which means he can return to racing cars within the bloc, providing he does it under a neutral flag.

However, even if Nikita Mazepin can drive Formula One cars in the EU, that won’t be much good to him if he can’t race in other parts of the world, too, particularly in Britain, where most of the racing teams are based, so he’s challenging his sanctions in Canada and in the U.K.

• “Negotiations to join a Formula 1 team usually begin in May or June of the previous year. Thereafter he must be able to enter the UK, not just for the British Formula 1 race, but for briefings, ergonomics design work, training and attending the team’s base,” his lawyer Rachel Scott told a British court earlier this month.

It is, however, unclear if he’ll be in much demand as a driver if he doesn’t come with the kind of financial backing that his dad’s companies previously provided to the team he drove for. “Uralkali” used to be written in huge letters across the Haas team’s cars and, although the EU’s court said it has not been proven that Nikita “directly benefited” from his father’s sponsorship of the team, there is certainly evidence that Dmitry took a strong interest in what was going on. In fact, there’s a show on Netflix (Season 4, Episode 4) in which you can watch Dmitry directly threatening the team’s cash-strapped boss to pull his sponsorship unless his son gets given his teammate’s car (which Dmitry had become convinced was the reason he was outperforming Nikita on the track). It’s quite something. He’s even got a St. George’s Ribbon (the orange-and-black symbol of boorish Russian nationalism) pinned to his T-shirt while he does it.

In fact, if you’re interested in learning more about the tensions that result when a team relies for funding on the parent of a rookie driver with a history of making a bit of a tit of himself on social media, and who struggles to stay on the track so much so that motorsports fans nicknamed him “Maze-spin,” then I highly recommend checking it out.

Aargh, I intended to focus on the challenges of confiscating wealth, but I got distracted by irrelevances again, which is ironic since that appears to be what has happened to our entire legal system. We were promised the confiscation of oligarchs’ wealth for the benefit of Ukraine, but instead we’re getting endless nonsense for the benefit of oligarchs’ lawyers. Of course, this is how the rule of law works, and if we’re going to start complaining about how wealthy people get preferential treatment in court, we’re going to need a bigger boat. But Ukraine is being destroyed right now and, as British parliamentarian (and all-round good egg) Chris Bryant put it earlier this year, when presenting a bill to allow for the seizure of Russian state assets, that is not an academic question. Someone has to pay to repair the damage, and why should it be the Ukrainians?

• “Here is the main point. This is a political decision, not a legal one. Nearly $350 billion of Russian Central Bank reserves have been frozen by democratic countries around the world, and 26 billion pounds of that is frozen in the United Kingdom. Canada, Italy, the European Union and the United States are all considering action. It is the very least we owe the people of Ukraine. Russia has forfeited its rights to these assets. It owes Ukraine far more than money; it owes it blood,” he said.

His bill, despite wide cross-party support, isn’t going anywhere, but the question of who pays to rebuild Ukraine will only get more urgent. I hope confiscation will be on the agenda at the Ukraine Recovery Conference to be held in June. The conference already has a good plan but needs more money if it is to have a hope of fulfilling these objectives. Confiscating Russian money would not only provide funds to help implement this plan but would also help ensure wider support from democratic countries, too, since their citizens would be less vulnerable to appeals from demagogues arguing that the money would be better spent at home.

If the only people who benefit from oligarchs’ wealth being sanctioned are oligarchs’ lawyers, then sanctions are not working.

DOWN THE TUBES?

One of my favorite oligarchical locations in London is the disused Brompton Road tube station, which Ukrainian tycoon Dmitry Firtash bought from the British government in 2014, shortly before he was indicted by the U.S. government on corruption charges (which he denies). He’s never got to enjoy the old tube station, sadly, since he’s been stuck in Vienna battling extradition ever since, but it remains an eye-catching monument to Britain’s willingness to sell anything to anyone who’s got ready cash.

Firtash got rich from his close relationship with Gazprom, but gas may now prove to be his undoing, if allegations aired by Ukraine’s security service are upheld in court (if you are reading that document via Google Translate and find it confusing, it may be helpful to know that “блакитне паливо”/“blue fuel” means “natural gas”). According to the agency, Firtash embezzled gas worth almost $500 million from the state energy company.

• “Effectively we are talking about the embezzlement of money from ordinary Ukrainians who paid their utility bills,” its statement said.

Group DF, Firtash’s company, “firmly and categorically” denies the accusations, but it is interesting to look at what it was doing with its money during this period. In the summer of 2019, it was partly funding Rudi Giuliani’s travel and living expenses while the lawyer traversed the globe looking for information useful to Donald Trump. Everyone involved says the relationship between Firtash and Giuliani was “an inadvertent error” (after all, who among us hasn’t accidentally found themselves on the hook for $36,000 in private jet fees for the U.S. president’s lawyer?), and nothing has been proven.

However, the statement from Ukraine’s security service does raise the intriguing prospect of the embezzlement of huge sums in Ukraine leading to the Trump White House. Perhaps it’s not just Britain that’s willing to take money from anyone.

GOLDEN PASSPORTS

Troubling news from people who invested in Cyprus and/or Malta to obtain citizenship, since it appears the two EU islands have been quietly canceling the citizenships-by-investment of dozens of Russians and Belarusians over the last year or so. In February, Moritz Körner, a liberal member of the European Parliament from Germany, tabled a written question to the European Commission about sanctions violations, asking how many sanctioned people possessed these so-called golden passports.

Unusually, the written answer — which came earlier this month — actually volunteered information beyond what he requested and informed him that Cyprus had canceled the citizenship of 43 individuals, and Malta had done so for another two, one of whom is designated on the EU sanctions list and the other in the U.S.

The whole point of purchasing citizenship is that it gives you the same rights as someone who gains it in the usual way, but this news does rather suggest that economic citizenship is limited, and purchased passports can be canceled long after they have been awarded.

This follows the suggestion by U.K. Security Minister Tom Tugendhat that Britain could consider scrapping visa-free entry for citizens of any country with a golden passport program, which would also remove one of the programs’ major plus points. These passports tend to be used as “super visas” for wealthy citizens of poor countries who wish to visit rich ones, and if they lose their travel privileges as well as their irrevocable nature, they will lose much of their appeal. Bad news for oligarchs, bad news for the kind of countries that sell passports, but perhaps not such a big deal for the rest of us.

WHAT I’M READING

I’ve been reading “The Hunger Games” to my nine-year-old and had forgotten how very absorbing it is. Last night, we started on the second book in the trilogy and — after he went to bed — I thought I’d read an extra chapter or two. This was a bad idea as, when I next looked up, it was 1 a.m. and I’d finished it. I am not feeling very bright today, so, if this newsletter has been more than usually incoherent, please blame Katniss Everdeen. It’s all her fault.

The post Confiscated oligarch property fails to cover damage to Ukraine appeared first on Coda Story.

Thanks to a friend for forwarding me an email sent from South Dakota’s Division of Banking to the state’s trust companies after the $1.5 million fine imposed on Kingdom Trust by FinCEN (about which I wrote last week). It sets out a long list of actions that all state-chartered trust companies must now perform: identify high-risk “customers and business lines,” evaluate if trust companies have the procedures and personnel to comply with financial regulations, check whether they have been filing an adequate number of Suspicious Activity Reports, identify occasions when a bank has closed accounts held by the trust company and describe why that happened, check up on any business relationship with third parties that refer customers to them.

An initial assessment must be completed within 30 days, then remedial actions must be finished within 90 days, as well as various other bits/bobs, which are all very good/necessary, while also being too little/late.

I now look forward to statements from the state’s Division of Agriculture advising South Dakotan horse owners on the correct mechanism for closing stable doors and any remedial action to be taken on occasions when the horse has already bolted. If it’s following the lead from the Division of Banking, however, it won’t worry itself too much with attempting to recover any runaway horses. There is no mention in the statement of follow-up investigative work to prosecute dishonest clients who have put illicit funds into the state’s trust structures, to confiscate any illicit funds that are found or indeed to investigate any dishonest trust providers.

Of course, thanks to the delights of South Dakota’s trust legislation, were any of the trusts to be found to have been created fraudulently, any creditors would need to bring a case at a criminal standard of proof (unlike in many other states) and to do so within two years. There is potentially very rich irony in South Dakota’s desire to attract trust business and consequent campaign to pass more generous trust legislation, preventing the state from cleaning up that same trust business. Though that does rely on the state actually wanting to clean up the trust business, which isn’t a given.

SIXTH TIME’S A CHARM

Many years ago, when I was studying history at university, I wrote an essay about criminal justice policy in early modern England, which was almost certainly as boring as it sounds. My tutor managed to remain awake long enough, however, to take issue with my argument that ever-stricter laws imposing the death penalty for minor crimes against property meant the government took these crimes seriously. “But, Oliver, if they’d solved the problem, why did they keep needing to pass laws? And, if they failed for decades to solve the problem, how could you say they’re taking it seriously?” Hmmm, good points.

It was, as they say, a teachable moment.

Anyway, I don’t want you to think that I’m comparing the European Union’s approach to money laundering to the fact that — by the 18th century — a starving English person could be hanged for catching a rabbit. However, it does seem to me that some EU officials are hoping that we’ll accept their production of anti-money laundering directives as a substitute for actually stopping money laundering. And I also think that we need to guard against the mistake my 19-year-old self made and not assume that this regular production of anti-money laundering directives means that European countries are actually taking the problem seriously. Because they’re not. If they were, just one directive would have done the job.

Anyway, the broad parameters of the sixth directive (6AMLD) were agreed two and half years ago to widespread indifference, building on the “successes” of 1AMLD (1991, criminalized money laundering), 2AMLD (2001, expanded the list of “predicate offenses”’), 3AMLD (2005, addressed terrorist financing), 4AMLD (2015, did something about “designated non-financial businesses and professions”) and 5AMLD (2018, required the publication of company ownership information). This was all plain sailing, until late last year when — as regular readers of this newsletter will remember — the European Court of Justice ruled on a case from Luxembourg and decided that a rich person’s right to hide their wealth was of greater import than the right of the rest of us to know how they hid it. That destroyed a central element of 5AMLD, thus giving 6AMLD greater import than it had previously assumed, since it now not only has to restore the ability of journalists, investigators and others to find out who owns companies registered in the EU but also has to do all the other stuff it was already intended to do.

Members of the European Parliament have voted in favor of tougher measures. And some of these measures are potentially transformative, including the creation of an EU-wide Anti-Money Laundering Authority with a registry of offshore companies owning property in the EU.

However, this being the EU, that is only the beginning of the matter, since the measures have to be agreed with the EU Council and Commission too.

• “The European Parliament has made a full suite of progressive amendments to ensure that civil society, media, academia and foreign competent authorities do not encounter barriers when seeking ownership information for anonymous companies created across the EU, regardless of where they are based. And they did so while fully respecting the CJEU ruling. Now, we look to you to match the Parliament’s ambition and unequivocally support the right of investigative journalists, activists and academics – around the world – to access the information freely and without undue restrictions,” said an open letter to the European Commission and to the governments of member states from a very impressive list of academics, campaigners and others last week.

Negotiations will go on deep into the fall. And even then, that won’t be the end of things, since legislation only makes a difference if it’s enforced.

It is perfectly possible for an EU member state to have maintained an open corporate registry (Latvia has, for example) despite the Court of Justice ruling. It just requires a bit of political will and legal cleverness. However, it is also perfectly possible for an EU member state that lacks such political will to have hidden behind the same court ruling, waved its hands in the air and declared that there’s nothing it can do. Cyprus has decided that from now on, only banks or other similar organizations that submit a “solemn declaration” can access ownership information and that any information so gathered can only be used for the purposes of making compliance checks on current and prospective clients. Lawyers warn it could be perjury to misrepresent the purpose of your search if — for example — you’re a journalist or researcher trying to work out who exactly owns a Cypriot company that has won a cushy state contract somewhere and who pretends to be someone else in order to do so.

In short, it’s not enough to pass an anti-money laundering directive, whether it’s the sixth or 16th, it also has to be enforced properly.

Funnily enough, the same thing was true for legislation protecting property in early modern England. The Parliament kept on creating new capital offenses (by 1815, there were more than 200 different crimes bearing the death penalty, including going out at night with your face blackened), but the enforcement agencies of the time (juries in the law courts) refused to enforce them. Fewer people were hanged under this so-called “bloody code” than previously, and judges would go to extreme lengths to find reasons not to sentence people to death. Then as now, it was all about the battle between political will and political won’t.

RUSSIAN OIL

So why does it matter that we know who owns companies? Let’s take the case of Gatik Ship Management. Its website says almost nothing, but it has — over 18 months — accumulated a fleet of oil tankers worth $1.6 billion and shipped vast amounts of crude oil from Russia to India, becoming one of the largest shipping companies in the world. And no one has any idea who owns it, or, rather, someone does but they’re not saying.

A connection to the Russian oil company Rosneft is certainly suggestive.

• “In a 2016 article in Russian Pioneer magazine on his love of jazz, Sechin waxed lyrical about one of his favorite bands, the “magnificent” Cuban son orchestra, the Buena Vista Social Club. Whether by coincidence or by design, one of the vessels in Gatik’s fleet is called the Buena Vista. The name of its registered owner in the Marshall Islands: Social Club Inc,” notes the Financial Times in its article about Gatik.

But getting beyond such hints and suggestions is extremely hard. Each Gatik ship is owned by a company in the Marshall Islands, which does not reveal who owns its corporations. That makes it difficult to know if they are compliant with Western sanctions that prevent insurance companies from covering cargoes that breach the price cap on Russian crude. The continuing trade is helping raise money for the Russian budget and keeping its war effort afloat (although it is not perhaps a very good long term strategy, as this analysis makes clear).

Global Witness did a great job exposing the bonkers nature of the situation. A real ship carries real oil through the English Channel. If it goes wrong, the pollution will destroy a real ocean environment. And, once refined in India, the Russian crude returns to the West in the form of gasoline, diesel or other products. All hidden behind shell companies.

• “Recently, Oleg Ustenko, an economic advisor to President Zelenskyy, told a reporter, ‘I had a friend in New York in the 1990s who complained cockroaches would get into his apartment through any available hole — that’s what Russia is doing with its energy,’” the Global Witness report said.

There are quite a lot of people that think I’m a bit hardline in my approach to company ownership information. As far as I’m concerned, if society limits your liability, society has a right to know who you are. But there are others who say that wealthy people risk being kidnapped or extorted from or otherwise targeted if they have to publicize what they own.

If you’re on that side of the fence, then I think it’s worth asking why your concern about one hypothetical person being kidnapped thanks to a non-anonymous company outweighs the entirely concrete reality of Russia funding a war of aggression that has already killed thousands of people on the back of an anonymous company.

WHAT I’M LISTENING TO

I’m sure many of you already listen to the BBC podcast “More or Less,” which you can find both on Radio 4 and on the World Service. Both versions delve into the statistics in the news with wit and passion, though this week’s edition on U.S. life expectancy was unexpectedly harrowing. A few years ago, I wrote a book about Russia’s demographic crisis, which is driven by the combination of a low birth rate and high mortality, particularly among young men.

I was struck by similarities in the story I told back then and the developing U.S. situation, where young men die early thanks to violence and overdoses. In Russia, there was marked inequality in the figures. People with higher educational qualifications lived as long as people in Western Europe, whereas people without qualifications had the life expectancy equivalent to that of sub-Saharan Africans. Life expectancy in Hawaii is around the same as that in Sweden, but Mississippi is akin to Tajikistan. That surely deserves more discussion.

Another excellent BBC podcast is “The Lazarus Heist,” which delves into North Korea’s clandestine activities in cyberspace. It’s very well made, and I recommend it. On the subject of murky online matters, this piece from Wired on suspect hackers working for Russia’s foreign intelligence service is excellent as well.

The post From South Dakota to the high seas, the world gets less transparent appeared first on Coda Story.

The last 15 years or so have witnessed a gradual migration of money out of traditional tax havens — Switzerland, the Bahamas, etc. — and into the United States, thanks to the difficulty of opening anonymous bank accounts these days. The short explanation for this is that the U.S. imposed rules on other countries, then refused to impose the same rules on itself (which is all part of a general, low-level hypocrisy in anti-money laundering policy from bigger countries, which smaller countries are furious about). The long version you can read in this article I wrote a while ago.

People who campaign against tax dodging, kleptocracy and financial crime have been concerned about this for a while, and it is notable that the Tax Justice Network now puts the U.S. in first place in its Financial Secrecy Index — way, way, way ahead of Switzerland and Singapore, which are tied in second.

Much of the attraction of the United States as a wealth haven for rich foreigners has been the trusts on offer in states like South Dakota, which can now provide a level of protection and secrecy unrivaled in any of the places we traditionally think of as tax havens. Since there are no state taxes on wealth, and no statute of perpetuities, money placed in trust in South Dakota can stay there forever, compounding indefinitely, without anyone else knowing who benefits from it. As of the end of last year, assets worth $607.5 billion had been placed with the state’s trust companies, up from $500.6 billion a year earlier and from just $57.5 billion in 2009.

South Dakota itself has a population of less than 900,000 people and little ability to monitor or regulate the wealth pouring into its trust companies’ coffers. Its division of banking only checks its trust companies every three years and — anti-corruption activists warn — that’s not good enough.

But other people respond that you shouldn’t judge the U.S. by the same standards as traditional tax havens because of its rigorous enforcement mechanisms. Yes, a lot of money has flowed into South Dakota, Nevada, Alaska, Delaware, Wyoming and the others, but that money is overseen by experienced professionals and regulated by the Department of Justice. So, don’t worry, it’s all good. We’re not talking 1980s Florida here.

So, about that.

• “Kingdom Trust had virtually no process to identify and report suspicious transactions, resulting in it processing over $4 billion in international wires with essentially no controls,” said FinCEN’s Acting Director Himamauli Das, shortly after fining South Dakota-headquartered Kingdom Trust $1.5 million. “This enforcement action is an important statement that we will not tolerate trust companies with weak compliance programs that fail to identify and report suspicious activities, particularly with respect to high-risk customers whose businesses pose an elevated risk of money laundering.”

The details of this case are extraordinary and worth reading in full. From 2014, thanks to advice from an unnamed consulting group, Kingdom Trust began relationships with “foreign securities and investment firms” that were struggling to open bank accounts in the U.S., which should have been reason enough to be suspicious before the real suspicions began.

Among these firms were a “Uruguayan money services business,” which moved cash around for its customers, a Nevis-registered “tourism services” company, a British Virgin Islands-registered company directed by two Argentinians, which sent large payments to Miami-based companies purporting to be in the mobile phone business, and a Panamanian holding company with a U.K.-based subsidiary registered at a service address, which specialized in “logistics in general.” Those four examples are not so much waving red flags as they are entirely dressed in red flags while sitting in a red flag factory, based in a town called Red Flag. And that was just the start of it.

After a financial institution closed some of Kingdom Trust’s accounts over fears of money laundering, it hired auditors to check its processes. The auditors raised concerns over these “high-risk customers,” but Kingdom Trust made no meaningful changes as a result.

All financial institutions are obliged to report suspicious transactions to the Financial Intelligence Unit in their country (in the case of the U.S., that is FinCEN), but Kingdom Trust failed to do this on hundreds of occasions. Which was hardly surprising, since it only had one employee overseeing thousands of transactions who had other tasks to do as well and who was in any case not provided with the information necessary to raise the kind of red flags that might have provoked a Suspicious Transaction Report.

• “The red flags included: customer requests for anonymity, customer attempts to open an account without identification, and an account opened with a nominal balance that subsequently increased rapidly and significantly. It would not be reasonably possible for a Kingdom Trust employee to identify those red flags given the quantity of information contained in the daily transaction reports.”

Two things struck me about this case. Firstly, it was remarkably reminiscent of examples I heard about last week when chatting to a detective who worked on Operation Greenback, the first major money laundering investigation brought in the United States, all the way back in 1980. Financial institutions — in those days, banks — were simply ignoring the Bank Secrecy Act provisions designed to monitor suspicious transactions and moving huge sums, which is just what Kingdom Trust was doing. Money laundering investigators were then, and are now, totally reliant on compliance from financial institutions for the information they need. It is worrying how little has changed.

Secondly, it was very instructive about the nature of South Dakota’s trust industry. This is an industry that deprives other jurisdictions, both in the United States and elsewhere, of the ability to tax financial assets by shielding them behind its legislation. It also hides illicit transactions behind a shield of almost-complete anonymity. The justification for this — in South Dakota — is that it creates jobs and prosperity.

So, about that.

Kingdom Trust may well be headquartered in Sioux Falls, but the majority of its 80 employees are in Kentucky. In fact, although there are 116 trust companies in South Dakota, they only employ 482 people in the state, which means each employee — on average — is the steward of more than a billion dollars. Obviously, those are high-paying jobs and mean a lot to the people who have them. However, I wonder if — at a federal level — it might not be time to ask whether this particular game is or is not worth the candle.

• “The world’s wealthy already operate by a different set of rules and laws. But allowing the full scale carveout and manipulation of U.S. state trust law to serve their interests should not be one of them,” says this forceful op-ed from January.

In South Dakota, they argue that the Kingdom Trust case shows that state regulators are doing their jobs.

• “It’s kind of like, if you’re following the speed limit and seeing someone else who was violating the speed limit get pulled over. It’s reinforcing for you that you’re doing the right thing,” said Tom Simmons, a member of the state governor’s trust fund task force. “I think it shows that those who are not doing what they’re required to do — in terms of complying with all the expectations that are imposed on them — are going to get in trouble… That’s exactly what everyone in the trust industry wants to see.”

I would counter that, however, by pointing out that this was brought by federal regulators, under federal regulations. I would have more faith in the ability of South Dakota to police its swollen trust industry if it were to bring a case of its own.

MORE MONEY NEEDED

FinCEN’s acting director, Das, gave evidence last week to the House Financial Services Committee on progress toward implementing the Corporate Transparency Act, as did Brian Nelson, the under-secretary of the Treasury Department.

There was much interest in their presentations, including details about how sanctions have degraded the Russian war machine, how laborious it is to discover who owns a shell company, how criminals are using crypto to launder wealth and more.

But I was most struck by Das’ comments on how limited FinCEN’s resources are, compared to the scale of the task that Congress has set for it. FinCEN regulates 290,000 different entities within the financial industry but has just 300 full-time employees, of whom only a small number work in the enforcement department.

• “This results in FinCEN having by far the smallest ratio of employees to regulated entities compared to all the Federal Banking Agencies and Federal Functional Regulators. Additionally, all of FinCEN’s enforcement and compliance professionals are based at FinCEN’s offices in the Washington, D.C. area, despite their nationwide scope of responsibility, whereas the Office of the Comptroller of the Currency, for example, has more than 30 regional offices and the Federal Reserve system has 12 regional banks,” Das said.

If we want FinCEN to keep regulating the dollar-denominated financial system, to backstop trust regulation in places like South Dakota and to implement the rules of the new beneficial ownership registry, it needs more people.

• “Guarding the U.S. financial system against abuse by transnational and domestic criminals should not be a political issue. FinCEN needs the funding necessary to achieve its critical national security goals, and to end the era of U.S. complicity in global financial crime,” said Ian Gary, the director general of the FACT coalition.

RIGA

Last week, I went to Riga to attend a conference organized to mark Latvia’s compliance with international anti-money laundering standards. This is a big thing, in that — not too long ago — Latvia’s financial system was basically a sewer pumping dirty money into the West. According to one estimate quoted in 2016, fully 1% of all dollar transactions were going through Riga, which meant Latvian regulators’ failure to check where the money came from was a problem for all of us. How times change. This conference was opened by Prime Minister Krisjanis Karins urging banks to be “more proactive in lending to our economy,” and I heard multiple complaints during coffee breaks about banks being excessively risk averse. Being too scrupulous is not something Latvian bankers would previously have been accused of.

A discussion I found particularly interesting was one about how to ensure that refugees have full access to the financial system (something of particular relevance to Latvia, which has welcomed 50,000 Ukrainians, having previously had no refugee population to speak of). Refugees are uniquely ill suited to providing the kinds of documents required for passing anti-money laundering compliance. They often lack a permanent address, not to mention the multiple documents required to prove their source of funds, and they often automatically raise concerns, thanks to arriving from a high-risk country.

One banker told me about writing to a Ukrainian to request information on the source of her funds, only to be told that her husband was on the frontline, hard to contact and — not surprisingly — unwilling to use his rare periods of rest to gather documentation for what must have seemed an insane and officious process. In March, the European Banking Association attempted to bring order to the situation by publishing some new guidelines, including in relation to not-for-profit organizations.

My main conclusion from reading them, however, is how incredibly complex they are. It’s easy to make a sweeping statement — “refugees must have banking services” — but when you try to distill that into guidelines applicable to any compliance officer in any bank faced by any displaced person anywhere, you end up with a stew of acronyms comprehensible only to people with the highest-possible boredom threshold and which are of — I would suggest — very limited actual utility.

That means individual banks still have a high degree of leeway when it comes to choosing their own risk appetite, which is what got Latvia into all that trouble in the first place.

Incidentally: what do the EU and South Dakota have in common? Just like with Kingdom Trust, no one in Europe was willing to get serious with Latvian banks like ABLV until FinCEN told them to. Just imagine what it could do if it had more than 300 employees. And just imagine how great things would be if more than one country had a regulator willing to, you know, regulate.

WHAT I’VE BEEN READING

My computer broke on my way to Latvia, which was annoying and which forced me to delve into my Kindle for things I hadn’t read yet. So imagine my delight when I realized that, by some strange oversight, I had never read “Neverwhere” by Neil Gaiman. It was great and — if only for a little while — consoled me for the fact that I couldn’t get any work done.

The post State trusts sling the US into first place for financial crimes appeared first on Coda Story.

Anyone who has seen “Lethal Weapon 2” will be aware of the tremendous power of diplomatic status when it comes to getting away with crime. Had Danny Glover not been prepared to unilaterally revoke Joss Ackland’s diplomatic immunity by shooting him in the head from 50 yards away while Mel Gibson lay on the ground and grimaced, the apartheid-era South African baddy would have got away scot-free.

And if one crooked diplomat at a U.S.-based consulate could single-handedly create a crime wave in Los Angeles back in 1989, imagine what a whole bank could do these days. Which was why the U.S. Department of Justice acted to stop it from happening.

• “Halkbank, a Turkish financial institution whose majority shareholder is the government of Turkey, willfully engaged in deceptive activities designed to evade U.S. sanctions against Iran,” said FBI Assistant Director-in-Charge William F. Sweeney Jr. back in 2019. “Halkbank illegally facilitated the illicit transfer of billions of dollars to benefit Iran, and for far too long the bank and its leaders willfully deceived the United States to shield their actions from scrutiny. That deception ends today. The FBI will aggressively pursue those who intentionally violate U.S. sanctions laws and attempt to undercut our national security.”

The allegations leveled by the Department of Justice were pretty extraordinary. For years, high-ranking officials in Ankara allegedly conspired with their counterparts in Iran to move billions of dollars’ worth of oil revenue via Halkbank, which retained its correspondent banking relationships in New York, despite stringent U.S. sanctions barring Iranians from accessing dollars.

Considering that a senior Halkbank manager was jailed in New York in 2018 for being involved in precisely these crimes (and another participant had pleaded guilty), it looked like a pretty open and shut case. And considering what’s happened to other financial institutions — yes, BNP Paribas faced a penalty of almost $9 billion — found to have helped Iranians and others access international markets when the American government didn’t want them to, it looked like it could prove expensive for Halkbank.

But not so fast. The Turkish government clearly contains people who are almost as enthusiastic about second-rate, late-eighties buddy cop comedies as I am. It responded to the allegations with all the hammy outrage of Joss Ackland (if not, one hopes, with his dreadful South African accent), pointing out that as a sovereign-owned institution, Halkbank was immune from prosecution.

Fortunately, the U.S. Supreme Court still retains the ability to make some sensible decisions because it was not swayed by this ludicrous defense. Last week, it rejected Halbank’s immunity claim and sent the case back to a lower court, though I’d like to pause to pick out a detail from the case.

• “Halkbank argues that U.S. criminal proceedings against instrumentalities of foreign states would negatively affect national security and foreign policy,” the court ruling notes.

I may not approve of what Halkbank allegedly did, but I am prepared to acknowledge the glorious chutzpah of the bank’s argument that its own immunity from being prosecuted for violating U.S. sanctions was an important contributor to U.S. national security.

The Supreme Court’s decision is a very important one. If state-owned institutions were able to merrily shift as many dollars as they wanted through the American banking system no matter what sanctions were imposed by the federal government simply by virtue of being state-owned, it would make a fairly substantial mockery of U.S. government policy, not to mention basic logic.

• “Adopting the sweeping logic of Petitioner’s arguments falsely equating Halkbank with Türkiye would eliminate the jurisdictional basis for prosecutions of foreign state ‘agents’ and ‘entities’ for fraud, corruption, money laundering, economic espionage, cybercrime, and other serious offenses,” noted this amicus brief submitted to the court.

This tale may not be over, however. Turkish President Recep Tayyip Erdogan has previously said the case is politically motivated and was only brought thanks to the influence of the Gulen network, and has consistently demanded that it be dropped. When Donald Trump was president, his administration appears to have agreed with the Turkish government and intervened at many levels to try to stop prosecutors from persisting with the case against Halkbank. Perhaps (and this is the most benign explanation), the Trump administration was conscious of the need to keep Erdogan onside to allow U.S. forces access to Syria.

With the Ukraine war, and Turkey’s pivotal role as the gatekeeper to the Black Sea, Erdogan now has — if anything — even more influence with Western decision-makers than he did before, and we can be sure he’ll be using it to protect Halkbank. Although Joe Biden doesn’t appear to share Trump’s man-crush on Erdogan, there are realpolitik interests at stake as well as financial ones, on top of the complicated influence of Turkish domestic politics and an upcoming election campaign, all of which give Erdogan even more reason than normal to be obstreperous.

• “In striking contrast to his approach to Russia, Saudi Arabia, and the UAE, Erdogan tends to be far more combative and belligerent with his Western allies. Standing up to them is popular at home. He therefore never misses an opportunity to rail against them,” noted Foreign Affairs earlier this year. “In contrast to his vulnerability on domestic economic issues, foreign policy offers Erdogan various ways to reinforce his leadership at home.”
  

One benefit (for Erdogan’s government) of Erdogan’s transactional foreign policy has been a large influx of wealthy Russians keen to buy themselves a second passport, thus gaining access to a world otherwise largely closed to them. Demand for Turkish travel documents is healthy, even though Erdogan’s government increased the minimum investment necessary to obtain citizenship to $400,000 from $250,000 last year. Applicants are also coming from places even more worrying than Russia, says one rather alarming story in the London Times.

• “If you want to buy property in Turkey, no one asks the source of money,” said one Istanbul lawyer. “It’s a bit scary: you could have got this money through a terrorist organization, you could be a drug dealer. The information the documents ask for is very limited.”
  
• “I’ve had North Koreans come to me with their Vanuatu passports saying they want to become Turkish,” said another lawyer. “It’s crazy.”

I know the Department of Justice’s hard-pressed investigators have a lot on their plates right now, and may not fancy picking another fight with Ankara, but could they take a look at this too please?

The passport price is denominated in dollars, after all. Or perhaps the Europeans could look into who exactly is paying for the right to live next to the EU?

Of course, the real high rollers buy themselves a diplomatic passport. But that is a story for another time, though I did describe what I still consider to be the most entertaining example of this practice in “Moneyland” should you crave more of this kind of stuff (although, it’s only fair to warn you in advance that I couldn’t resist the Lethal Weapon 2 references when writing about it then, either).

ORTHODOX OLIGARCH

It’s more bad news for Cypriot professionals, who just can’t seem to stop accidentally doing business with sanctioned oligarchs. I would say it’s a mistake anyone could have made, but actually I’m not sure that it is.

• “Russian investor-turned-propagandist Konstantin Malofeyev was able to shuffle tens of millions of dollars worth of debt between his shell companies with the help of a Cypriot corporate services provider despite being sanctioned by the European Union and the U.S, leaked documents show,” according to this story from the OCCRP.

Malofeyev is a Russian nationalist tycoon often called the “Orthodox oligarch.” He is currently facing an attempt by U.S. prosecutors to confiscate $5 million he once invested in a Texas bank, because nothing says you love your country more than investing in its major geopolitical rival via a Seychelles shell company. According to U.S. prosecutors, he tried to extract the money from the country after he was sanctioned for his alleged role in supporting the annexation of Crimea in 2014. Malofeyev says he did nothing wrong and claims he can’t get any justice in the United States. So instead, he’s going to challenge the U.S. government’s actions in a court in Moscow, which is certainly innovative from a legal point of view.

• “I, as a citizen of Russia, a state with a thousand-year history of justice, will not file a lawsuit in an American court,” Malofeyev said, according to Reuters. “Our laws are designed to protect our rights and I will apply to the competent authorities where I live.”

I used to work for Reuters, and we were always scrupulously neutral in how we wrote stories. We used to get a lot of stick for it, particularly for the policy of never calling anyone a terrorist. But that didn’t mean we didn’t have our own opinions about what we were reporting. I can’t help feeling therefore that there was a little bit of a wink from the Reuters journalist when he wrote the words: “It was not clear whether a ruling in Malofeyev’s favor in a Russian court would have any impact on the U.S. case.” It would take more chutzpah than even Halkbank’s lawyers possess to argue that it would, and I fear Mr. Malofeyev may struggle to get what he considers to be justice.

Perhaps he should have thought about this before he decided to invest his money in the United States and thus take advantage of its rule of law, openness to foreign investment and dynamic economy. Still, it’s always easy to be wise with hindsight.

Another man who may be questioning his past decisions is the former Fox News producer who helped Malofeyev set up his TV channel and who now faces federal charges of his own. In a Turkish connection, Malofeyev’s channel is called Tsargrad, which is what the Russians once called Istanbul.

WHAT I’M READING

It’s a bit of a short newsletter this week, I’m afraid, since I’m on the road and don’t have as much time as I’d like. But your loss is my gain, since all the travel has given me the chance to read my advance copy of Tom Parfitt’s “High Caucasus: A Mountain Quest in Russia’s Haunted Hinterland.” Parfitt is one of the most insightful Moscow-based journalists of my generation, with a determination to get behind the headlines, to get mud on his feet and fresh air in his lungs. Like me, he became obsessed with the delights and difficulties of the Caucasus mountains. This book is the story of a walk from the Black Sea to the Caspian Sea, which he undertook in 2008, like a modern-day Patrick Leigh Fermor (but mercifully without the purple prose). It’s very good.

The post A Turkish bank defies US law and demands diplomatic immunity appeared first on Coda Story.

Tobin Auber, a friend of mine who lived in Saint Petersburg for decades (but who’s now stuck in Turkey in a complex, immigration-related “bureaucratic limbo,” which the British government should sort out), has been writing a memoir about his times in the Russian film industry. It’s in Russian but — if you speak the language — it takes you back to the chaotic but marvelous country that I moved to in 1999, before Vladimir Putin became president.

Of course, it’s possible to romanticize things, and of course, 1990s Russia was very, very far from perfect, but it’s heartbreaking to contrast the hope so many people felt back then with the hateful reality of what Putin is currently inflicting on Ukrainians and on anyone else who he finds inconvenient. So I send boundless respect and solidarity to Evan Gershkovich, the journalist accused of espionage for writing the truth, and to Vladimir Kara-Murza, the opposition activist jailed (“de facto for life”) for speaking the truth.

• “I am not losing hope,” Gershkovich wrote to his parents in a brief letter. “I read. I exercise. And I am trying to write.”
  
• “The day will come when the darkness over our country will evaporate,” said Kara-Murza in a speech at his show trial. “When black will be called black and white will be called white; when it will be officially recognized that two times two is still four; when a war will be called a war, and a usurper a usurper; and when those who fostered and unleashed this war will be recognized as criminals, rather than those who tried to stop it.”

We must not become inured to such barbarity. Everyone involved in either process should have assets in every Western country frozen and should be barred from travel to the West until the two men are released. Although that won’t make much difference to the judge who jailed Kara-Murza, who previously was part of the persecution of Sergei Magnitsky and was sanctioned as a result.

But, to end on a more hopeful note, here’s a shout-out to one Russian who’s still living like it’s a free country and whose protest at least one academic is linking to growing anger against conscription among ordinary Russians. Let’s hope this is the beginning of a movement in Russia to stop this war, and let’s hope Westerners retain their focus and resolve to do so, too.

ENABLERS

Talking of sanctions, the U.S. and the U.K. have expanded their lists to try to prevent oligarchs from slipping assets out of their reach. Two Cypriot gentlemen — Demetris Ioannides and Christodoulos Vassiliades — will find their business activities catastrophically curtailed from now on, thanks to their alleged role in crafting the offshore structures used by Roman Abramovich and Alisher Usmanov, although they deny doing anything wrong.

The British government has also designated several close family members of oligarchs, including Gulnara Kerimova, the daughter of Suleyman Kerimov, who must under no circumstances be confused with Gulnara Karimova, the daughter of the former president of Uzbekistan. Although such confusion is not unjustified, because, as if the world was specifically trying to make things difficult, Karimova is spelled Kerimova in Turkish.

I am happy to see Washington and London coordinating their actions and maintaining their determination to undermine the business interests of the Russian elite. On that note, it is good that Britain has reversed its ludicrous decision to give oligarchs automatic access to frozen money if they want to sue journalists (although the situation remains suboptimal) and changed the rules about how permission will be granted in future.

However, I wish there was an equal urgency in efforts to close the loopholes that allowed suspicious wealth to flow into our economies in the first place because the best time to solve a problem is before it’s even happened. If we keep kleptocratic wealth out of our financial systems, that will help prevent new Putins from coming to power, will prevent them or their allies from enriching themselves at the expense of the rest of us and thus prevent suffering.

So I sincerely hope that the U.S. administration is listening to the concerns being expressed about the Corporate Transparency Act. This piece of legislation has the potential to radically improve the battle against financial crime worldwide, but only if implemented properly, which is looking increasingly doubtful. The regulations being put in place would force law enforcement agencies to obtain a court order to access company ownership information but would also make the reporting of that information essentially optional, which would severely limit its utility.

• “These aren’t flashy issues. The technical details of a draft Treasury rulemaking rarely make the front page. But these mistakes risk undermining the most important anti-money laundering law of the past 20 years,” noted U.S. Senator Sheldon Whitehouse.
  
• “Not getting this right undermines anti-corruption efforts not just in the U.S. but has far-reaching impacts on the global fight against corruption,” Lakshmi Kumar, the policy director of Global Financial Integrity, told the International Consortium of International Journalists.

The British government meanwhile has published its new economic crime strategy, which is full of ideas to tackle the deadly triumvirate of money laundering, fraud and kleptocracy, and promises new personnel, new resources, new IT, as well as new regulations. It’s a good strategy, written by serious people, and I sincerely hope it does help turn the tide.

• “The Plan’s outcomes-focused approach reflects a shared focus on directing public-private resource towards agreed priorities, to maximize collective, ‘whole-system’ impact against the threat,” said the Home Secretary and Chancellor of the Exchequer — who are respectively responsible for policing and finance — in a jargon-heavy introduction.

As I read the careful way that the strategy lays out how the government, the financial sector, lawyers, accountants, investigators, regulators and others will coordinate their efforts against a problem that spreads throughout society and the economy, I couldn’t help being reminded of something. Where else was it, I wondered, where I had learned about the need for a joined-up, whole-of-system approach to this urgent threat? Ah yes, it was in the proceedings of a conference on financial crime held all the way back in 1994, addressed by leading figures in U.S. and U.K. law enforcement, which I read last week as part of the research for a new book I’m writing.

• “There is no simple, easy answer to what is, in fact, a very complex problem. The worst thing, it would seem to me, is to view this as something cops do. ‘We’re going to solve this. We’re to put two FBI agents in Moscow and that will fix that. We’ll give FinCEN a new computer. That will solve it.’ It will not even barely address it. What has to really be done is that we as a matter of fundamental national policy have to address this across the board. That we need to engage the people who really know something about money, and that is the financial community, as allies,” said Stanley Morris, the then-director of FinCEN, the U.S. financial intelligence unit.

If you changed “FBI” and “FinCEN” for their British equivalents, that could have slotted pretty seamlessly into a launch event for the new U.K. strategy, which is a depressing thought. We’ve known what to do about economic crime for at least three decades, and yet we have consistently failed to actually do it. The strategy we really need is one that helps us to implement an economic crime strategy, but that I fear is still beyond us.

• “Organized crime is entirely motivated by profit. It follows that unfettered or easier mobility of persons and property will always be exploited by criminals to gain access to profit wherever it may be found. Untraceable, untaxable income in the hands of criminals is the new lingua franca of organized crime. The link between Medellin and Moscow is the $100 bill,” said David Veness, the assistant commissioner of London’s Metropolitan Police, at that same conference back in 1994.

I think that’s a good quote and just wanted to share it. It’s even more true now than it was then.

FLAGS

Anonymous accounts on Twitter get a bad press. But I am enormously grateful to whoever is behind @baasKlass for sharing a remarkable story from Lloyd’s List about how “flags of convenience” are being used to disguise the trade in Russian and Venezuelan oil.

In case you haven’t come across the term “flags of convenience” before, they refer to the practice of ship owners registering their vessels in a country other than their own to take advantage of more lenient regulations. According to one origin story, they first came about when floating saloons chose to fly the Panamanian flag so Americans could buy booze during the Prohibition, and they have since become a huge business for Panama, Liberia, the Marshall Islands, the U.K.’s tax havens and various other places. These registries allow ship owners to underpay their crews, and avoid environmental regulations, and disguise their ownership, and that’s just the start of it.

Beneath the larger registries is a layer of smaller ones, which are even more completely opaque. Previously, countries like Palau, Comoros and Saint Kitts and Nevis have provided flags for ships about to be broken up, so workers in the shipbreaking yards of Bangladesh and India can be treated badly and paid almost nothing, and now they’ve diversified into helping the Russians fund the murder of Ukrainians.

• “The nexus between the St Kitts & Nevis flag and the mysterious Dubai-based shipowner’s billion-dollar fleet that has been built from scratch in just 14 months remains opaque and obscure. This relationship is one of many that exist within the largely unregulated underbelly of privatized flags that often lack resources to provide proper regulatory or government scrutiny. Such traits are to the detriment of safety and technical oversight in international shipping,” notes the article, which is by Michelle Wiese Bockmann.

Sometimes, I think I’ve got the hang of things, and then I open a link like this one and realize there are labyrinths within labyrinths, which lead to more labyrinths. Funnily enough, I once visited the St. Kitts and Nevis ship registry, which was not in the Caribbean at all, but in a drab office building in the English town of Romford, though it appears to have since moved half an hour up the road to Grays.

St. Kitts is not alone in this regard: the Marshall Islands registry is headquartered just outside Washington, D.C., the Liberian registry is in Dulles, Virginia. The Panamanian registry, the world’s biggest, has an address in Panama, but was for most of its history run from an office in New York. Palau’s registry is headquartered in Greece and Comoros’ is in Dubai. It all serves as yet another reminder that the offshore world is completely artificial and only exists because we tolerate it.

If we want to stop tankers shipping Russian crude in defiance of sanctions, we should at the very least stop these registries from operating in our countries.

WHAT I’VE BEEN READING

I’ve been on holiday for two weeks and read a lot of thrillers, because that’s what I do on holiday, of which I think the best were “The Alice Network” by Kate Quinn and “Restless” by William Boyd. If anyone’s got any recommendations for more books of this nature, please send them my way! If you don’t listen to the Freakonomics podcast, then I highly recommend this episode on Delaware, which was fun, in the sense that it’s fun to have your pocket picked by a thief who really knows what he’s doing.

The post Western countries struggle to curtail Russian economic activity appeared first on Coda Story.

Many of you will have at some stage sat on the shore and watched a yacht slip by, its reflection dappling on the azure waves, the sun glinting from its portholes, the distant susurration of merry revelers drifting over the water, and envied the fortunate souls able to afford such a delightful possession. If you recognise yourself in that description, be of good cheer, for this could be your moment. The alarmingly-named superyacht Alfa Nero (was Caligula already taken?) is up for sale and — chances are — the price will be low, relatively speaking.

• “ALFA NERO is a unique masterpiece, built to inspire. The stunning Alberto Pinto design features an innovative infinity pool that transforms into a dancefloor, creating ample deck areas with state-of-the-art party set-up and warm interiors.” Apparently the pool/dance floor also triples up as a helicopter pad, should you need one.

Alfa Nero’s charmed existence ended this time last year, when it was named by the U.S. Department of Treasury as the property of the fertilizer tycoon Andrei Guryev, who’s been sanctioned in the U.S. and the U.K., along with his son, also called Andrei. Alfa Nero has since dropped off the Cayman Islands shipping registry and been more or less abandoned in Falmouth Harbour, Antigua, the bills unpaid, the pool unsplashed in, the dance floor untrodden. Its 41-strong crew has gradually dispersed, and now there are just five people left on board, and they only have enough money left for a fortnight’s worth of food.

The Guryevs have previously denied owning the Alfa Nero. Its ownership documents name the British Virgin Islands-registered company Flying Dutchman Overseas Limited and Guernsey’s Opus Private Limited, but the Antiguan authorities have got fed up with not hearing from them and have declared the yacht to be abandoned.

• “It has lost its registration and its sea-worthiness and it has been here in Antigua and Barbuda accumulating waste water, other waste and debts…the resources raised will be placed in the Consolidated Fund – the Treasury – and the government will meet some of the obligations that were incurred and it will also be provided with a new name and the flag of Antigua and Barbuda so it can sail out of port,” said the Prime Minister’s Chief of Staff Lionel Hurst.

So, should you decide to make an offer, how much should you expect to pay? The superyacht Axioma sold for a mere $37.5 million at auction (to settle a debt to JPMorgan) in Gibraltar last year, despite being valued at twice that, which is why this may be your best chance to snap up a superyacht for a song.

• “Nero would be lucky to land between $60 and $80 million. If history (read: Axioma’s case) has taught us anything, it is that no matter how gorgeous a pleasure craft is, when a sanctioned owner’s possession is auctioned, it would be considered lucky to amass even half its actual value,” it says here. Hurry up though, bids of $48-50 million have already been received.

But don’t get your hopes up too high. This is Antigua and Barbuda after all, where politics is rarely straightforward. The political parties differ little (if at all) when it comes to the policies they implement when in government, but that does not stop them throwing all kinds of accusations at each other. The government changed the law specifically to make sure there would be no legal blowback from the auction, but that has alarmed Jamale Pringle, leader of the United Progressive Party. He led a walkout by opposition MPs in protest against the government’s decision to auction Alfa Nero, claiming it could undermine the country’s yachting industry. Following that, a Muscovite called Alexander Mavrodi emailed the UPP claiming to be the true owner of the yacht, and no one is quite sure what to do with that information.

Antiguan officials are hoping to hurry things along, however. Partly this is because they want their harbor back and partly because superyachts lose value fast when they’re just sitting around. Amadea, which is currently at a mooring in San Diego, is costing the U.S. government millions of dollars a year and will continue to do so unless a judge allows her to be sold off.

Scheherazade is costing the Italian authorities similar sums, and Meridian A is causing similar problems in Spain.

• “I think most oligarchs would happily say, ‘Well I can’t use it, I am not paying for it, let’s release it,’” said James Jaffa of the specialist legal firm Jaffa & Co. “Do they pay for the upkeep of a boat which they have no control over, certainly no enjoyment, or just leave it and see what happens?”
  
• “It’s been a public-relations success for Western governments, but legally and, perversely, financially, it’s a total mess,” Bloomberg noted.

So if you decide to enter the bidding for Alfa Nero, you’ll need to make a choice, therefore: Do you think these other yachts will come on the market as well? Because if they do, you could get an even better bargain. Be careful about hidden costs, however. The running expenses for the Scheherazade alone are said to be $70 million a year.

CANADA WASHES WHITER

The American satirist P. J. O’Rourke once said: “A Canadian is indistinguishable from a normal boring white person, except that he’s dressed to go outdoors.” (Apologies if I’ve got that wrong; it’s been about 30 years since I read the book containing that particular bit of snark, but I’m pretty sure I’ve got the gist of it.) I am not endorsing that description, and I personally think the Canadians are super interesting, but I do think it speaks to the fact that Canada has a rather staid image, which has helped its professionals launder money without anyone really noticing. We expect financial crime in Miami and Moscow, but we surely don’t expect it in Montreal.

Even when the colossal inflow of hot money into Vancouver from China was exposed by the Cullen Commission’s final report, it didn’t do much to alter everyone’s image of Canadians as being basically delightfully dull. The Toronto Star attempted to alert the world to what was happening by coining the term “snow-washing,” the process by which Canadians take dirty money and make it as “pure as the driven snow of the great white north.” But did any of us really pay attention?

So, in light of all that, one and a half cheers for the Canadian government’s introduction of a bill that would provide transparency of ownership of corporations established under the Canada Business Corporations Act. Murky company ownership is one of the biggest boons to financial criminals because it allows them to move money around undetected, and opening up corporate registries is very important. This bill, if passed, could well strike a blow at snow-washing and help expose a key nexus in the criminal economy.

• “Our government continues to take all necessary steps to prevent illicit activities, improve Canadians’ trust in corporate institutions and ensure a well-functioning marketplace. Now, more than ever, greater corporate transparency and accountability are needed, and this is why we are committed to implementing a beneficial ownership registry that will strengthen the safety and economic interests of Canadians,” said Francois-Philippe Champagne, the minister of innovation, science and industry and a member of parliament from the ruling Liberal Party. Incidentally, the New Democratic Party, which is propping up Justin Trudeau’s government with a confidence and supply deal, is steadfastly claiming all the credit.
  
• “We applaud Minister Champagne for introducing critical legislation as a publicly accessible and searchable registry can potentially deter billions of dollars of illicit funds from entering Canada through federal companies each year,” said Sasha Caldera, the beneficial ownership campaign manager at Publish What You Pay Canada.

What’s not to like about that, I hear you ask? Why’s grumpy old Oliver misquoting people being mean about the Canadians and only giving one and a half cheers for this excellent piece of proposed legislation? I will be very happy to be proved wrong, but I fear that this may be one of those devil/details situations that so often arise whenever we’re talking about corporate transparency.

• “The federal registry will be implemented in a way that makes it scalable to include the information held by provinces and territories that decide to participate,” the government press release states.

That decide to participate? Oh dear.

Canada is, of course, a federal state, and its provinces have powers to set their own rules around corporate registries. Quebec has made progress, but other provinces have not, which makes the federal changes a bit academic, rather as if Delaware or Nevada could just opt out of the new U.S. Corporate Transparency Act. The situation is really not that great at present.

LES PETITS HOMMES BLEUS

In last week’s newsletter, I wrote about smurfs and wondered whether, in French, the equivalent word “schtroumpf” has the same double meaning as it has in English — both a little blue person and a foot soldier in a sophisticated money laundering operation. Thanks to Clement who wrote in to tell me that it does!

• Schtroumpfage is defined as “blanchiment par fractionnement des dépôts.”

But, wait, just as this newsletter was going to press, Youri wrote in to add a bit of complexity to an answer that did look surprisingly straightforward, considering we’re talking about the sacred French language. It’s true that the Financial Action Task Force used the term in its mutual evaluation of France last year and the United Nations has done so too (though, it got the spelling wrong in this document, I’m shocked to notice), but Youri says that looks absurd, and he prefers to use the English term, even when speaking French.

• “I think the French being more formal in work relationships would tend to use ‘smurfing’ (which would add to their credibility) rather than ‘schtroumpfage’ (which could risk undermining it),” he wrote.

Personally, I wouldn’t blame any proud French speaker who chose to shift the blame for the silliness of the term onto the Anglophone world. It must be practically irresistible.

When it comes to silly money laundering expressions, however, we are nowhere near the bottom of the barrel, so what about cuckoo smurfing? For those who don’t know, this ludicrous expression describes a technique whereby criminal proceeds are laundered via the bank accounts of people who don’t realize they’re being asked to move illicit money. As such, it’s a metaphor piled on top of another metaphor: Firstly, there is the money laundering foot soldier, who’s akin to one of the little blue people, and secondly, there is the recipient welcoming disguised cash into her account, who is (supposedly) like a songbird unknowingly raising another bird’s chick as her own. Pleasingly, in French — or in Quebecois, at any rate, since this example comes from Scotia Bank — a cuckoo smurf engages in “schtroumpfage du coucou.”

Flushed with enthusiasm for multilingual money laundering terminology, I decided to check whether smurf has the same double meaning in other European languages. I didn’t get very far though, mainly because I got distracted by an improbable news report from last year about a Colombian football star who was arrested in Italy in connection with a cocaine smuggling scheme. He was very short, so his nickname was Pitufo, which means smurf in Spanish. And as if that wasn’t improbable enough, read on.

So what is smurf in German? Schlumpf. And what was the name of the Swiss president in 2012, when Switzerland was forced to negotiate the U.S. deal that pushed the notoriously-dodgy Swiss banks out of the secrecy business at last? Eveline Widmer-Schlumpf. I don’t know if that counts as nominative determinism exactly but, really, what are the odds?

WHAT I’VE BEEN WATCHING

The BBC has been screening a drama called “The Gold” based on the true story of the gigantic heist at the Brink’s Mat warehouse near Heathrow airport in 1983, which I didn’t get round to finishing. However, it also made a parallel documentary about the case, which I thought was more interesting, particularly for the light it shed on the lack of rules against money laundering back in the 1980s.

A banker in a small English town was handing out hundreds of thousands of pounds worth of brand new banknotes to a gold dealer just weeks after the biggest gold theft in British history but had no need to report it to the authorities. Then a car was stopped on its way to Switzerland, with a vast quantity of the same banknotes onboard, but that was fine too. When the police cracked the conspiracy, one of the conspirators just hung out on a beach in Spain, which had no extradition treaty with the U.K.

There was no need for clever techniques like smurfing in those days, and it’s no wonder most of the gold was never found.

The post How to buy a superyacht on the cheap appeared first on Coda Story.

This is going to be a short newsletter this week because I am in London running from meeting to meeting, including this one, which is dedicated to the oversight of Ukraine’s reconstruction efforts. It is obviously crucial for the success of Ukraine’s rebuilding program and for its continued legitimacy in the eyes of both Ukrainians and others that the money sent to pay for it is not stolen. If even a small amount of money does end up buying houses in London instead of rebuilding them in Mariupol, international donors and Ukrainian citizens alike will get fed up quickly.

Perhaps of even greater significance, a well-run reconstruction program would not only rebuild the bridges, roads, factories and houses that Vladimir Putin’s war has destroyed but could also help build the solid and accountable institutions necessary for a robust democracy, which oligarchs have undermined in the past.

• “There is a widespread view that the savvy and strategic use of reconstruction funds can set Ukraine on this path, but that without strong oversight in the use of these funds, international financial support risks reversing the country’s progress in fighting corruption,” is the view of this pithy analysis from Transparency International’s Helpdesk.

There are differences of opinion (of course) on how to make that happen, with an inevitable tension between democratic legitimacy at home and international supervision abroad. Balancing those two competing demands is easier to call for than to actually implement. There has been some progress in strengthening Ukraine’s anti-corruption institutions over the past year, so international donors will hopefully be willing to trust officials in Kyiv a bit more than they might have done in the past. But the recent competition for a new head of Ukraine’s National Anti-Corruption Bureau, which returned a candidate with whom the country’s leading anti-corruption activists were unhappy, is a reminder that oversight remains necessary. There is a colossal amount of money at stake, as well as the future of a civilization, and stuff like that, so the pressure is on.

On a slightly more frivolous note, I’m giving a solid 8 out of 10 to whoever came up with the name “Supervising and Monitoring Ukraine’s Reconstruction Funds” for the civil society oversight program and the acronym that results from it.

• “The SMURF project aims to empower Ukraine’s ‘second line of defense’ – civil society and investigative journalists – to gather the expertise and tools that will enable it to monitor the proper allocation of funds and discourage kleptocracy and corruption.”

As many of you may know, smurfing is a money laundering technique that involves breaking large amounts of cash down into smaller quantities that can pass undetected through automated compliance procedures. I once asked a police source why it was called smurfing, and he said it was because it involved an army of people doing repetitive tasks like the little blue mushroom-dwellers in the comic strip/cartoon. I admit that at the time I was dubious. It was an etymology that seemed too convenient (rather like the idea that “money laundering” derives from mobsters running cash through laundry businesses to disguise its origin), but I’ve been reading congressional committee transcripts from the 1980s over the past week, and it looks like my source was right.

• “For years, launderers attempted to evade the money trail created by this reporting requirement by using a technique called structuring or “smurfing.” Structuring works as follows: launderers divide large amounts of cash into smaller portions and deposit the latter into separate accounts in amounts of less than $10,000, or into the same account on different business days. The Anti-Drug Abuse Act of 1986 modified the law to make it clear that smurfing was a felony,” it says here from all the way back in 1989.

Smurfing appears to have originated with the Florida-based Colombian Alberto Barrera Duran who broke down cash bundles into totals of less than $10,000 to avoid the cash disclosure requirements of the Banking Secrecy Act and had the smaller quantities taken to incurious tellers in regional banks where they were exchanged for cashier’s checks. He thus gained the nickname Papa Smurf after the cartoon character who — while still being blue and small — has red trousers and a beard and who keeps the other smurfs in line. Smurfs themselves use the verb “to smurf” to mean pretty much anything and, in the original French, where the name for a smurf is a schtroumpf, “schtroumpfer” has the same universal meaning. So I’m wondering if schtroumpfer does the same job in French money laundering parlance as “to smurf” does in English. Any French speakers among my readership who are willing to let me know? Whether it does or not, it would be 20 out of 10 for anyone who could come up with a parallel French-language oversight program for the disbursal of international funds to Ukraine with the acronym SCHTROUMPF.

RACE TO THE TOP

It was good to see that the U.K.’s newly-updated strategic review has a solid commitment to tackle the misuse of the City of London by oligarchs.

• “We will go further in stopping the exploitation of the U.K.’s financial systems and economic openness for domestic and international criminality and corruption… and make it harder for organized criminals, kleptocrats and terrorists to use opaque entities to abuse the U.K.’s financial system,” it says.

I think but am not sure that this is the first time we’ve seen the word “kleptocrats” in an official U.K. strategy document. And the anti-oligarch mood is now fully bipartisan, judging by what David Lammy, who speaks on foreign affairs for the opposition Labour Party, had to say in a column in the Economist. He was vocal in his support for a Transatlantic Anti-Corruption Council, which has been backed by U.S. senators like Sheldon Whitehouse and Jeanne Shaheen and which was first proposed by Ben Judah, who is admirably well connected on both sides of the Atlantic and deserves a lot of credit for getting this idea onto politicians’ desks.

• “In Labour’s first year in office, we will invite all the foreign and interior ministers from “five eyes” (an intelligence pact between America, Britain, Canada, Australia and New Zealand) and the EU to London to develop a common strategy and platform to co-ordinate how best to (combat) money-laundering, influence-buying and economic crime. With such help we will clean up the London laundromat and defeat cronyism. The exercise will be a perfect example of where foreign and domestic politics meet,” Lammy writes.

Wouldn’t it be amazing if anti-corruption efforts gained the kind of race to the top momentum that the campaign to arm Ukraine has had? I recognize that nothing has come of this yet, and that cheering the competing rhetorical commitments of the two main political parties to tackling oligarchs is a bit like cheering a contest for who can more ostentatiously sign up to a stop smoking program when no one has even discarded their cigarettes yet, but still, it’s better than them puffing away on the couch.

BELARUS

For most of the post-Soviet period, the authorities in Belarus played a clever game of balancing between Moscow and the West, showing a bit of leg here, flashing an ankle there and winning concessions from both. That approach has clearly run its course, and Belarus is now as much a pariah as Russia. It was interesting that the first legal challenge to the U.K.’s post-Brexit sanctions routine should have come from a Belarussian company.

The judgment is pretty dystopian, in that it gives insights into the capabilities of face-tracking software produced by the sanctioned company, which can scan 200,000 faces a second from real-time CCTV footage, including that of then-fugitive activist Nikolai Dedka.

• “With the use of this information, presumably read in conjunction with bus timetables or similar information, the security forces were able to work out Mr Dedka’s hiding place and his likely movements. When he was arrested, gas was sprayed into his face.”

But probably of greater significance is the fact that a judge accepted broader sources of evidence than would be admissible in a criminal or civil proceeding, which will be a comfort to government ministers worried about the more meaningful sanctions they’ve imposed on Russian oligarchs and any challenges brought against them in court.

• “The role of the court in reviewing sanctions decisions is limited – in particular to whether the decision was irrational, plus the court will grant ministers considerable room for maneuver as experts on government policy,” noted Spotlight on Corruption.

I understand that the hearings in the challenge brought by Eugene Shvidler are due to start imminently, and they will undoubtedly prove a sterner test for the sanctions regime.

WAR CRIMES

I am still digesting the news that Vladimir Putin has been indicted for war crimes. I spent years talking to people from Russia’s North Caucasus whose relatives were tortured, murdered or disappeared and had no prospects for justice from Putin’s government (and I would recommend you check out the work of the European Human Rights Advocacy Centre for examples of how many, and how appalling, these cases were), and it is extremely disorientating — if undeniably very welcome — to see a court finally go after the man responsible for all that.

I am sure this will not be the last indictment that the International Criminal Court brings against a Russian official, and most of them will undoubtedly and rightly be for the horrific crimes against humanity committed in Ukraine. However, the Rome Statute also lays out at least one oligarch-adjacent offense by declaring that “extensive destruction and appropriation of property, not justified by military necessity and carried out unlawfully and wantonly” is listed among the recognized war crimes.

Alexei Navalny’s Anti-Corruption Foundation published an expose at the end of last year about how a deputy defense minister got Very Rich from the reconstruction of Mariupol, which was written up by Meduza here. That certainly looks like it deserves some of the words in the Rome Statute, and hopefully will attract some attention from the prosecutors, as does the illegal grain trade. Russian officials of course insist that the reconstruction is entirely above board, and perhaps it would be if it weren’t being conducted by an occupying army in an illegally-annexed region of an illegally-invaded sovereign state.

WHAT I’M READING

Half of my brain is currently living in the 1970s and 1980s and seeking to understand the mechanisms and approaches of that time toward money laundering in the United States, which is why I’ve been delving into congressional transcripts. On that note, I really enjoyed “The Year of Dangerous Days: Riots, Refugees and Cocaine in Miami 1980” by Nicholas Griffin, which is detailed and gripping in the best tradition of American journalism.

Incidentally, after finishing the book, I discovered to my delight that he was the same Nicholas Griffin who wrote “Caucasus: A Journey to the Land Between Christianity and Islam,” which I read enthusiastically during that past life when I obsessed about the peoples of southern Russia.

The post Reconstruction without graft will determine Ukraine’s future appeared first on Coda Story.

If you haven’t yet read Politico’s oral history of the Western response to Vladimir Putin’s aggression against Ukraine, then you should do so ASAP. It is a remarkable piece of work that gives extraordinary insights into U.S. decision-making in the run-up to an unprecedented crisis. I think it works very well in conjunction with the BBC Series “Putin vs the West,” which has a longer x-axis but similarly excellent access. A key theme was an awareness that the Kremlin won the information war in 2014 and a determination to prevent that happening again. That informed far more of the West’s response than anybody (by which I mean, in the Trumpian sense, “me”) realized — up to, and including, who got sanctioned.

• “Look, in 2014, we didn’t win the narrative within Russia — so this time, let’s seize the physical assets of the kleptocracy, the yachts, the fancy cars and luxury apartments — not so much because we thought the owners of those assets would influence Putin, but it was intended to be a demonstration to the Russian people that they’d been getting ripped off for a very long time,” said Daleep Singh, the U.S. National Security Council’s deputy national security adviser for international economics.

A year ago, when I was talking about sanctions, it didn’t occur to me that policymakers were using them not just to influence the Kremlin or to degrade Russia’s abilities — which were the two dominant explanations at the time — but also as a tool in the global influence campaign aiming to paint Russia as a kleptocracy, not as a rival civilization. It’s clever. Although, having said that, it is perhaps cleverer for a country like the U.S., where courts don’t oversee sanctions, than it is for the European nations, where sanctioned individuals can challenge their designation. Certainly, if I was an oligarch’s lawyer, I’d now be arguing that my client had been targeted unfairly in a propaganda battle, rather than because of anything he’d done. And I do wonder if, perhaps, officials in the U.K. or EU aren’t now slightly cursing Singh for saying the silent bit out loud.

These days, however, the buzzword is “circumvention” and how to stop Russia from rerouting its trade and finances via countries like Turkey, the United Arab Emirates, Georgia and Kazakhstan, opposition to which is coordinated by the multilateral Russian Elites, Proxies and Oligarchs Task Force. Before I move on, and I appreciate they were in a hurry this time last year and perhaps couldn’t get quite as creative as they might have liked, but surely they could have come up with a better acronym than REPO? Not least because “repo” is already a thing in financial markets. It’s taken me about 90 seconds to come up with CORRUPT — Countering Oligarchs’ and Russian Rulers’ Unearned Property Taskforce — and I don’t have any experience at this. Considering the depth of acronym talent in U.S. institutions alone, REPO shows a disappointing lack of ambition, IMO.

Anyway, last week REPO (shudder) produced a report detailing various techniques being used by wealthy Russians, which is an interesting insight into the ingenuity of their various enablers, as well as a tribute to the work being put in to stymie them. Some of it is pretty unremarkable, in that it looks just like a continuation of the previous methods used by oligarchs to hide their financial transactions, only more so, but other bits are new because they are about the smuggling of physical objects rather than just about money.

• “One method Russian end-users use is to list a freight forwarding business, often located in third party jurisdictions, as the final destination of a good, when in fact those goods will be further shipped to their intended final destination in Russia. The entities facilitating these transactions may often appear to have no affiliation with the transaction and may be utilizing a known trans-shipment point,” the document notes.

For “a known trans-shipment point,” we can read “Dubai.” And for an insight into why Dubai is allowing Russians to use its services even though its key Western allies are asking it not to, I found this Financial Times article on Swiss banks interesting. Switzerland has been inching away from its traditional policy of neutrality for a while, but having values can be expensive.

• “We were not just surprised but shocked that Switzerland abandoned its neutral status,” said one board director who oversees Asian operations at a Swiss bank. “I have statistical evidence that literally hundreds of clients that were looking to open accounts are now not.”

Dubai has spent decades building an economy on its willingness to accept money from literally anyone, just like the Swiss used to do, and won’t want to give that up unless forced to. Lawyers are getting concerned though that this could get messy, not least because — unlike with previous rounds of sanctions against Russia — Western countries do not yet seem to be losing interest in the Ukraine crisis.

• “Last year demonstrated the EU’s and our partners’ resolve to stand up for what is right, notwithstanding the cost. But it also showed that, in some regards, we need to structurally adjust,” said David O’Sullivan, the newly-appointed EU special envoy on sanctions. “The swift adoption of the 10 packages of sanctions has been a huge achievement. My role now is to ensure that they are effectively implemented and not circumvented via third countries.”

He is attempting to make sure all EU countries work together, though it is not yet clear whether European states as a whole will back the Dutch proposal of having a centralized EU sanctions enforcement headquarters.

• “We currently have too little capacity in the EU to analyze, coordinate, and promote new sanctions — that is why I would like us to set up a sanctions headquarters in Brussels, aimed at circumvention,” Dutch Foreign Minister Wopke Hoekstra said. “This would be a place where member states can pool information and resources on effectiveness and evasion, where we do much more to fight circumvention.”

That does, of course, presuppose that all member states actually want to fight circumvention, which is not a given. Hoekstra’s idea has backing from the more hawkish EU states but, notably, not from Hungary or from other Putinophile countries, who may be rather envying Dubai right now. As the now-Dubai-based Russian pop star Daria Zoteyeva/Instasamka put it when asked by the New York Times why she hadn’t spoken out about the war in Ukraine. “It’s to avoid letting go of my audience, and to make money,” she said. “Because it’s a lot of money. It’s a lot of money.” (Incidentally, if her lyrics are any guide, Western brands are yet to lose popularity thanks to Western opposition to Russian foreign policy.)

Before I change the subject, I liked this comment piece by Timothy Ash about how to make Putin pay for his own war. Oligarchs have enjoyed the rule of law in the West for decades, which is of course why they’ve been so keen to stash their wealth here, and it’s interesting to see someone making the case for us to treat that access as a privilege, not a right.

• “The argument around the defense of private property rights and rule of law seems ridiculous. There can be no doubt at all that Russia is stealing and destroying private property in Ukraine. It is therefore liable to pay recompense. Why should Western taxpayers foot the bill for Russian actions?”

When you put it like that, it’s a good question.

GOOGOOSHA

My old friend Tom Mayne has produced an absolute banger of a report on Uzbekistan’s Gulnara Karimova, which — among other things — reminds us that kleptocracy is not solely a Russia problem. There was always something more than a bit absurd about Karimova, with her duets with Gerard Depardieu, etc., which obscured the sheer nastiness of her and the regime under which she made so much money. But Mayne has a history when it comes to delving beneath the surface of Central Asian power networks, and it takes more than a cosmetics label to distract him.

• “As the United Kingdom and other countries have played host to Karimova’s schemes through the provision of financial services, it is beholden on these nations to act to reduce the likelihood that such a massive corruption scheme can take place again in the future,” the report concludes.

The report details many of the usual grisly manifestations of kleptocracy — companies in the British Virgin and Cayman Islands, U.K. luxury real estate, Swiss banks, sluggish/non-existent enforcement, compliant enablers — all laid out in remarkable detail. Karimova may not have posed a strategic threat to any Western governments, but she helped to spread a colossal quantity of misery among ordinary Uzbeks as well as to enrich some truly foul people both at home and abroad. As such, we should take the time to learn from her example at least as much as we do from the Russians who claim to be challenging the West (but who at the same time like to benefit from its financial services).

What Karimova’s example teaches us is that, while we talk about sanctions and the need to limit Russian oligarchs’ access to their wealth, it’s important to remember that the world would be a far better place if they’d never been able to steal it in the first place. This report’s recommendations would make very useful reading for the world’s policymakers, though it’s depressing that some of them seem like they should be too obvious to need stating.

• “Existing laws should be implemented and enforced,” is one such example.

While writing this, I found myself idly wondering what Depardieu was up to these days, since I’d last thought about him a decade ago when he was given Russian citizenship personally by Putin. Even at a decade’s remove, that whole episode seems odd. I’m trying to imagine Emmanuel Macron personally popping up to give a French passport to a Russian has-been, but I still can’t see it. So, I googled Depardieu and, hey presto, what did I find?

• “Even if I still have French nationality and a French passport, I am now a Russian and Dubai citizen,” he said last year.

But of course he is! Is there anything Dubai won’t do for money? Answers on a postcard, but only if it’s got a picture of the Burj Khalifa on it.

A CONFESSION

I have a confession to make: I really don’t understand Moldova. It’s one of only three former republics of the USSR that I’ve not spent time in (the others are Belarus and Turkmenistan, though I did once spend an anxious five minutes in the latter after an Uzbek bus I was on wandered across the border, but that’s a story for another time), and I am nervous about trying to interpret it, lest I do so through a Russian or Ukrainian prism.

This is annoying, because turbulent things are happening: potential coups, expensive root vegetables but cheap soft fruit, clumsy signaling from the Kremlin, assertive signaling from the White House, bans for football fans and more.

So, please, can you suggest the best people to follow for Moldova analysis? Thank you!

WHAT I’VE BEEN READING

My latest book project is taking me to slightly unexpected places and recently that has been Texas. So, toward the end of last week, I read bits of “Big Wonderful Thing” by Stephen Harrigan and “Lone Star” by T. R. Fehrenbach, as well as “The Populist Moment” by Lawrence Goodwyn. I can’t wait to go and have a look for myself.

The post The U.S. devised sanctions to influence ordinary Russians appeared first on Coda Story.

Billionaire Eugene Shvidler has earned a place in the record books as the first person ever (!) to challenge U.K. sanctions in court. This isn’t admittedly as big a deal as it sounds, since Britain only gained the ability to sanction people unilaterally when it left the European Union, but still, I’m sure it’s a comfort to him to know that — win or lose — he’ll always have his small place in history.

Shvidler is represented by Peters & Peters, a London law firm, and I should be careful what I say here because the last time I had formal dealings with them (they threatened legal action against a film I made, which mentioned one of their clients), it was so stressful that I lost four kilos in a week. Still, like them or loathe them, I can’t deny that they’re good at their jobs: We never did get to screen the film, which is a shame because it was really interesting.

Shvidler was added to the sanctions list in March last year, with the official reason being that he had close relations with Roman Abramovich, who in turn was — according to the U.K. — “involved in obtaining a benefit from or supporting the Government of Russia.” Shvidler’s lawyers say the British government made “significant errors” in assessing their client’s relationship with Abramovich, and this is what will be examined by a judge.

Although sanctions sound like a law enforcement tool, they are in reality a political instrument imposed when a government minister decides they should be, if he or she “has reasonable grounds to suspect the person is involved in, or connected to, an activity set out in the regulations for a particular sanctions regime.” The regime in turn is laid out by a particular piece of legislation. In this case, the sanctions are intended to support Ukraine’s sovereignty and to urge Russia to de-escalate.

When the U.K.’s sanctions law was passed in early 2022, it still looked possible that Russia would refrain from invading Ukraine or that threatening to cost oligarchs money would persuade them to put pressure on Vladimir Putin to show restraint. The justification for maintaining the sanctions is now more about degrading Russia’s war machine, and it looks like Shvidler’s lawyer may be picking up on this shift in emphasis in his appeal hearing.

• “He has spoken out against the war and he cannot conceivably influence Russian government actions in Ukraine, which is meant to be the purpose of these sanctions,” Michael O’Kane of Peters & Peters told the Guardian.

According to comments made by a spokesman to OCCRP’s Russian Asset Tracker, Shvidler has not been to Russia since 2007 and has no ties to the Kremlin. (He does have a very nice-looking yacht.)

It will be interesting to see if Shvidler is the first of many to challenge his designation or an outlier, but either way it will be an important test case for the post-Brexit legislation, which obliges the government to revoke any designation if the conditions for it are not met. Judges have not had their say on this yet, but they do have a history of being markedly less enthusiastic about agencies making expansive use of new powers than those agencies are about using them (for example, Unexplained Wealth Orders).

In the EU, however, presumably in a sign of the relatively greater significance of EU sanctions on oligarchs’ ability to function, there are dozens of challenges against the designation process and the resulting legal pile-up has reached epic proportions. In fact, challenges to previous designations from previous rounds of sanctions are now bumping into more recent ones (Yanukovych, for example, is now rubbing shoulders with Mordashov and Melnichenko) in a manner that suggests that the courts are going to be busy for decades. Verily, being a sanctions lawyer is the 21st century’s gift that keeps on giving, not least because sanctions offices are having to expand in response, which involves them hiring ever more lawyers.

Staffing at the U.K.’s Office for Financial Sanctions Implementation has tripled over the last year, to around a hundred. The EU’s regulations are vast in scope, involving staff in every member state. I suspect that officials in Europe are slightly envious of their colleagues in the United States, however, since U.S. sanctions are not challengeable in court. Sanctioned individuals can write a petition to ask to be removed from the Office of Foreign Asset Control’s list, but the decision will be made by OFAC officers themselves.

Anyway, be that as it may, if EU history is any guide to the U.K. present, even if Shvidler wins, he may not be free of restrictions on his actions: European officials have consistently re-designated former Ukrainian officials even as those officials have won their court challenges against designation, sometimes many times over, and perhaps British officials will do the same.

ARE YOU COMPLIANT?

One of the reasons that politicians like sanctions so much is that they’re cheap. All a government has to do is to publish a list of all the people it thinks shouldn’t be welcome in its economy anymore, and it can leave the implementation to someone else. Private sector companies are obliged to comply with the government’s decision and — at their own expense — to conduct the necessary “due diligence” to make sure no one is sneaking in through a back door. You can see why politicians like it: There’s no cost to them, and the blame if it goes wrong falls on the bankers.

The downside, of course, is that financial firms’ compliance departments have ended up being an absolutely crucial element of the plan to squeeze Kremlin insiders out of the deep, rich and profitable markets of the West. So, how’s that going? Here are a couple of articles from the Financial Times which have caught my attention of late and which suggest that it’s not going well.

• “The bank’s official due diligence file on Roldugin contained only a printout of the website for the Mariinsky theater in St. Petersburg — where Roldugin was a conductor — and a single negative search result on Worldcheck, a compliance database.”
  
• “A sanctions-hit Russian warlord who has been accused of human rights abuses around the world was able to pass U.K. anti-money laundering checks by submitting a utility bill in the name of his 81-year-old mother.”

This reveals a problem at the core of what, for the lack of an alternative, I’ll refer to as our global anti-money laundering system. We are reliant on private companies to guard the gates of the financial system, and they in turn subcontract to other private companies for the information they use to make judgments on who they should admit. Those other private companies are trying to form a complete picture from incomplete fragments of information at a competitive price, and so we end up with printouts of theater websites or someone’s mum’s gas bill substituting for actual due diligence.

This is why proper transparency of ownership is so important. Instead of companies like Worldcheck attempting to assemble those fragments into a coherent whole, compliance officers should have reliable, easily accessible, government-verified information on who owns what available at the touch of a mouse button. Sadly, it looks like efforts to create a more transparent system in the United States are running aground.

• “State, local and tribal law enforcement — those on the front lines of the fight against fentanyl — will face a mountain of paperwork to access information that could be time-critical in saving American lives. U.S. banks legally required to identify and report suspicious transactions by cartels, terrorists and spies have also had their access severely restricted. As if that weren’t enough, trusted allies like the United Kingdom that readily share their registers with our law enforcement agents will also be blocked,” notes Nate Sibley in this analysis of the U.S. Department of Treasury’s rules for how the corporate registry will work.

This is another demonstration of a crucial principle in efforts to tackle financial crime, which is that politicians need to pay at least as much attention to how laws are interpreted and then implemented as they do to passing them in the first place. Otherwise, you end up with ever-more bureaucratic nonsense, ever-more expense and ever-more dirty cash.

And it’s not just people like Sibley who are concerned about the proposed system, which does indeed look remarkably non-transparent, considering it was created by a Corporate Transparency Act. As it stands, banks will have access to corporate registries for the purpose of establishing clients’ identities but then will not be allowed to use that same information for the purpose of complying with anti-money laundering rules. This creates the potentially bizarre outcome of bankers knowing that money is being laundered, but not being allowed to report it, not least since they’re not allowed to share information from the registry with people outside the United States.

• “The proposal creates a framework in which banks’ access to the Registry will be so limited that it will effectively be useless, resulting in a dual reporting regime for both banks and small businesses,” stated a letter to FinCEN signed by the American Bankers Association plus the bankers associations of every state in the union. “As conceived, the proposal is fatally flawed and should be withdrawn.”

And that’s just the start of the problem.

• “An even more dangerous threat to the anti-money laundering value of the statute comes from a seemingly innocuous place — the form that FinCEN has proposed to collect information from reporting entities. Within the 14 fields that reporting entities must report — for instance, their street address, or the name and license number of their true owner — they may mark in 11 of those that they are ‘unable to get the information.’ The draft form effectively renders the entire reporting regime under Corporate Transparency Act optional,” said FACT’s government affairs director Erica Hanichak.

I sincerely hope FinCEN is taking this on board, but I sincerely doubt that it is, because the story arc of officials-realizing-new-anti-money-laundering-measures-are-useless-then-crafting-new-ones has always taken at least a decade in the past, and why should anyone show any urgency now?

On the subject of FinCEN, I found this piece interesting about the way its officials attempt to balance the need to stop foreign banks from bringing dirty cash into the United States with the desire to avoid destabilizing the financial systems of fragile countries. FinCEN can, however, act against suspicious Russian institutions directly and without additional oversight, and in January acted against Bitzlato, a crypto exchange, so I hope it continues to do so in light of suggestions that U.S. officials are increasingly concerned about third countries facilitating sanctions-busting.

ACRONYMS

Last week, I asked rhetorically whether the elaborate names given to bills by American congresspeople help them to become law. And then, because this newsletter has the best readers of any newsletter anywhere, I got an answer in the form of this paper. Three forward-thinking academics surveyed a select group of Americans and concluded that a good acronym goes a long way.

• “In our degraded informational ecosystem, where a disturbing number of voters find themselves in a media echo-chamber, a constantly repeated acronym buffeted by evocative imagery might take on special power, swaying more voters across the political spectrum. It is disturbing to think that legislative success might turn on marketing rather than actual improvement. Yet, today’s deep partisan divide has brought an ever growing need to motivate core supporters. Tactical titles may be employed to help push a law over the top.”

So the conclusion is that this isn’t such a fun subject after all and appears to be as depressing as everything else. Sigh.

WHAT I’VE BEEN READING

I’m enjoying “Slouching Towards Utopia” by Brad DeLong, though I’m aware that everyone else has probably already read it. It’s engagingly written, which counts for a colossal amount for a book about economics, although it does feel like it’s currently taking an excessively long time to recount the story of hyperinflation in Germany, which I’ve definitely read enough times in the past.

By the way, in the unlikely event you feel you don’t get enough of me talking about why action against financial crime is important, here’s an interview I gave last week to the Silicon Curtain YouTube channel, which you can watch, if you are so minded.

The post Reliance on private companies jeopardize sanctions appeared first on Coda Story.

I used to be a keen photographer and would buy photography magazines for long train or plane journeys, until I realized that they basically only ever had one article — “How to Use Your Digital Camera” — which was repeated in different forms month after month. The magazines’ readership appeared to consist solely of people who had just bought a DSLR and wanted to know how it worked, and who, therefore, would only ever buy one issue, so the editor’s job consisted of endlessly coming up with new ways to write the same article. Working for one of those magazines must be one of the most soul-crushing forms of journalism in the world.

Anyway, writing this newsletter is nothing like that because you are an attentive and alert readership, always yearning for new oligarch-adjacent content. You therefore know already that I have a soft spot for the daft acronyms chosen by American legislators for their bills, because I regularly talk about it.

Which brings us to the Democracy Is Strengthened by Casting Light On Spending in Elections (DISCLOSE) Act, which is back in Congress for — I think — the 13th year in a row. Do legislators come up with the name first, then fit the words to it, or does it work the other way around? Is there one particularly gifted legislator who everyone else asks to do the acronym, like the clever kid at school? Or do they have an AI-enabled computer program? And more to the point, does having a catchy acronym help a bill become law? The fact that this particular piece of legislation has been failing to get passed every year since 2010, despite its great name, suggests that perhaps it doesn’t.

• “A toxic flood of dark money has given billionaires and special interests a powerful way to rig the system secretly in their favor, dark money even enabled these same interests to capture our Supreme Court,” said Senator Sheldon Whitehouse. “It’s time to pass the DISCLOSE Act to end the corrupting influence of dark-money spending and make government work better for the American people.”

It is indeed long past time. Incidentally, Whitehouse was in the U.K. last week, and I enjoyed meeting him at lunch.

• “The sad fact is that, if you do not have a super PAC or a history of making multi-million contributions, you cannot make much impact in Congress,” he said. For the record, I do not have a super PAC or a history of making significant contributions, which may help explain why nothing I want to happen ever happens (witness Wales’ dismal Six Nations campaign).

As I mentioned last week, I am slowly but surely making my way through Martin Wolf’s new book, in which he analyzes deeply what’s gone wrong in the political systems of major Western democracies in the last few decades. His thesis is that capitalism and democracy are mutually necessary for each other to function, since neither political freedom nor economic freedom can long exist without the other. However, the interests of the wealthy few and the not-wealthy many are essentially contradictory, so there is a constant dynamic tension at the heart of democratic capitalism, and the balance has gone out of whack of late.

• “It is impossible to sustain a universal suffrage democracy with a market economy if the former does not appear open to the influence — and the latter does not serve the interests — of the people at large. This, in turn, demands a political response rooted not in the destructive politics of identity, but of welfare for all citizens — that is, a commitment to economic opportunity and basic security for all,” he wrote in this piece in the Financial Times. “Only if trust is revived will the legitimacy of the system be protected against its predators, who are not only without, but also, alas, within.”

Increasing wealth inequality has led to increasing political inequality, with rich donors able to buy access to politicians, but weirdly that has gained only a fraction of the attention of the (far smaller volumes of) Russian money going into Western politics. In the U.K., concerns over foreign interference spurred the government to introduce the Foreign Influence Registration Scheme, which is disappointingly known as FIRS, because Britain has no tradition of fun political acronyms.

• “The new Foreign Influence Registration Scheme will make it harder – and riskier – to operate covertly in the U.K. at the behest of a foreign power. It will also increase openness and transparency around the scale of foreign influence in our political affairs and make it harder for our adversaries to undermine our democracy,” said Ken McCallum, head of MI5, when it was announced in October.

The bill is based on the US Foreign Agent Registration Act and an Australian equivalent, so perhaps the Brits thought it would be uncontroversial, but as soon as it was announced representatives of foreign companies started to complain about being bracketed with firms from unfriendly places like Russia. One businessman called it one of the “most bone-headed, dunder-headed, ill-thought-through pieces of legislation,” which is quite something considering the competition recently. And the scheme has since been amended to make clear this won’t impede journalists or others from doing legitimate work. There is still a lot of grumbling from representatives of EU countries, the U.S. and other British allies who don’t think this should apply to them at all, however.

Perhaps they’re right, but I can see why politicians want to err on the side of caution. The danger of getting it wrong is visible in the ongoing corruption scandal afflicting the European parliament, where countries like Qatar and Morocco — neither of which are exactly considered major geopolitical rivals to the EU, but which appear to have caused substantial mischief anyway — are accused of buying influence.

• “Prosecutors suspect Belgian MEP Marc Tarabella of ‘having taken certain positions in the European Parliament in favor of a third country in exchange for cash,’ according to the report on him. ‘A testimony against him puts forward that he may have been compensated several times for a total amount estimated to be from 120,000 euros to 140,000 euros.’”

Incidentally, I thought Whitehouse’s most interesting point at the lunch I attended was that Western countries need to get better at articulating what they are actually aiming to achieve. What’s the positive vision that unites us all? I always feel that it’s better to be in favor of something (which is why anti-austerity always seemed a bad brand) rather than to be defined as an opponent of something, so what’s the positive vision of the West? And, on that point, should this newsletter be called something more catchy? Maybe I need an acronym of my own. Oliver’s Lengthy, Informative, Great, Argumentative, Readable and Consistently Helpful to You (OLIGARCHY) newsletter? Hmmmmm, perhaps not, anyone know an acronym consultant?

RUSSIAN MONEY!

Few oligarch-related issues are more hotly discussed than what we should do with the Russian money that has been frozen in Western countries. Bill Browder, as you’d expect, has made a very strong case for seizing the wealth and giving it to Ukraine, for fighting Russia with banks as well as tanks, and many politicians agree with him. Canada has already started using new powers that allow it to seize sanctioned wealth.

• “Putin’s oligarchs are complicit in Russia’s illegal and barbaric invasion of Ukraine. Canada will not be a haven for their ill-gotten gains,” said Chrystia Freeland, the minister of finance (and author of a really good book on Russia’s 1990s privatization, which is definitely still worth reading). “It is just and appropriate for Russian assets to be used to help rebuild Ukraine.”

The United States has transferred forfeited Russian money to help the Ukrainians, and some U.K. politicians are demanding the same happens in London.

But how much wealth is there to share? Obviously, it’s not easy to put an exact dollar value on the houses and superyachts sanctioned in Western countries because selling them requires a buyer in a market depressed by the absence of, well, Russian oligarchs. Equally obviously, there won’t be enough money in the pot to rebuild Ukraine on its own: Criminals’ actions always cause more damage to their victims than they earn profit for the perpetrators.

But much of the money is in the form of Central Bank deposits, etc., and so we should have a pretty good idea of its volume — $300 billion is the estimate shared by the U.S. Treasury’s Russian Elites, Proxies and Oligarchs (REPO) task force. The EU estimate, incidentally, is 300 billion euros though I think they’re basically saying the same thing, although it’s odd that the U.S. estimate of frozen oligarch wealth is $30 billion, compared to the EU’s 19 billion euros (about $20 million).

John Cusack, a financial crime expert, has gone beyond the aggregated figures and attempted to add up the various estimates given by different countries, and it’s a more baffling picture than we’d like. France, for example, was last year reported to be holding Russian Central Bank assets worth 71 billion euros, but now is saying it has a total of just 23.7 billion euros.

• If the French figures are correct, it would seem unlikely that other Western countries though didn’t experience a similar reaction. Applying the same level of reduction seen in France across all Western Countries would reduce the amounts potentially frozen to just $112 billion or a reduction of $228 billion,” Cusack concludes.

This does seem important, and the lack of clear information about where these assets are is a bit alarming. More information please!

• “Providing greater transparency on the amounts frozen and the locations of Russian oligarchs’ frozen assets and Russian Central Bank assets would help clear up whether and how much of these assets are actually frozen and where in the West these assets are held, as well as then who gets to decide what happens to these assets and what laws apply,” Cusack said.

Incidentally, the U.S. Department of Justice has launched a civil case looking to confiscate $75 million worth of property belonging to Viktor Vekselberg, whom it accuses of sanctions violations. Thanks to Google street view you can gawk at properties one, two and three (in New York) from the comfort of your home, but you can’t gawk at numbers four, five and six, which are protected from such gauche scrutiny by virtue of being in “a very exclusive private community… often described as one of the best-kept secrets of Miami.” Perhaps Fisher Island just didn’t let the Google photographers disembark, but then it is the richest ZIP code in the United States, so I guess it can afford to.

UNEXPECTED SURPRISE

This week, Michael Gove, a British cabinet minister, just gave a speech about the future of the country, which included the following snippet.

• “A butler economy, which attracts international capital by serving it, through the provision of financial and business services, no-questions-asked property transactions and a bias towards rentiers can never be truly resilient,” he said.

Someone’s been reading my book. I wonder if he’ll do anything about it.

WHAT I’M READING

I just devoured “Trust” by Hernan Diaz in a couple of sittings, having bought it for my Kindle a while ago and forgotten all about it. Coming to it completely cold, I found its peculiar structure at first a bit off-putting but then increasingly sucked in. I’d recommend it.

The post US Congress makes a 13th attempt to reign in dark money appeared first on Coda Story.

It is now almost exactly a year since Russia launched its unjustified, vicious and — even judged on Vladimir Putin’s own terms — deeply counterproductive war on Ukraine. The most important conclusion anyone can draw from the last year is about how profoundly everyone underestimated the Ukrainians’ willingness to defend their nation. Yes, Russian leadership was bad, Russian plans were dreadful and Russian kit has proved unreliable, but Ukrainians have fought heroically and will be remembered by history as heroes.

The second most important conclusion is that the West has acted with greater resolve and unity than many of us anticipated. We had all — including, of course, Putin — become accustomed to the fact that, when forced to choose between their values and their revenue streams, Western politicians routinely prioritized the money. That has, for the most part, not happened, and those leaders deserve credit too.

But this newsletter is about oligarchy, and I want to talk about how well Western countries have done in responding to the threat posed by weaponized corruption to the heart of our system. 

Over the decades of his reign, Putin has transformed Russia into one of the world’s purest examples of kleptocracy — “a crime that requires the use of multiple jurisdictions to hide crooked politicians’ money” — and as such he and his cronies have relied on the greed of Western enablers, the complacency of Western politicians and the inadequacy of Western law enforcement agencies to move, hide and spend the stolen wealth. We therefore all share some of the blame for what he built in Russia and therefore for what has happened to Ukraine. We should all be improving our systems to prevent another kleptocracy like Putin’s from forming, and here we have been found deeply wanting.

The sanctions, that the U.S., U.K. and the EU imposed, have been good. Hundreds of Russian oligarchs have been cut out of the Western financial system and Russian state assets have been frozen. I was heartened to see that Joe Biden in Kyiv said there would be more sanctions “against elites and companies that are trying to evade or backfill Russia’s war machine.” But often it feels like politicians think sanctions are a sufficient response on their own, which they are not. They are a bucket under a leak in the roof, a bandage on a stab wound or a patch on a punctured tire. If you don’t mend the roof, disarm the assailant or sweep the tacks off the road, the problem will return, worse than ever.

There has been heartening legislation in the U.K. — in the form of corporate transparency legislation, bringing light to the ownership of property and companies, both of which are favored ways for oligarchs to hide their assets. But in the European Union, movement has been in the opposite direction, thanks to November’s disastrous ruling from the European Court of Justice, which was in response to a complaint appropriately enough from a businessman with multiple companies in tax havens. A law enforcement official in, say, Ukraine trying to work out who’s behind a Dutch company bidding for a state contract will no longer be able to just look it up, which provides corrupt officials with the shield of anonymity they have abused for far too long (including, for example, in medical procurement).

• “The French language expression for a public company is “société anonyme.” This ruling has gone a considerable distance to render all companies anonymous… Amendment there must be, and soon,” notes this Irish lawyer, who expresses well the flaw in the ECJ’s judgment.

Instead of amendments, there has been a collective political shrug from a continent that really should by now have recognized the danger to its integrity and values posed by anonymous wealth. The United States is at least moving in the right direction, as it implements the Corporate Transparency Act, but where is the urgency? Companies will not be able to file beneficial ownership information until January next year. Can the American state really not move faster than that?

• “The international order built on democracy, free markets, and the rule-of-law is under assault from autocracy, kleptocracy, and criminality. This assault has been fueled by opaque legal structures—such as anonymous trusts and other similar legal arrangements—created by the rule-of-law world, which provide sanctuary for the stolen wealth of the world’s worst actors,” noted 12 U.S. senators in this letter to the head of the Financial Action Task Force, demanding it toughen up its proposals.
  
• “As the war in Ukraine demonstrates, the work you are doing is instrumental to defending democracy, the rule-of-law, and free markets. The updates to Recommendation 25 present a once-in-a-decade opportunity to shore up our financial defenses against kleptocracy and criminality. We hope you meet the moment.”

And then there’s enforcement. It’s not enough to pass laws, adopt resolutions or expose ownership information, you also need to act on it. If you don’t, you’re like someone who wants to get fit, who pays for gym membership, who buys the latest athleisure wear, but who never gets on the treadmill or attends a single class. Getting results requires perseverance, sweat and focus. This is where the hard work starts, and I see no sign of recognition from Western countries that they need to do more to investigate oligarchs, prosecute them and confiscate their wealth, and will need to do more for decades.

And finally, before I change the subject, I want to stress that Russia is not the world’s only kleptocratic regime. Yes, we need to make sure Ukraine wins this war, but we also need to make sure such wars don’t happen again in other parts of the world. If we could prevent oligarchs from accessing our economies, we would totally change their calculations. If oligarchs know their wealth would be confiscated if they spent it in the West, they wouldn’t bring it here. If they didn’t have access to the real estate markets, luxury goods and financial systems of the West, they’d have far fewer places to spend their hard-stolen cash, and then they wouldn’t steal it in the first place. Why would anyone bother stealing a billion, if they couldn’t spend it in Cannes, Miami or London?

If the money didn’t get stolen from the citizens of developing countries, those people would have the chance to build their lives in dignity and prosperity, and kleptocracy would never become entrenched. This is a prize worth fighting for, in my opinion, and would ensure something valuable resulted from the horror of the last year. Ukrainians have done more than enough to deserve that we make the small sacrifices that these measures would involve.

BLACKLIST

And an important thing to avoid is hypocrisy. If you want to know why politicians in countries like South Africa don’t take everything Westerners say as gospel, and don’t think it’s dreadful to stage naval exercises with Russian ships, it’s because they have become wearily accustomed to Europe, the U.S. and the U.K. demanding changes from poorer countries that they have no intention of implementing themselves. If you don’t give people reasons to trust you in the good times, they won’t trust you in the bad times.

And while I’m on the subject of hypocritical drivel that outrages people in the Global South while achieving nothing, the European Union has published another one of its six-monthly blacklists of “non-cooperative jurisdictions for tax purposes,” with the headline being that it has added Russia to the list.

• “Russia is listed after the code of conduct group screened Russia’s new legislation adopted in 2022 against the good tax governance criteria of the code and found that Russia had not fulfilled its commitment to address the harmful aspects of a special regime for international holding companies (criterion 2.1). In addition, dialogue with Russia on matters related to taxation came to a standstill following the Russian aggression against Ukraine,” the statement says.

Don’t worry, it’s not you. That really doesn’t make any sense.

• “It blacklisted a white country for the first time ever. Guess which one. Russia. Now, if that isn’t confirmation that EU Blacklists are all about politics and power, I don’t know what is,” tweeted the Caribbean economist Marla Dukharan.
  
• “With this joke list, the EU continues to allow the super-rich and profitable to stash away their fortunes while ordinary people are battling with the cost-of-living crisis,” said Chiara Putaturo, Oxfam EU’s tax expert.

But what about the other countries singled out by this rightfully-much-maligned list? Has the EU finally moved on from its policy of blacklisting small islands with marginal significance to the global epidemic of tax evasion, simply because they lack the geopolitical heft to do anything about it, while ignoring large Western economies that are actually causing the despoliation of the world? Yes, it has. LOL, only joking, of course it hasn’t.

If you want to know more about this, I draw your attention to my past newsletters on this topic, of which there have been many.

In totally unconnected news (not), here’s a fun Financial Times article about how Ireland’s tax treatment of U.S. corporations is so unbelievably generous that the resulting capital flows have distorted the entire EU’s economic statistics. Which jurisdictions cause EU members a greater tax loss: Ireland or Russia? Luxembourg or Palau? The United States or Guam? The U.K. or Fiji? Which ones are blacklisted? Why do developing nations suspect our motives when we ask them to make economic sacrifices? See you in six months for more fun EU blacklist content. 

CBDCs

What are Central Bank Digital Currencies really for? Thanks to the folks who sent me material about Jamaica’s pioneering Jam-Dex, which has the — slightly misleading, in my opinion, but never mind — slogan, “No Cash, No Problem.” Part of the issue with the declining use of banknotes as a proportion of legitimate transactions, which is happening pretty much everywhere despite the objections I received when I said that last week, is that people who don’t have bank accounts could end up even more excluded from the economy than they are at present, if shops start refusing to accept cash money.

So, it’s interesting that Jamaica has been pioneering the use of its CBDC to pay benefits “for the furtherance of the inclusion of segments of the population that would otherwise not have been represented in the financial ecosystem.” If the CBDC can indeed help financial inclusion in Jamaica, that is heartening and could be an example to follow elsewhere.

WHAT I’VE BEEN READING

I am inching my way through Martin Wolf’s “The Crisis of Democratic Capitalism” which is fascinating but requires more concentration than I am sometimes able to give it. At other times, I’ve been delighting in the revelations about money laundering contained in testimony given to the 1980s Kerry Commission into drug trafficking. So much ridiculousness, and so little has — ultimately — changed.

The post Sanctions against Russia are working, but they alone can’t end kleptocracy appeared first on Coda Story.

Whenever people have explained to me how digital currencies are going to revolutionize the world, are in the process of doing so, or have already revolutionized it, a little voice in the back of my head has always said: if this was actually true, governments would have stepped in to stop them.

Establishing a monopoly on issuing coins was one of the earliest steps princes took for a reason, in that it’s both incredibly important, and extremely lucrative, and it’s hard to see how powerful countries would just surrender all that because, you know, blockchain and stuff. Governments as a rule are not in the business of surrendering power.

China has long been an outlier here, however, with the digital renminbi being in development since 2014. It has been tested in multiple cities, and was used at the Winter Olympics with some success. However, the nature of China, with its strict restrictions on capital exports, as well as strict restrictions on everything else, meant that its reasons for creating a so-called Central Bank Digital Currency didn’t really apply to more open countries.

(Incidentally: when I worked at Reuters we had special stickers on our desks to remind us to make sure we hadn’t mixed up billions and millions, but we regularly did it anyway. On which note, ouch, I’m glad that correction wasn’t one of mine.)

But gradually, Western countries have begun issuing their own proposals, which suggests they too think it’s finally time at least to consider how to push back against privately backed currencies like Bitcoin. Last year, the Federal Reserve issued a consultation paper on a digital dollar, and announced that its prototype was performing well in initial tests. The European Central Bank had already issued a report on its own plans for the e-Euro, although (as with many ECB reports) it took many words to say very little.

• “Looking ahead, we need to be ready to introduce a digital euro, shall the need arise. For now, we maintain the options open as to whether and when this should happen.” Thanks for that, Christine Lagarde, I’m glad you could join the call.

And last week the Bank of England weighed in, with a consultation paper on what it appears to be non-ironically referring to as the “Britcoin.”

I am interested in this because physical banknotes are central to the global criminal economy, and I am fascinated by how Western central banks have been issuing ever-larger volumes of them, despite the fact the legitimate use of cash money is falling everywhere, without anyone asking where they’re all going. 

Seriously, it’s amazing. Last month there was $2,299,897,000,000 worth of Federal Reserve banknotes outstanding, up from $1,160,082,000,000 worth in January 2013, and no one has stopped to ask why the world needed twice as many dollar bills (most of which are in the $100 denomination) in the same decade when Americans’ cash usage dropped off a cliff.

So why do people want to have banknotes at a time when they don’t want to use banknotes? The ECB has thoughts.

• “This seemingly counterintuitive paradox can be explained by demand for banknotes as a store of value in the euro area (e.g. euro area citizens holding cash savings) coupled with demand for euro banknotes outside the euro area,” it concludes here, which is to say people want banknotes because people want banknotes. With insights like that you can see why they get paid the big euros.

The appeal of banknotes to criminals is obvious — they’re anonymous and almost universally accepted — and my theory is that, as anti-money-laundering restrictions have become increasingly onerous, more criminals have opted out of the financial system, and are instead using cash as part of an elaborate Informal Value Transfer System instead. Euros and dollars in particular have become the fuel for globalized criminality.

If Central Banks replace physical cash with Central Bank Digital Currencies, that model would be threatened, and criminals would have to find a new — and, presumably, less convenient — way to legitimize their earnings. So, now we have all these consultation documents, is this part of the vision? The Bank of England says it intends to have banknotes and the new digital form of sterling operating in tandem, but there is an intriguing snippet which would surely alarm money launderers. Although actual Britcoin usage would be anonymous, creating the mechanism to access it would not.

• “You would access the digital pound through a virtual wallet and you would have to share some personal data with your wallet provider. This is because you would have a commercial relationship with your provider and they would require some form of ID in order to prevent financial crime or fraud,” the Bank of England’s FAQs says.

The Federal Reserve seems to be coming at this from the same angle.

• “Any [Central Bank Digital Currencies] would need to strike an appropriate balance between safeguarding consumer privacy rights and affording the transparency necessary to deter criminal activity,” it said in its own document this time last year.

The European Central Bank has also considered this issue and has an interesting suggestion about putting limits on the usage of digital euros outside the eurozone.

• “The cross-border circulation of a digital euro might facilitate international criminal activities, if not properly controlled,” it states (thereby proving that its analysts are actually capable of writing in a comprehensible manner, and begging the question of why they don’t do so the rest of the time).

Like I said, one of the reasons princes have always monopolized coin issuance is because it is lucrative, and that is thanks to seigniorage, the profit available from issuing currency. In the old days, seigniorage was the fee a prince’s mint charged for guaranteeing the purity of bullion; but these days, it is any profit made from issuing currency. The Federal Reserve, for example, makes slightly more than $99.90 in profit every time it prints a $100 bill, which is after all only valuable because the Fed says it is. There are currently about $1.4 trillion worth of $100 bills in circulation, from which the Fed earned around $1.39 trillion in seigniorage.

If Bitcoin, Ethereum or another privately-run digital currency became actually successful, then that seigniorage income would be threatened, but if Central Bank Digital Currencies take off, the opposite would happen. Central Bank Digital Currencies would cost even less to issue than banknotes, making issuing currency even more lucrative. In the digital future, there are no banknotes to print, replace, store or design; just ones-and-zeroes, which miraculously become valuable because the Central Bank says they do. These are interesting times, and this is a space worth watching.

CAN THERE BE TOO MUCH OF A GOOD THING?

Thanks to John Cusack, editor of Financial Crime News, for getting in touch with some thoughts about Suspicious Activity Reports. For the last couple of weeks’ newsletters, I’ve been musing about SARs, and about whether it is good or bad that a country generates a lot of them. I didn’t come to a conclusion but did say it was bad that the U.S. and U.K. have so few employees in their Financial Intelligence Units, because it means the units are unable to read all the Suspicious Activity Reports they receive.

Thanks to Cusack’s data, I can see that the Netherlands should join them on the naughty step, since it has only 76 employees to process 1.1 million SARs, giving the Dutch a ratio of 14,474 SARs per employee per year, which is even worse than the Brits or Americans.

But wait a minute, what’s this, a little further down Cusack’s helpful spreadsheet? Russian intermediaries generated a scarcely-credible 17.7 million SARs in 2018 meaning that, despite its FIU employing a colossal 800 people, it had an even-more dramatic ratio of 22,125 SARs per person. If those Russians were working the standard 260 days a year, and eight hours a day, that means they would need to get through more than 10 SARs every hour just to prevent them backing up.

This surely puts to bed the question of how much significance we should place on the size of a country’s financial intelligence unit, or the volume of SARs it generates, when we’re trying to work out how clean its economy is. Russia scores at the top of the class on both measures, and its economy is a slew of filth, so the answer is none.

So what actually is a useful metric for measuring financial crime? Or, if there isn’t one, how should we create one? Send me your thoughts, please!

SUNNY PLACE FOR SHADY PEOPLE

It’s become a bit of a cliché to point out that tax havens are no longer sunny places for shady people like they once were, but instead these days more closely resemble South Dakota, Ireland and Delaware. Like all clichés there is some truth behind it, but the United Arab Emirates is doing its very best to make sure we don’t forget that warm places can still be dodgy too.

The UAE’s Central Bank has issued a license to MTS Bank, the fintech wing of Russia’s largest mobile network, which is controlled by the Sistema conglomerate. Vladimir Yevtushenkov responded to being sanctioned last year by the U.K., Australia and New Zealand, by handing 10% of the shares in Sistema to his son, thus bringing his stake below half, but he still owns 49% of the group.

Dubai, along with Turkey, has seen opportunity in wealthy Russians being squeezed out of their favored Western haunts, and provided a haven for tens of thousands of individuals (and their wealth) since the Ukraine crisis began a year ago.

• “It’s all about the business case [and] the number of Russians living here now,” a “person briefed on the decision” to give MTS a license told the FT. 
• “This is going to be a game-changer,” a banker said.

That is an alarming thought. Russians had already been pouring money into Dubai real estate, and the presence of a Russian financial institution will make that easier. A lot depends on the response of the U.S. and other Western allies. U.S. officials have said they are watching Dubai closely but, as of now, there haven’t been any secondary sanctions. If the UAE can play, as a home for oligarchic wealth, the same role that India has played as a home for Russian oil, then Western sanctions will be ever-less-useful.

Of course, we need to remind ourselves that questionable wealth is not only from Russia, and corruption allegations did not begin with the Ukraine crisis. As such, it’s worth checking out this bit of open-source wizardry from Bellingcat. Intrigued by the whereabouts of Isabel dos Santos, once Africa’s richest woman but now target of an Interpol red notice, its investigators took a look at her social media posts to see if they could figure out where she was passing her time. The answer that they came up with may surprise you, but probably won’t.

WHAT I’VE BEEN READING

I was lucky to get hold of an early copy of “Who Gets Believed?” by Dina Nayeri, which I really enjoyed. It’s got that amazing combination of being a book which is both deeply personal, and of wide significance, and looks at why it is that some people’s stories are doubted, and some people’s aren’t. Look out for it.

The post Does Britcoin have a future? Central Bank Digital Currencies have a moment appeared first on Coda Story.

A wealthy Saudi royal has fallen out with his co-investors in a luxury resort development or, as Bloomberg put it in a headline that calls to me like vodka to an alcoholic: “Saudi Prince Locked in $5 Million Fight Over ‘James Bond Island.’” A day may come when I’ll be able to resist finding out what’s going on here, but it is not this day.

The Bahamas has almost 700 islands, of which only a few dozen are inhabited. Since Bahamians don’t make much of anything that anyone else wants (seriously, I spent two hours scouring the market for presents for my kids and ended up buying three small “rum cakes” that tasted just like ordinary sponge cakes, and cost me $25), they sell what they do have — sun, sand, competitive offshore services, and overpriced confectionary to guilty-feeling fathers who abandoned their families for a week. What the Bahamas do have, however, is plenty of real estate, which — if you spend more than $500,000 on it — comes with the attractive bonus of Bahamian permanent residency, and thus the country’s highly competitive zero tax rate.

As of this moment, around 20 Bahamian islands are advertised as for sale on the website of specialist estate agency “Vladi Private Islands,” including Big Darby Island (a snip at $35 million), or the more entry-priced Cat Cay. The names, incidentally, are negotiable. When Hog Island was bought by A&P heir Huntington Hartford in the 1950s, he re-branded it as Paradise Island. It is now home to many of the country’s more boujee resorts, something that would surely not have happened if it had retained its original porcine moniker.

Anyway, back in 2015 Vladi put the 220-acre island Cave Cay on the market for $90 million (the Guardian featured it in their Surreal Estate section, which appears to be where the “James Bond” connection comes from), promising “stunning natural beauty, a protected and private, deep-water harbor and marina with floating cement dock system and 35 dock slips, plus a 2,800 ft. private airstrip.”

• “The island is available ‘as is,’ and features unspoiled beaches, lush vegetation, elevations of up to 40 ft. capturing breathtaking views, and a vast excess of compacted sand that can be sold to nearby islands if desired,” the listing said.

It either did not sell or was flipped shortly thereafter, because another listing — this time complete with more photos — came online four years later. Prince Sultan bin Salman bin Abdulaziz Al Saud was attracted by the prospect, along with other people putting in money via a Floridian company. A Bahamian government minister said last year the prince and his co-investors would be spending $550 million to develop the island to create “a luxury mixed-use hotel resort, residences and marina” but, alas, there is trouble in this corner of paradise.

The prince feels he’s been made to unfairly pay $5 million that was not demanded of his co-investor, Cave Cay General Partner Ltd, of the British Virgin Islands, and so it has all ended up in the Court of Chancery in Delaware. In summary: a Saudi royal has gone to a Delaware court to sue the Florida-based owners of a British Virgin Islands company, over investment in a Bahamian island set to offer the ultimate in “barefoot luxury” to foreign tourists. There may be a cost of living crisis for us lot down at the bottom, but there surely isn’t at the top. But then, there never is.

• In case you’re worried this could impact your holiday plans, do not be alarmed. Cave Cay LP denies any wrong-doing and is plowing on regardless with its plans.“The project’s investment and development timelines remain unchanged, as the default of one investor does not impact the long-term plans of the unique luxury development in the Bahamian Exuma islands,” it said. And I for one am relieved to hear that.

MORE IMPORTANT BUT LESS FUN

The end of January was the deadline for all offshore companies owning property in the U.K. to register their owners or suffer the consequences!

• “There is nowhere for the criminals and corrupt elites to hide. We will be using all the tools at our disposal, including fines and restrictions, to crack down on foreign companies who have not complied,” said Business Minister Lord Callanan.

Spoiler: there is somewhere for them to hide, about which more in a minute.

Attentive readers of this newsletter will already be familiar with the strange and turbulent history of the Register of Overseas Entities, so here’s a very brief recap.

1. For decades, oligarchs and others bought U.K. properties via used anonymous offshore companies to hide their identities.

2. David Cameron, when he was prime minister, promised to do something about this as part of an anti-corruption drive.

3. He lost the Brexit referendum, and no one else in power was interested in driving out oligarchs, so they all accidentally on purpose kind of forgot all about it.

4. Russia attacked Ukraine last February and the British government wanted to do something about oligarchs.

5. This was something.

6. So the government did it.

The legislation zoomed through parliament in a matter of days last spring, and the register became live in August. The deadline for registration has now passed, as of last week, so we can see what the results have been, thanks to the good folks at Open Ownership who’ve crunched the numbers. Much of it is unsurprising: the most common jurisdictions of origin for property-owning shell companies were the British Virgin Islands, Jersey, the Isle of Man, and Guernsey, which are all bits of Britain that aren’t British enough to count as British. Then came companies from the usual “countries most likely to deny they’re tax havens”: Luxembourg, the Seychelles, Hong Kong, Panama, and Cyprus.

There is also a useful list of sanctioned individuals, who own property via shell companies, including Igor and Olga Shuvalov, whose duplex apartment overlooking the Thames we liked to highlight on our kleptocracy tours; plus Alexander Frolov, Vladimir Potanin and lots of non-Russians.

These are early days for the registry, so I don’t want to be too critical of it, but I am alarmed to see that it appears to replicate the flaws of the U.K.’s existing Companies House, which is notorious for publishing obviously wrong information. Graham Barrow has scanned through some entries on the new registry and already found two Liberian companies that inexplicably have a postcode in the Isle of Man, which is indicative of an alarmingly slapdash attention to detail. If that is replicated more widely, these entries won’t be of much use to anyone.

It is also worrying that only 19,510 companies had declared their owners, out of a registered total of 32,440. It is possible that many of the outstanding declarations are stuck in Companies House’s inbox, but it does suggest their owners weren’t exactly trembling with fear at the prospect of being prosecuted for filing late.

My main concern, however, is something I addressed in this newsletter last year and in the Guardian last week, which is that offshore shell companies are only a fraction of the problem. Far more properties are owned by trusts, which do not have to publicly declare their beneficiaries, and so remain a way for rich and powerful people to hide their assets from scrutiny.

A new Economic Crime Bill, currently inching its way through parliament, would provide extra powers and resources to Companies House (“up to 20 million pounds,” according to this statement) so hopefully the age of obviously fake information in company filings will soon be a thing of the past. I know that at least one MP is seeing if it’s possible to amend this Economic Crime Bill to make trusts as transparent as shell companies. Fingers crossed that it’s not too late.

On the subject of Corporate Transparency, the U.S. registry is ever closer to reality, which is important news since the U.S. has long been an outlier in terms of the murkiness of company ownership. In December, FinCEN published its final regulations around how the registry will work.

• “In this next step, the proposed rule would provide the highest standards of security and confidentiality while ensuring that the new beneficial ownership database is highly useful to law enforcement agencies in its efforts to combat financial crime. As we drive toward full implementation of the Corporate Transparency Act, we move closer to exposing criminals, corrupt actors, and anyone trying to hide ill-gotten gains in the United States,” said FinCEN Acting Director Himamauli Das.

Of course, while celebrating progress in the U.K. and U.S., we also need to remember that late last year the EU’s highest court decided that rich people’s right to privacy outweighed citizens’ right to know who owns the companies that their governments incorporate. The three U.K. Crown Dependencies (Jersey, Guernsey, and the Isle of Man) took the opportunity to delay their own plans to open up company ownership as a result, and I’m sure other countries will do the same. Two steps forward, three steps back.

SARS

I had some very interesting emails in response to last week’s section on Suspicious Activity Reports, the compliance reports that financial professionals send to regulators that are also known as Suspicious Transaction Reports (SARs or STRs, both are correct). I was particularly interested by this report from Jim Richards and Alison Jimenez, analyzing the situation in the United States.

In 2002, regulators received 281,000 SARs; and in 2021, they received 3,070,000 — a ten-fold increase. Yet, over the same period, the number of criminal cases into financial crime fell from 8,100 to 5,100. That means the number of SARs filed to the authorities for every criminal case fell from 35 to 602.

• “The private sector is pulling its weight in the fight against financial crime. It appears that the public sector is not. Something needs to change,” Richards writes. I agree with him, governments everywhere are forcing private companies to pay for the burden of tackling financial crime, while themselves failing to resource investigative or prosecutorial agencies. Do better, governments!

One point I hear again and again is irritation from people who file SARs that they don’t get better feedback from the agencies they send them too, and thus cannot judge whether the substantial resources they commit to compliance are or are not a complete waste of money. Obviously, the Department of Justice can’t be expected to personally respond to more than three million reports, but it could be better at sending out statistics to show that SARs had actually been useful.

The report in the last paragraph has an interesting table on page 28 comparing resourcing in the four big Anglophone economies: FinCEN has just 272 employees, to deal with its 3,000,000 SARs; the equivalent body in Canada has 355 people to deal with barely a tenth as many reports; and in Australia, 405 people dealt with just 265,000 SARs. Its authors failed to find equivalent figures for Britain, but the report I quoted in the newsletter last week says the U.K.’s Financial Intelligence Unit is expanding to 201 employees, while it last year had to deal with 901,000 SARs.

So, in Australia, there were 654 SARs per Financial Intelligence Unit employee; in Canada, there were 1,037; but in the US, there were 8,824. The U.K. figures are not directly comparable but last year the equivalent was 4,483 reports per employee. It’s hardly surprising that the U.S. and the U.K. are struggling to process all the reports their FIUs received. They employ too few people to do the job.

WHAT I’M READING

I’ve been sent a more than usually high number of advance copies of books at the moment, and I’m tearing through Wasteland by Oliver Franklin-Wallis, a head-expanding voyage through the global trash industry. It’s going to do well.

The post From Bahamas to the UK, the super rich tussle over real estate appeared first on Coda Story.

This past week I have been in the Bahamas, attending a very interesting conference organized by the Central Bank of the Bahamas on money laundering. I met up with some old friends and made some new ones, which was great (and I went snorkeling). I mentioned a couple of the conference papers in last week’s newsletter, and this week I want to highlight an interesting presentation by Aretha Campbell of the University of the West Indies, comparing the costs of complying with money laundering regulations between small and large countries.

She argued that, since most requests for information come from large countries (members of the OECD, the European Union or others) while the cost of answering those requests is covered by small countries, there is a mismatch in who is paying for anti-money laundering work.

• “The overall conclusions drawn from these findings are that [anti-money laundering] initiatives undertaken in The Bahamas, Bermuda, the BVI and the Cayman Islands and the costs associated with them serve to benefit mainly OECD and EU countries, with the larger benefactors being the European Union, the US and UK,” her paper states (it’s the fifth on this list).

I’m sort of sympathetic to this argument, although my sympathy is tempered by the fact that all four of those countries make a decent living out of helping citizens and companies from large countries to avoid taxes, so I’m also sort of not sympathetic. But there was an interesting discussion afterwards about the part of her presentation dealing with Suspicious Activity Reports (also known as Suspicious Transaction Reports), which are the means by which professionals that handle money report any concerns to the authorities.

In some countries, professionals report huge numbers of SARs/STRs, while in others they report very few. So, which is better? Does a large number mean there’s a lot of money laundering because professionals are reporting so much? Or does a large number mean there’s not much money laundering because professionals are so suspicious? Or does it mean something else entirely? Or nothing at all?

• “It means you are in compliance with regulations matters. The quality of the data is more important than what it means,” said Campbell, which struck me as her coming down on the side of “SARs mean nothing at all.”

But on that note, for the first time in — drum roll! — two years, the U.K. has published its data on how many SARs have been filed by the country’s financial professionals. In 2020-2021, there were 742,317, but in 2021-2022 there was a truly remarkable total of 901,255. Huge round of applause, well done to all concerned, another record has been achieved, what a large number. If they keep this up, they’ll hit a million in no time.

I don’t want to be too sarcastic here, because of course it’s important that suspicions are passed onto the police and acted upon, but the proportion of those SARs that ended up being used is tiny in comparison to the number filed. It’s good that money was frozen as a result of SARs being filed, but it was still only 305 million pounds, which isn’t much more than 300 pounds of potentially dirty money identified per SAR. Since the U.K.’s financial sector alone spends 30 billion pounds a year on compliance, they probably don’t cost much less than that, each. To put that 305-million-pound figure into context, the National Crime Agency estimates that hundreds of billions of pounds are laundered through the City of London each year. The University of Portsmouth estimates that fraud alone costs the British economy 137 billion pounds a year. We are clearly, despite everyone’s efforts, identifying just the tiniest fraction of a fraction of what needs to be identified.

Anti-money laundering policy is in a rut. For decades, its basic philosophy has been (a) acquisitive crime is a problem but (b) criminals can’t move money without the help of financial professionals, so (c) if we force financial professionals to tell the authorities about suspicious transactions, then (d) the authorities can block those transactions, meaning (e) criminal money gets seized, therefore (f) crime no longer pays and (g) the problem is solved. But the problem has not been solved, so governments have concluded that there just aren’t enough suspicious activity reports, demanding more and more of them, which explains the tsunami that floods into the U.K.’s Financial Intelligence Unit, into FinCEN and into those Caribbean financial intelligence units in Campbell’s paper.

The definition of insanity, as someone who apparently wasn’t Albert Einstein once said, is doing the same thing over and over again and expecting different results. Perhaps it’s time to stop and think about whether the whole global anti-money laundering edifice isn’t a bit insane.

On a side note, I heard a funny bit of gossip while I was in the Bahamas, relating to the (in)famous estimate of the scale of global money laundering made in 1998 by Michel Camdessus, then the head of the International Monetary Fund.

• “The estimates of the present scale of money laundering transactions are almost beyond imagination, 2 to 5 percent of global GDP would probably be a consensus range,” Camdessus said. And that estimate has been used ever since, including by senior figures speaking at the conference last week.

So where did it come from? Apparently, one IMF official invented it off the top of his head in the lift on the way down to the venue, since they felt the speech lacked a bit of oomph, and everyone involved has been mortified ever since by its omnipresence in the global debate around financial crime. The general consensus now, by the way, is that (a) you can’t accurately measure money laundering because (b) what would you include, and how would you include it? But (c) if you did, the total would probably be more like 10% of global output.

Entirely separately, I can’t help liking the way that there is a little red label marked “popular” next to literally every single report published on the U.K.’s Financial Intelligence Unit website, up to and including clickbait like “UKFIU SAR Glossary Codes Note March 2022.” It has similar energy to the time I wrote “I am Cool” on my pencil case at school.

PERCEPTIONS

Aren’t indexes great? They reduce the whole complexity of human existence to a single number, rather like the rankings of rugby teams. On that note, I’ve been thinking of creating a Democracy Perceptions Index to assess democracy in different countries, so we can compare them to each other. Perhaps it would help our governments know who to invade?

Anyway, my proposed methodology is foolproof. I’ll take the leading media outlets in each country and assess what they say about its democracy. If they’re negative, we’ll give the country a low score, and if they’re positive, we’ll give it a high score. Then we put all the countries’ scores in an Excel spreadsheet, click “Sort & Filter” and congratulate the winner. Yay, well done, North Korea, what a victory! Better luck next year, Eritrea, but second place isn’t bad. Congratulations, Russia, on your bronze medal.

In entirely unrelated news, Transparency International has once again missed a good opportunity to discontinue its annual Corruption Perceptions Index. The CPI has a slightly more sophisticated methodology than my DPI but with similarly nonsensical results. In 2023, for the umpteenth year running, it has concluded that the countries in Asia, Africa and South America that get looted are more corrupt than the countries in Europe, Australasia and North America where the loot ends up. Congratulations though to the U.K., U.S., UAE, Switzerland, Singapore, Austria and Luxembourg, which all kept their places in the top 30. Good job, everyone.

Anyone tempted to use the CPI as a way of judging which countries are corrupt, and which aren’t, please don’t. It’s misleading, victim-blaming tosh with real-world consequences, in that it informs decisions by rating agencies, aid organizations, international financial institutions and others. Developing nations deserve more from an organization that should know better.

UKRAINE

Coming in 116th place on the CPI was Ukraine, and coming in 137th was Russia. Yet it was in Ukraine that a deputy minister has been fired, and the defense ministry, along with front-line governors, is under investigation after allegations of corruption. If it’s less corrupt than Russia, why is there corruption, eh? Answer that with your science. This has certainly given ammunition to extreme-right politicians in Western countries (examples here, here and here) to denounce support for Volodymyr Zelensky’s government and to claim that the money sent to Ukraine is being embezzled.

There is a parallel to the question about SARs here. How do you know if a country is more corrupt: if it has public corruption scandals or if it doesn’t?

I have written extensively about corruption in Ukraine in the past (like this article from 2014, as well as material in my last two books), and I get annoyed by the widespread argument among certain public figures in the West that officials in Kyiv are only corrupt if they’re pro-Russian. In the past, Ukrainian oligarchs and supposedly pro-Western politicians have been as much to blame for undermining the integrity and prosperity of their nation as Russians. Ukraine’s great strength is not in being free from corruption, but in the brilliance of its pro-integrity activists, welded together by organizations like the Anti-Corruption Action Centre, journalists like Kristina Berdynskykh and activists-turned-politicians like Serhiy Leshchenko.

The fact that they are still demanding anti-corruption measures, even in wartime, criticizing corrupt officials, even if they sit in the defense ministry, and generally behaving like free people in a free country is a sign that Ukraine deserves our support, not that it doesn’t. The reason Russia lacks such scandals is not because too few officials are on the take, but because too many of them are.

I am convinced that one of the reasons Vladimir Putin felt so threatened by Ukraine was precisely because of the successes its activists had in forcing through anti-corruption measures. The measures weren’t perfect, and they weren’t sufficient, but they provided an example of how to start building an honest society, which was potentially existential to the Kremlin’s business model.

SLAPPs

Speaking of Russia, the scandal around the U.K. government giving the lawyers representing Yevgeny Prigozhin permission to accept his money — despite him being sanctioned — so he could sue Eliot Higgins for saying something completely true will hopefully run and run. Along with other deeply-questionable libel threats, the Higgins affair is proof that Britain finally needs to rein in its greedy lawyers who need to remember they are “officers of the court, not public relations professionals in wigs,” as Edward Lucas aptly put it.

A decade ago, organizations English Pen and Index on Censorship proposed that arbitration should be introduced in libel proceedings to lower costs and reduce the risk of them being used abusively. It is time the idea receives the hearing it did not get at the time. For journalists, the costs of avoiding defamation cases, protecting against them and fighting them are weighing on their efforts to expose corruption and wrongdoing. Too often, the solutions proposed to prevent abusive cases involve more lawyers taking more time to argue among themselves, which would just make things worse. The problem is the cost, and it is caused by lawyers.

Lawyers fight hard to retain their income streams (is it not written that “the way to change the world is to find a way for lawyers to make money out of it”?), and we can expect strenuous efforts to suggest that justice would be harmed if they were excluded from defamation cases. But here it is the presence of lawyers that is causing the injustice, and that needs to be reduced to allow poorer defendants a chance.

WHAT I’M READING

I read Paul Newman’s autobiography while I was in the Bahamas, which was good in parts, but I’m thoroughly enjoying “The Power Law: Venture Capital and the Art of Disruption” by Sebastian Mallaby, which delves all the way back to the 1950s to look for the origins of the funders that helped build Silicon Valley. Along the way, it somehow manages to make the inner workings of investment funds fun. Highly recommended.

The post The dirty money governments recover isn’t worth the paperwork appeared first on Coda Story.

I’m in the Bahamas this week (I know, I know, it’s a tough life, but I’ve learned to cope) to attend a conference on money laundering hosted by the Central Bank of the Bahamas and to chat to people about the good old bad old days when all you had to do to launder a plane-full of dollars was to fly it from Miami to Nassau. I’ve written a paper about a bugbear of mine, which is how Western countries print extravagant quantities of banknotes, without asking — in an era of supposedly declining cash usage — who exactly is using them all.

There are lots of other folks talking too, and I’ve been spending this morning reading their papers, and I want to pick out two that address the important issue of sanctions and what we can learn from the experience of the last year.

Regular readers of this newsletter may have noticed that I’m pretty agnostic about the modern enthusiasm for sanctions as the answer to geopolitical problems. After all, they were a favored tool of the League of Nations, and their success rate at reigning in aggressive governments during the 1930s was, let’s be honest, mixed. It seems to me that, by announcing sanctions against kleptocrats and then expecting private companies to enforce them, governments are getting credit for tough action without having to spend any money on actually being tough. It risks being the worst kind of government-by-press-release.

Just to be clear, I do think sanctions can be useful but only as the cherry on top of a cake of well-resourced investigative and prosecutorial work into financial crime, as a temporary holding solution while other resources are put in place. If we expect them to take the place of the whole cake, we’ll end up pretty under-nourished.

The first paper I want to highlight (it’s the ninth on this list) is by Michael Findley, Daniel Nielson and Jason Sharman and lays out their investigation into whether private companies are following the sanctions. If you don’t know how this trio of academics work, they specialize in a “secret shopper” approach to financial crime, writing carefully calibrated emails to potential enablers, seeing how many of their correspondents reply, then assessing how many of them followed the anti-money laundering rules around checking identities, etc. (If you haven’t read their book “Global Shell Games,” I think you should). It turns out that a depressingly high number of people are happy to do business with pretty much anyone if the price is right.

• “We have many international clients with the same confidentiality concerns so I am happy to tell you that you have found the right service provider for your needs!” is one genuine reply they received in a previous investigation into how easy it is to set up shell companies.

They started their new round of research into sanctions before February last year, when the war broke out. They had a natural experiment about whether the Ukraine crisis would change the effectiveness of the existing Magnitsky-type sanctions in multiple jurisdictions. They wrote emails purportedly coming from people who were already sanctioned and other emails from people with unremarkable names, then compared the replies. Their first finding, derived from hundreds of pre-war solicitations to company formation agents and banks asking for a shell company or an account, is that those so-called “smart sanctions” were pretty feeble. There was almost no difference in the replies they received when pretending to be sanctioned individuals, compared to when they weren’t.

• “The results from the first round of solicitations cast doubt on the effectiveness of the sanctions. Before the Russian invasion, private firms in the United States, European Union, the U.K., Canada, and other countries with Magnitsky sanctions legislation were statistically as likely to accept business and flout compliance requirements when dealing with high-risk sanctioned names as they were when fielding requests from the low-risk placebo solicitations,” they note.

But that changed after Vladimir Putin launched his full-scale war on Ukraine last year. Suddenly, far fewer professional enablers were prepared to countenance doing business with people on the sanctions list. So, what does this mean? Does this mean that the sanctions suddenly started working after February? Or something else? Fortunately, Sharman and his co-authors addressed that question by sending solicitations to potential enablers in countries that had not adopted Magnitsky-style legislation.

• “The results indicate that, even though firms in countries without Magnitsky laws had no legal requirement to discriminate in their treatment of sanctioned names relative to placebo solicitations, they nevertheless did so. In countries without Magnitsky laws there was a substantively large and statistically significant decrease in the number of firms willing to engage with treatment emails, and a corresponding decline in refusals (compliance and non-compliance declined also, but these results were not significant statistically). These results suggest that it was the effects of the war, perhaps in political and reputational terms, that drove the sensitivity to approaches,” they write.

So does that mean sanctions work? Kind of. To see what I mean by that, it is interesting to also read the paper by Anjishnu Bandyopadhyay and Max Heywood (it’s the second one on the list), which looks at the problem from the other end of the telescope and examines the macro data on financial flows between banks inside and outside Russia.

• “We find that in aggregate, banks in the sample are effective in reducing cross-border flows to newly sanctioned entities. However, these flows do not fall to zero, indicating that gaps in sanctions implementation remain,” they note.
  
• “The continued use of cross-border transactions across a range of jurisdictions by both originators and beneficiaries with links to Russian banks highlights the importance of a cohesive international approach to effective anti-money laundering and sanctions implementation.”

The conclusion I draw from these papers is that relying too much on sanctions means we are putting too much faith in the willingness of the private sector to fulfill the demands of governments. If past behavior shows us anything, it is that private companies are more than willing to help criminals dodge the rules if the price is right. Logically, the more that private companies impose sanctions, the higher a price that can be charged by those that do not.

If we outsource our response to a national security threat, we have to be prepared for the very real risk that some firms are willing to take money to undercut it. Even a small compliance failure can let through a very large amount of money. That means we need to properly resource our investigative bodies so they can check up on how compliant private companies are being.

In short, sanctions on kleptocrats are not — and must not become — a substitute for real substantive action against financial crime, and we must beware of governments trying to make them become so. In the meantime, if you want to know what sanctions evasion looks like, check out this indictment alleging that a Russian and a U.K. national helped oligarch Viktor Vekselberg maintain access to the U.S. financial system even after he was sanctioned in 2018, in order to maintain his superyacht.

• “The efforts of these facilitators permitted Tango to continue to operate as a luxury yacht with the full array of services and luxury goods available to it, supported by hundreds of thousands of dollars of illegally-obtained U.S. services and U.S. financial transactions, and all for the benefit of Vekselberg,” the indictment notes.

I have to say though, the fact that these two characters used the codename “Fanta” to disguise the identity of a yacht called “Tango” does not suggest to me that they were exactly criminal masterminds.

OLIGARCHS

I received an interesting email this week from a reader suggesting that I should retire the word “oligarch” because, in relation to Russia, it’s so overused that it mainly just means “wealthy Russian I don’t like.” I can see his point, and it’s one that also applies to the word “corruption,” which tends to be used to describe actions taken by the political enemies of whoever’s speaking. If a word is only something you apply to people you already don’t like, then it isn’t very useful.

So I thought I’d lay out what I mean by “oligarch,” and why this newsletter is called “oligarchy.”

We decided to start this newsletter long before February 2022, because we thought it was important to talk about extreme wealth’s gravitational force and how it distorts the shape of politics, society and everything else. I admit that, since Putin launched his large-scale attack on Ukraine a year ago, I’ve talked more about Russian oligarchs than about others, but that doesn’t mean I don’t think there are oligarchs elsewhere.

In fact, I cannot wait to write about oligarchs from other places, just as soon as Ukraine defeats Russia, Putin’s regime collapses and peace is restored to Eastern Europe. But I’m going to keep using the word oligarchy, and I mean it in its original ancient Greek sense. If it’s good enough for Aristotle, it’s good enough for me.

THINKING AHEAD

On that note, this is an interesting article by Jodi Vittori and Matt Page, two of the smartest thinkers on kleptocracy anywhere, asking what happens next in the battle against kleptocracy. They accurately highlight how extremely adaptable kleptocracy is, thanks to its network of entrepreneurial enablers scattered all over the world, all looking to move their clients’ wealth quickly, secretly and efficiently. As such, democracies need to create an anti-kleptocratic network that is equally adaptable, in order to expose that wealth.

They lay out how rich Russians have begun moving wealth via Turkey and the UAE in order to hide it from prying eyes and then to use those countries’ connections to the West to move the money onwards anonymously. This risks undermining all the progress that has been made, and Western countries will need to decide what they value more: containing Russia or maintaining close ties to Ankara and/or Dubai.

• “Too many democracies fail to prioritize global corruption as a major national security threat or to see how their own laws, institutions, and social norms enable it. Few recognize that corruption is a leading driver of crime, conflict, poverty, and democratic backsliding worldwide, considering it instead as more of a nuisance best tackled by helping foreign anti-corruption agencies, journalists, and civil society groups. As a result, democratic policymakers cannot see the cost to democracy of subordinating anti-corruption concerns to security and other geopolitical interests they perceive as being more important,” they write.

If democracies do not accept that kleptocracy is a challenge every bit as serious as communism was in its day, that it will not go away on its own and that confronting it requires standing up to some powerful interest groups in our own countries and among our allies, then we will never contain it, let alone defeat it.

You’ll be pleased to know that Page and Vittori have multiple policy proposals to add to my evergreen favorite of adequately resourcing enforcement agencies, all of which I agree with: increasing support for journalists and activist groups, improving cooperation between all parts of the anti-kleptocracy alliance and preventing abusive lawsuits that stifle public interest journalism. If you’re interested in more, they held a virtual event to discuss the report, which you can watch here.

WHAT I’VE BEEN READING

It’s a long flight across the Atlantic, and there was nothing I wanted to watch on the video screen, so I read a lot. Firstly, I finished Matt Stoller’s “Goliath,” which is a sweeping account of the rise and fall of anti-monopoly politics in the United States. I read it because it features Wright Patman, a politician I’ve recently become slightly obsessed with, but I found it interesting and provocative. I finished that somewhere near northern Canada and moved on to “I Used to Live Here Once,” a biography of the novelist Jean Rhys by Miranda Seymour, which took me all the way to the queue for immigration. I read it because I adore the Wide Sargasso Sea, but I didn’t think it added all that much to what I already knew, although I did discover that Rhys occasionally used to stay in a pub near my house. I’ll raise a glass to her next time I drop by.

The post Governments outsource sanctions enforcement to private industry to mixed results appeared first on Coda Story.

Like many people of my generation (I am apparently a “cusper,” having characteristics in common with both Gen X and millennials, so make of that what you will), I was very influenced by Naomi Klein’s 2007 book “Shock Doctrine.” If you haven’t read it, she argued forcefully that the then-ongoing U.S.-led Iraq takeover was part of a neoliberal ploy to exploit crises to force through unpopular policies so as to benefit big business and immiserate ordinary people. The book has many villains: Milton Friedman, the U.S. and British governments, the Central Intelligence Agency and the International Monetary Fund among them. 

Part of the reason I found the book so compelling (leaving aside the fact that it confirmed everything I already thought about the 2003 Iraq War) was that her analysis of the 1990s in Russia supported what my Russian friends told me: greedy Western advisers turned up and forced the Russian government to pass laws that ruined the country. The oligarchs were our fault.

So why am I talking about this now? In what looks like a classic example of her thesis, those villains at the IMF have faced down the Egyptian government and forced it to do all the things the IMF always demands — liberalize the exchange rate, expand the private sector, cut spending, balance the budget, blah blah. So presumably I’m furious about it? Hmmmmm, perhaps not.

Egypt may not be the most depressing example of how the Arab Spring turned wintry, but it is depressing enough. The hopes of democratic transformation were extinguished by a coup in 2013, and since then military officers have gradually cemented their hold on pretty much everything.

• “In addition to launching a massive campaign of repression against the opposition and political parties, the regime has been re-structuring the state apparatus in a manner that has affected the nature of the state. In other words, it is a process that transforms the state into an appendage of the military institution. The classic role of the state as a mediator of social conflict disappears, as it is transformed into a blunt instrument of repression, and a way for a parasitic form of military capitalism to thrive, through the appropriation of public funds,” noted political analyst Maged Mandour, who’s currently writing a book about Egypt under President (and former field marshal) Abdel Fattah al-Sisi.

Egypt’s military is even following that classic example of modern kleptocratic practice (see also: Neom, Ciudad de la Paz, Naypyidaw and whatever the capital of Kazakhstan is called this week) by building a new city, which gives the prospect of almost unlimited kickbacks.

• “The military will see huge financial returns once the new capital is completed. Moreover, these gains will not be inspected by a civilian authority, as the government has little oversight over the military’s finances,” as Mustafa Menshawy wrote.

The Carnegie Middle East Center produced a very detailed report on the military takeover of Egypt (which was built on decades of creeping klepto-militarization) back in 2019, and it was prescient about the consequences.

• “The potential consequences of the present policy course for the Egyptian economy are portentous. The World Bank estimated in December 2018 that Egypt needs $675 billion to cover infrastructure needs and financing gaps over the coming twenty years, but faces a shortfall of $230 billion that only private investment or commercial financing can meet. This is wholly dependent on creating an enabling environment, but highly unlikely on current trends,” its author Yezid Sayigh stated.

And then the twin shocks of Covid-19 and the Russian assault on Ukraine happened, the latter was particularly serious for Egypt because it is heavily reliant both on Russian tourists and on imported grain and thus vulnerable to price spikes (in fact, high food prices helped trigger the Arab Spring). And the government in Cairo had to ask the IMF for help. In October, the two sides announced a staff-level agreement, and a full report was released last week.

• “Egypt’s reform program, supported by the new IMF arrangement, includes an extensive package of structural reforms to support greater private sector activity and to facilitate trade. For example, the state ownership policy sets out ambitious plans to reduce the footprint of the state and catalyze private sector investment. It establishes a clear framework to inform which sectors the state will reduce its presence in and how such divestments will be implemented,” said the IMF’s Ivana Vladkova-Hollar.

On one level, you could see this as a classic Shock Doctrine example of the IMF bullying the Egyptian government into following the Washington Consensus. But on another level, you could see this as a priceless opportunity to force thieving military officers to submit to some basic transparency about what they’re up to, to stop awarding themselves state contracts and to withdraw from bits of the economy that they have no right to be in, which the IMF has quite rightly seized and which leading human rights groups have been asking it to do for months, if not years. Who else can face down the Egyptian military? No one in Egypt can do it. For kleptocrats, bigger money is the only thing that beats big money.

So, what do I think about Klein’s Shock Doctrine idea now? I increasingly think that just blaming the IMF or Western economists for what happened in, say, Russia, is wrong. Yes, Westerners earned healthy sums advising ministries in Moscow on how to sell state assets to insiders, but they could only do that if politicians and oligarchs in Russia were up for it too. You can’t really make a distinction between the developed and developing worlds in terms of who’s to blame for the spread of kleptocracy: people from both sides grabbed the money, and they all deserve criticism.

(I think everyone, however, can agree that the IMF setting conditions before offering loans is better than the 19th century equivalent, which was the British government offering funds in exchange for Egypt giving it the Suez Canal.)

The solution is, as ever for me, more oversight of everyone’s behavior (both the IMF’s and the recipient governments’) and more enforcement of the rules. And if some kleptocrats somewhere run out of money, there is nothing wrong with demanding they stop being so kleptocratic if they want a loan. The question of course is: will it transform Egypt in the long run?

• “Past experience suggests that the government will exploit every loophole to delay implementation of provisions of the IMF agreement, and prevaricate across the board. Neither the presidency nor the government have done the kind of intensive political preparation needed to push through something as wide-ranging and far-reaching as the State Ownership Policy. The agreement with the IMF will certainly suffer significant delays and watering down, potentially making it more aspirational than operational,” said the Carnegie Center’s Sayigh.

If it does work, however, there could be lessons to be learned in how to transform the Russian economy when it inevitably collapses under the weight of Vladimir Putin’s mismanagement. Interestingly, on current trends, Egypt’s population is due to overtake Russia’s within 15 years so the comparison is not as outlandish as it perhaps appears.

GOLDEN VISAS

After Putin sent two assassins to the English city of Salisbury to kill defector Sergei Skripal in 2018, the British government began to wonder if it hadn’t perhaps been a little foolish in selling Russian oligarchs anything they wanted. As part of this rethinking process, it said it would review whether the United Kingdom should keep selling so-called Tier One (Investor) visas to anyone able to pony up two million pounds (of whom many had been Russian).

And now, five years later, with all the urgency of an underperforming slug, the results of that review have slithered over the finish line. Or a self-justifying summary of those results has anyway, which is kind of the same thing as long as you don’t take more than three seconds to think about it.

• “The review of cases identified a small minority of individuals connected to the Tier 1 (Investor) visa route that were potentially at high risk of having obtained wealth through corruption or other illicit financial activity, and/or being engaged in serious and organized crime. I should stress that the work carried out only implies that a particular individual potentially poses a risk of having connections to criminality; it does not mean guilt has been proven,” said Home Secretary Suella Braverman.

The review showed that, of the 6,312 people awarded one of these visas, 10 have since been sanctioned. Braverman conceded there had been a problem in the past but said it was now solved, because this kind of visa would no longer be issued. We should sit back and trust the law enforcement agencies to take care of things from now on.

That is not good enough, and here are four questions we urgently need answers to:

• The review only looked at visas issued between 2008 and 2015. The program began in 1994 and continued until February 2022. We know that more than 5,000 visas were issued between 2015 and 2022 but have no idea how many were issued from 1996 to 2008. It certainly looks like the review covers less than half of all the golden visas sold since the early 1990s, and possibly much less. What about them? How many of those applicants are questionable?
• Only Russians have been sanctioned since February, and yet Russians made up less than half of applicants: What about the others? How many of them have been credibly accused of corruption but haven’t been sanctioned because their president hasn’t launched a major and totally unprovoked war?
• The law enforcement agencies are already flat-out researching sanctions violations, so how would they have time to investigate historic visa violations? Will they get extra funding?
• How many of these applicants have become British citizens? Will they be stripped of their passports if shown to have bought their visas with dirty money?

And that’s just to start with.

• “It is critical that the Home Office urgently develops specialist financial and economic crime expertise in its immigration function to make sure the other schemes and future schemes do not allow dirty money to enter the U.K.,” noted Spotlight on Corruption.

TAX THE RICH

It’s Davos time, which means it’s also time for Oxfam’s Inequality Report. Take a look.

• “Over the last 10 years, the richest 1% of humanity has captured more than half of all new global wealth. Since 2020, according to Oxfam analysis of Credit Suisse Data, this wealth grab by the super-rich has accelerated, and the richest one percent have captured almost two-thirds of all new wealth. This is six times more than the bottom 90% of humanity. Since 2020, for every dollar of new global wealth gained by someone in the bottom 90 percent, one of the world’s billionaires has gained $1.7 million.”

Since the weekend, my wife and I have been slightly obsessed with the person in Maine who won $1.35 billion in the lottery. We decided to win the jackpot too and began by happily spending our winnings on various joint ideas, but then we started to squabble over our respective projects before viciously cutting each other out and pledging to do our utmost to block the other’s plans. Anyway, I don’t know why we were so excited about it since it was clearly peanuts.

• “Billionaire fortunes are increasing by $2.7bn a day, even as inflation outpaces the wages of at least 1.7 billion workers, more than the population of India.”

WHAT I’M READING

I was lucky enough to get an advance copy of “Chasing Shadows” by Miles Johnson, an investigative reporter from the Financial Times, and zoomed through it. It’s a deep and engrossing voyage into the heart of South American cartels, Italian organized crime, Middle Eastern money launderers and more. Look out for it!

The post Building new capital cities is a sop for kleptocracy appeared first on Coda Story.

FinCEN, the U.S. Department of Treasury’s financial intelligence unit, was either giving us a Christmas present, or else waiting till no one was paying attention, when it chose December 22 as the date on which to slip out this interesting report on Russian oligarchs. It’s based on analyses of the filings made by U.S. financial institutions to regulators, as required by the Bank Secrecy Act (which is a weird misnomer, since the act actually made bank accounts significantly less secret than they had been when it was passed in 1970 and became the cornerstone of global anti-money laundering policy), between March and October 2022.

The report’s conclusions are based on 454 transactions totaling tens of billions of dollars, and I think they tell us interesting things about oligarchs’ position in the Kremlin hierarchy. As you may remember (though it seems a lifetime ago), when Vladimir Putin launched his all-out assault on Ukraine, there was much debate about what to do about the oligarchs, with people divided as to whether they were independent businesspeople who had gotten rich in Russia but had no influence over the Kremlin, or whether they were essentially shareholders in Kremlin Inc. who could be induced to lean on Putin and stop him from being a vicious, murderous tyrant. 

Opinion largely coalesced around the second option, and dozens of oligarchs found their Western-based assets frozen as a result.

Several oligarchs — such as, in this interview from March last year, Mikhail Fridman — complained bitterly, arguing that they in fact had no influence over Putin and that sanctioning them in this way was unfair. But the FinCEN analysis suggests that some oligarchs, at least, were better connected than they were letting on (though perhaps not Fridman, who knows?), had advance knowledge of the assault in Ukraine and took financial evasive action before sanctions were imposed.

• “Several oligarchs moved funds from accounts in Russia to accounts in other countries, including the United States, usually right before or around the time of the Russian invasion, and used the funds for property-related expenses. In some cases, these oligarchs had been transferring funds between their Russia-based accounts and their U.S.-based accounts for years, but the frequency and value of the transactions increased around the time of the invasion,” the report noted.
• “One Russian oligarch sent monthly credit card payments originating from his Switzerland-based account, but those payments increased in January and February 2022, suggesting substantially increased credit card spending from December 2021 through February 2022. BSA reports indicate that this oligarch purchased a larger number of goods than usual, which may have included luxury or high-value goods including art or jewelry, ahead of the Russian invasion and imposition of sanctions.”

The claims are anonymized, so we don’t know which individuals were engaged in this hasty financial engineering, but there is an interesting overlap with a Guardian article reporting that some 10 trusts established to benefit Roman Abramovich were rapidly reorganized in the weeks before the outbreak of full-scale war.

Back in February 2022, there was still much debating about whether Putin would indeed launch a military assault on Kyiv: London and Washington insisted that he would (but their credibility had not been helped by the Iraq debacle), but most other Western countries and Ukraine itself were skeptical, while officials in Moscow itself were derisive. When the invasion did come, it therefore came to a lot of observers as quite a surprise.

It has since been widely reported that the Kremlin kept the invasion plans within a tiny circle, which is why outsiders found it so hard to tell what was happening. If some of the oligarchs indeed had sufficiently advance knowledge of the military plans to extract their money in time, it suggests they are not the unfortunate bystanders they have presented themselves to be, but bona fide members of the Kremlin inner circle. And that means that their assets are fair game.

So, yay for the U.S. Senate and its late amendment to the omnibus spending bill that passed at the end of last year, which makes it easier to confiscate oligarchs’ assets for the benefit of the Ukrainians.

• “My amendment with Senator Graham gives the Biden administration authority to transfer the proceeds from recovered Russian oligarch assets back to the victims in Ukraine. It unlocks billions of dollars for the Ukrainian people to rebuild their schools, hospitals, homes, and critical infrastructure that Putin’s military has destroyed,” said Senator Sheldon Whitehouse (who, nominative determinism suggests, will be in the executive branch one day).

Western countries have battalions of ferocious lawyers, many of whom spend too much of their time defending oligarchs against the rest of us. If we want to undermine the oligarchs we need to find a way to turn those lawyers around, so they use their legal skills in the interest of Ukraine and other victims of kleptocracy, rather than in the interest of the kind of well-healed and well-informed insiders detailed in FinCEN’s report.

Back in the glory days of the Royal Navy, the crews of warships shared the value of any ships captured from the enemy, and the prospect of this “prize money” was a major factor in recruiting sailors and keeping them motivated during the long, miserable months at sea (as documented in Patrick O’Brian’s magnificent series of novels, which everyone should read). The genius of the idea of course is that it came at no cost to the British government.

I would like to see the Graham-Whitehouse amendment built on and turned into an equivalent approach to oligarchs’ assets, in which governments turn lawyers into privateers, with a promise that they can keep a decent chunk of anything they can find and confiscate. The European Union has been looking into this via its “freeze and seize task force” since the spring. At the end of November, the European Commission presented options to member states for how to go about turning that vision into reality.

In the short term, the EU wants just to manage frozen assets and to use any income they generate to help Ukraine. In the long term, it wants to deduct the cost of the damage Russia has done to Ukraine from the central bank assets that have been frozen, before returning them (prediction: there won’t be anything left). It also wants to see Russia prosecuted for aggression, although that would require the creation of an ad hoc tribunal, since Russia is not a member of the International Criminal Court. Such a tribunal has not been convened since the trial of Nazi leaders in Nuremberg but would be an important way to bring Putin’s murderers to justice. 

However, just as it took decades to track down scattered Nazis, it could well take as long to track down the oligarchs’ scattered assets, which are as well-hidden. The sooner we start, the sooner we’re done.

THIS IS FUN

Take a look at the interactive map on Missing Profits, which allows you to assess which countries are the winners and losers of the global tax system. Tax havens are in green, and it’s easy to see the usual suspects of small islands scattered around the world: Jersey, Guernsey, Bermuda, Malta, etc, etc. I think the most fascinating country for me though is Ireland.

One of the most striking aspects of diplomacy since Brexit is how well the Irish government has done in maintaining a united front in defense of its interests, both in Brussels and Washington, much to the howling frustration of British politicians who mentally still inhabit the 19th century (and to the secret amusement of quite a lot of Brits who think their country should have stayed in the EU). It is a diplomatic feat all the more impressive when you realize that Irish tax policy costs, according to Missing Profits, the U.S. more than $5 billion in lost taxes a year, Germany more than $4 billion a year, France more than $2 billion a year and Italy $1.5 billion a year. 

Fully 59% of the Irish government’s tax revenue has been artificially shifted from somewhere else, and in the circumstances it is quite the achievement that that government is still friends with everybody. They should offer courses.

I was almost as interested in Hungary, however, which spent ages opposing a global tax deal despite losing almost a quarter of its corporation tax to tax havens (of which Ireland accounts for the biggest share). It was like a turkey voting against vegetarianism. Still, it’s positive that finally the EU managed to reach agreement on the global tax deal, in the weeks before Christmas. It will be interesting what effect, if any, that has on future versions of this map.

NEW YEAR, SAME OLD ARGUMENT

Britain’s National Crime Agency has been looking for a cryptocurrency investigator (the application process has just ended, so apologies if you’d have been up for it), which is good news since it suggests that it has the resources to invest in new people. As I said many times last year, and no doubt will say again in 2023, there is no point having a good strategy to tackle oligarchs if you don’t have any people to implement it for you.

With an annual salary of more than $45,000, this investigator will earn a sum that Britain’s striking nurses can barely dream of, but is it enough?

• “Because crypto is an emerging market, some of the best expertise and understanding of crypto in the UK sits within policing. We have been investigating cryptocurrency since 2015 or 2016,” said Andy Gould, who heads up the British police’s national cybercrime team, in evidence to parliament at the end of last year. “One of my sergeants has just been offered 200 grand to go to the private sector. We cannot compete with that. That is probably the biggest risk that we face within this area at the moment.”

It’s clearly not sustainable if police agencies exist just to train up skilled investigators so the private sector can quadruple their salary, since that means new laws won’t have any teeth, including the new Economic Crime Bill.

• “Would you agree that the Bill will not be worth the paper it is written on if the enforcement agencies are not properly resourced to do the job?” asked one MP, during the same evidence session.
• “I fully agree that we need enforcement to be properly resourced with the right capabilities to be able to deliver what it is asked to do,” replied Nigel Kirby, formerly a senior officer at the NCA and now a senior officer at Lloyds Banking Group, with no apparent irony.

The U.K.’s Office for Sanctions Implementation doubled its headcount over the course of last year to more than 100 and expects to get more serious with enforcement in 2023. However, with inflation gobbling up budgets, and a year of recession ahead, that may be a rare bright spot.

• “Agency budgets are shrinking in real terms. Below inflation pay rises for civil servants suggest that the revolving door between public and private sector will operate only one way. It is hard not to see the failure to invest as counterproductive, with increased investment being likely to pay for itself with more efficient investigations and better outcomes,” noted this harsh but fair summary of butler Britain’s overall performance, from lawyer Chris Ladusans.

WHAT I’VE BEEN READING

I’d love to tell you that I’ve spent the holidays delving deep into the furthest reaches of klepto-literature, but I’d be lying. I’ve been reading about four nonfiction books simultaneously, but none of them have particularly grabbed me, so it’s been slow going.

In the absence of enjoyable history or current affairs, I’ve mainly been indulging my guilty passion for crime fiction, and I had a terrible cold so I’ve even got an excuse for having done so. I enjoyed the “Thursday Murder Club,” swiped my son’s copy of “One of Us Is Lying,” but most of all reveled in the new Strike Novel — “The Ink Black Heart” — which has that weird J.K. Rowling quality of being utterly unputdownable, despite being about four times longer than it has any right to be.

My most recent obsession, however, was the utterly brilliant film “The Banshees of Inisherin,” which I didn’t get to watch in the cinema last year, but which has just appeared on Disney+. It’s superb, and I would highly recommend you take the time to revel in its weirdness.

The post Russian oligarchs are more connected to the Kremlin than previously thought appeared first on Coda Story.

It’s the time of year when maddeningly catchy seasonal hits live rent-free between my ears and, just when I rid myself of them, someone starts whistling a snatch of Mariah Carey and all progress is lost. So, since I can’t think of anything else anyway, and since this is the last newsletter of the year, I thought I’d tell you all I want for Christmas.

Obviously, there is just one thing Ukraine needs right now, and that is generosity, so it can continue to repair the damage caused by Russian attacks on its electricity system and keep both its soldiers and its civilians warm and equipped this winter. But, without conquering the corruption that has allowed oligarchs to undermine it from within for so long, military success alone would be a partial victory.

• “The fight of Ukrainians against corruption has always been and will be one of the obstacles to destruction of our state by Russia. These are not empty words. It is corruption, among other things, that draws us to the “Russian world” of tyranny,” as the Anti-Corruption Action Center’s Vitaly Shabunin put it last month.

Even when corrupt politicians and officials have lost their jobs, they remain rich and thus able to buy the support needed to regain influence. An example is the court case brought by the long-overthrown Ukrainian president Viktor Yanukovich, who was seeking to have his title restored to him. Amazingly, a court in Kyiv was not only prepared to give him a hearing but assigned the case to a judge who previously served as a minister in one of Yanukovich’s governments.

Uprooting the networks of influence embedded within such institutions, and confiscating the wealth of corrupt politicians, requires detailed, committed and complex work, which is unglamorous but vitally important. It’s the political equivalent of being a sewage engineer: it’s never going to be fashionable but, without it, civilization collapses.

So, I was delighted to see that the judge who heads the Kyiv District Administrative Court (which accepted the scandalous Yanukovich case, along with many, many others) was last week sanctioned by the United States, showing an attention to detail from the U.S. — and an appreciation that Ukraine’s problems do not all originate in Moscow, but have been stoked by corrupt actors within its borders for decades — far beyond what’s been provided in other Western countries. That is the kind of Christmas present I can get behind.

Foreign partners need to be committed and focused in their strategy, but flexible and pragmatic in their tactics, if they are to help Ukrainians defeat corruption. It isn’t enough to offer a pathway to European Union membership, when oligarchs will always find people prepared to sabotage it.

Of late I keep hearing good things about reforms happening over the border in Moldova, a place I had previously pretty much written off thanks to it having had so many false dawns in the last 20 years. This is a very interesting document about how to dismantle corrupt networks, and build the rule of law, prepared by a Chisinau-convened panel of experts created “to analyze systemic corruption issues that cut across Moldovan institutions and improve implementation of anti-corruption measures.” It is clear-eyed about the scale of the challenge.

• “Over the past thirty years, the country endured economic collapse, extensive brain drain, poverty, endless political strife and endemic corruption at all levels. Privatization led to massive misappropriation by politicians and public officials. Bureaucrats were used by several individuals who managed to illegally appropriate state properties and grow into oligarchs,” the report says. As if that’s not enough, check out pages 9 and 10, for a long and detailed list of the specific problems that resulted.

The solutions proposed are examples of the kind of detailed thinking required to tackle corruption in every country where it exists. It is not enough to talk about “capacity building” and other donor-approved buzz terms that pop up in Western-funded programs until the money runs out (at which point they die without issue), but instead to really engage for the long term.

We also need to stop thinking of corruption as something that can be completely defeated. Recent scandals in both the EU and the U.K. show that cronyism and nepotism exist everywhere. The challenge is to reduce crooks’ room to maneuver and to make sure they get punished when they get caught. Several years ago, I asked Shabunin’s colleague Daria Kaleniuk how she doesn’t lose hope considering how hard it has been to defeat corruption in Ukraine.

• “I don’t think about defeating corruption,” she replied. “We are at four percent of where we need to be, and my ambition is to get to five. Then, when we get there, I’ll think about six.”

If I could have just one thing for Christmas, it’s for Western governments to spend a lot more time asking for advice from her, and from other people like her, then acting on it carefully, diligently, and meaningfully.

MAKING A LIST, AND CHECKING IT NOT AT ALL…

As for what I don’t want for Christmas, it’s the kind of short-termism encapsulated in the U.K. government’s decision to roll back reforms enacted after the 2007-8 financial crisis to strengthen its banks, intended to stop them going on another debt-funded binge that the rest of us have to pay for.

I don’t want to go on about this too much, because it’s supposed to be the season of goodwill, but I want to talk a tiny bit about why this is terrible. Imagine one member of your family lacked house insurance, so had more money to spend on lovely things than the rest of you, and spent that money ostentatiously and obnoxiously while boasting about how clever they were. Then their house burned down, they were left homeless, and everyone else had to chip in to build them a new home. Your sole condition was that — in the future — they took out insurance. But then, in a few years’ time, they decided it was wasteful and inefficient to spend all that money on insurance, and they’d be better off going back to buying lovely things instead. So they did. Then their house burned down again and you got stuck with the bill again, and so on.

This is just incredibly dumb, and the complete opposite of the kind of strategic, patient, committed, long-term thinking the world needs to secure prosperity for everyone. It’ll be great for a small number of well-connected financiers though, who’ll employ politicians when they retire, and they’ll all have cashed out by the time the next crisis comes, so who cares?

What else don’t I want? I don’t want short-term selfish politicking to scupper crucial long-term reforms. But sadly, we’ve got that as well, thanks to the EU’s failure to agree to the minimum global tax detail despite having already agreed to it last year.

• “First, it was Poland blocking it. When the Polish government withdrew its longstanding veto last July, Orbán’s government unexpectedly vetoed the agreement. Then in October, the Czech presidency did not even put it on the agenda of the EU finance ministers,” say three MEPs in a comment piece.
• “EU national interests have prevailed despite the cost-of-living crisis,” said Oxfam’s EU tax expert Chiara Putaturo. “This is a loss to ordinary people who are struggling with the cost-of-living crisis and a win to the ultra-profitable corporations.” 

Ukrainians are dying for the ideals of a free and democratic Europe, but EU politicians cannot find it in themselves to agree to a 15% tax rate on already-staggeringly-wealthy corporations that they’ve already agreed to so as to defend those ideals from the world’s greediest people. Yuk.

THEY’VE GOT CARS BIG AS BARS, THEY’VE GOT RIVERS OF GOLD…

Here’s a weird story from the Financial Times about a Luxembourg-based holding company LetterOne, which begins back in the spring, with the chairman “changing the art work and removing furniture from its Mayfair offices” to symbolically separate the fund from its wealthy Russian founders — Mikhail Fridman, Pyotr Aven, German Khan and Alexei Kuzmichev — who were sanctioned after the assault on Kyiv.

LetterOne has substantial investments in the U.K., the EU, the U.S. and elsewhere, all of which were put in jeopardy when its owners had their assets frozen. But the fund’s board — chaired (because they always are) by a former British government minister and member of the House of Lords — acted swiftly to disassociate itself from them.

• “Mikhail Fridman and Petr Aven have stepped down from the LetterOne board. As a result, they will no longer have any involvement with or influence over the business or its investments. They will not receive dividends, communications or any funds or economic resources, directly or indirectly,” LetterOne said in a statement in March.

After completing its hasty redecoration, both literally and metaphorically, the fund felt bullish once more, and began splashing a bit of money around, as well as giving money to charity and decorating its website with the Ukrainian flag. Here, for example, is a summary of all the money it had given to Ukrainian causes by September (that is so far the first and only monthly edition of a newsletter it issues to keep us all updated on its giving, but I am sure another one will be along at some point), all of which suggests it has moved on from its Russian founders.

• “I don’t mean this in a lighthearted way. But in terms of the business what is happening with them is not my problem,” Lord Davies told the Financial Times. “For them to come back into the company in any way, shape, or form, they’ve got to pass a fit and proper test. And for me, the bar on fit and proper test is pretty high now.”

But, as my boys might put it, is it though?

Both Aven and Fridman are challenging the legality of the EU’s sanctions against them, and Khan and Kuzmichev have transferred their stakes in LetterOne to an unsanctioned oligarch named Andrei Kosogov (who also ended up with an unexpectedly-vast stake in Alfa-Bank).

• “Kosogov financed the purchase of Khan and Kuzmichev’s LetterOne stakes with a note repayable within a decade bearing 2 percent interest, according to a person familiar with the matter. The loan was financed by other sanctioned LetterOne executives, people familiar with the matter said,” Bloomberg reported in May. (I keep reading that paragraph, and keep struggling to understand how it makes sense.)

Fridman’s ex-wife has already dropped off the EU’s sanctions list, which — as happened after 2014, when the EU sanctioned people involved in annexing Crimea — is shrinking in the face of what amounts to an overwhelming DDOS attack of legal challenges. So, what happens to LetterOne if Fridman and Aven’s appeals are successful, the Luxembourg-listed fund’s owners are no longer EU-sanctioned, and therefore everyone involved basically returns to how they were last year?

• “They have no rights as shareholders and – if sanctions are lifted – the board is under no obligation to return these rights,” LetterOne said in its March statement.

I have no problem believing Father Christmas can deliver presents to 22 million kids every hour of December 25, or that Rudolph and chums can fly him further than the distance from the Earth to the sun over the course of a single day, or that I’ll get all the festive cooking done without losing my temper, but I do struggle to believe that.

WHAT I’M READING

I’ve been spending a bit of time of late trying to learn more about how globalized finance used to work in its early days, so this week I read “The Rise and Decline of the Medici Bank” by Raymond de Roover, an astonishingly detailed and fascinating account of the legendary renaissance institution. I admit I did skip past the tables, as well as some of the denser descriptions of the trade balance between Florence and other Italian city-states, but the story is an incredible one with funny parallels to the modern world.

“A Milanese, Damiano Ruffini, sued the Bruges branch of the Medici bank for damages because of defective packing of nine bales of wool bought by the plaintiff from Simone Nori, manager of the London branch. Tomasso Portinari, as acting manager of the Bruges branch, denied all responsibility because the bales had not been sold by the Medici of Bruges and pointed out that Ruffini, if he had any claims, should bring action against the Medici of London. To this argument the plaintiff replied that the two branches were part of the same company and had one master. Thereupon Tomasso Portinari declared under oath that, while it was true that both branches had the same master, they were nonetheless separate partnerships, that one was not answerable for the other, and that the wool had sold to Ruffini for account of the Medici of London, not of Bruges.”

If you dislike this newsletter, please forward all complaints to my alter ego in the Marshall Islands, as they’re not my responsibility. Sorry, not sorry. Happy Holidays, Happy New Year, see you in 2023.

The post Corruption threatens war gains in Ukraine appeared first on Coda Story.