Nothing reveals the limits of a system more clearly than a crisis. Donald Trump’s presidency has demonstrated both the extent of Washington’s international financial power and the sway of kleptocracy in the United States itself. As the Federal Reserve single-handedly props up global finance and Congress pumps money into the economy at unprecedented rates, U.S. cruise companies notionally based in Panama and Liberia seek bailouts, U.S. senators face scrutiny for opaque stock transactions, and drug money literally piles up thanks to the forced closure of business fronts.
The two sides of this coin are U.S. power and decay. On the one hand, Trump himself built his business in an industry flush from money from kleptocratic regimes, easily laundered in the luxury real estate market, and has adapted the kind of closed-off governance by clique that pervades kleptocratic governance. Yet the enormous power of the Fed and the entrenching of the dollar system show how much leverage the United States has to shut those same forces down. It still holds immense power as a stakeholder in the global political and economic order, but the same order has facilitated the corruption of U.S. domestic politics and business by an international elite at ease with corruption.
The Trump years have made clear that kleptocracy is not just a phenomenon of corrupt states in the developing world or the former Soviet Union—it is an international network of financial practices that uses the global nature of the capitalist economy to escape democratic accountability and to extract profits by monetizing rents and holding back innovation. Dirty money captured by kleptocratic regimes is laundered and protected by global offshore money centers, including U.S. states, which also enable the financial ecosystem that allows firms and rich individuals to avoid paying their share of taxes.
As the scholars Alexander Cooley and J.C. Sharman have extensively documented, Central Asian kleptocratic regimes depend on corrupt networks that span from traditional illicit offshore money centers to conventional capitals of global finance, including London and New York. For example, a corrupt Central Asian official, in order to hide his illicitly acquired assets—often directly stolen from the public purse—can create a firm in Cyprus from which, due to a tax treaty, he can swap shares in a valuable Kazakh company for worthless shares in a sock puppet Cyprus company. This money is then used to purchase London real estate, exiting Cyprus into a new coterie of anonymous holding companies in another offshore center before purchasing luxury real estate in the West, ready to be sold as a so-called “clean” asset, as Global Witness has extensively documented in London.
These transactions are brokered along the way by a global network of lawyers, bankers, and consultants in major financial capitals. Major banks establish branches in tax shelters like the British Virgin Islands not only to manage ill-gotten gains but also to access massive dollar holdings to fund transactions in the global Eurodollar market—the market for global dollars issued by private banks that lubricates world trade.
The unnerving parallel between a corrupt Central Asian official and U.S. corporations is obvious. American kleptocrats use the exact same networks of professionals and jurisdictions to avoid taxation. Take a major U.S. pharmaceutical company that books its profits in low-tax Ireland and then takes these profits back into the United States by charging its Irish subsidiary for the use of its own intellectual property and deposits them into an account in the British Virgin Islands. This complex transaction can be brokered by the exact same firm and achieve the exact same results. The U.S. government, which likely issued the grants that made the pharmaceutical patent in the first place, is defrauded of tax income. The problem of kleptocratic governance “over there” can’t be separated from the causes of America’s increasingly unequal economy.
The sorest financial cankers of the Trump era are all emanations of this contemporary world political economy: the oligarch, the tax-avoiding supercorporation, the offshore-owned luxury properties used to launder money, and the untraceable dark money circulating at home and from authoritarian states. This makes the world safe for kleptocracy and authoritarianism and harms U.S. national interests by facilitating the corruption of business and political elites at home. It is not just the place where global unfettered capitalism directly impacts the country’s national politics and security but where Democrats need to rise to the challenge.
Should Joe Biden win in November, his administration must implement an anti-kleptocracy strategy that corrects previous administrations’ complacency toward, and in some cases collusion with, this kleptocratic nexus. The United States must wield the power it has exercised to stabilize the global monetary system to restructure the economic system that allows for kleptocratic governance to exist. The next president should not hold back from mobilizing the potential of U.S. financial firepower to beat kleptocracy.
The crisis of the Trump presidency has shown that the boundaries between home and abroad are no longer firm. Undermining the international financial system that empowered kleptocracy, and with it autocrats like Vladimir Putin, requires tracing dirty money through not just the Caymans and Kyiv, Ukraine, but Wilmington, Delaware, and Las Vegas. The most vital step Washington can take to fight kleptocracy is banning anonymous shell companies within the United States itself. States like Delaware and Nevada allow unsavory figures to set up anonymous companies that they then use for money laundering, sex and drug trafficking, nuclear proliferation, and corruption. The Financial Action Task Force, the global anti-money laundering standard-setting organization, has expressed “significant concerns” about this U.S. shortcoming. These state-level policies have a disastrous effect on U.S. national interests. Tax havens have modeled their laws on U.S. precedents and charge hypocrisy whenever Washington calls on them to improve.
Legislation already exists that a President Biden can champion. The centerpiece of the U.S. response to this threat has been the Corporate Transparency Act. The legislation would require all states to collect the information about the true owners of companies, so-called “beneficial owners,” eliminating U.S. anonymous companies. Biden has supported similar measures in the past. The Corporate Transparency Act passed the House in 2019 with bipartisan support but has so far languished in the Senate.
In the absence of legislative movement, the president can fight anonymity through executive action. If the administration wants to take bold steps toward this, one powerful tool available is the fourth special measure of Section 311 of the Patriot Act. This allows the administration to require foreign banks to disclose relevant information about their account holders to counterpart U.S. financial institutions. Foreign banks would have to reveal the beneficial owner (the “real” owner) of any account that uses a “correspondent account” in the United States.
Correspondent accounts allow foreigners to access U.S. markets and transact in dollars. This makes them central to the global financial system and ensures that greater disclosure requirements under Section 311 would have worldwide effects. Combined with the existing requirement for U.S. banks to collect beneficial ownership information for their account holders, the measure would ensure blanket coverage for any entity that hopes to do business in the United States.
The new administration could thwart global blowback by developing a white list of allies with high standards and acting strategically by imposing these Section 311 measures on a broad swath of entities and countries, spanning all types of economies. This broad-based approach would ensure global fairness in two ways. It would avoid solely bullying smaller countries dependent on the legal fees from providing shell companies, and it would make clear that major economies also enable global kleptocracy and make the United States itself a world leader through its willingness to tackle the problems at home.
A breadth of targets also limits unintended consequences. Usually, when Washington imposes money laundering penalties, financial institutions overreact and cut off any connection with the target. This would likely happen if the United States only applied Section 311 measures against a target like the British Virgin Islands. However, it would be impossible for banks to cut off major European financial networks that failed to comply with the minimum standards necessary to meet the white list. Instead, financial institutions would have to develop workable, transparent practices. Rather than simply playing whack-a-mole and just forcing kleptocrats to change their favored bases of operation, the United States would be changing the rules of the game.
After drawing on domestic sources of U.S. power like Section 311 to fix major gaps at home, a future administration should turn to cooperation with allies toward building new global norms and standards.
Fighting kleptocracy is at the heart of an internationalist foreign policy that recognizes that the modern world is deeply interconnected and thus national security depends on understanding and managing these gaps. A Biden administration would have the opportunity to reorient the U.S. alliance system toward these 21st-century challenges by tying U.S. domestic reform with a common set of anti-kleptocratic standards shared with the European Union and the United Kingdom. Such measures would fit squarely with Biden’s goal of a “foreign policy for the middle class” but on a global scale.
In addition to these country-to-country projects, a foreign policy committed to fighting kleptocracy should look to multilateral organizations. If Washington wants to shift its foreign-policy focus away from traditional geopolitical goals to an anti-kleptocracy approach aiming to fight for middle classes while maintaining an internationalist approach, private control of global financial nodes will not do. As a result, a Biden administration should seek greater governmental oversight of organizations like SWIFT. Bringing together the European Union, China, and international organizations, Washington should make global financial infrastructures supranationally controlled.
Carrots are needed as well as sticks in a global order where smaller countries have often turned to money laundering in order to scrabble for a place in global finance. If the United States is going to scale up its use of penalties and enforcement actions against kleptocracy, it will have to learn how to scale them down.
Too often, the United States has imposed sanctions or punished a jurisdiction for failing to follow anti-money laundering rules but then, once the target complied, has fallen short in welcoming it back into the financial system. Sudan, for example, suffered a deep shock after reentering the global economy following the removal of sanctions, facing major inflation, currency depreciation, and falling imports.
For this reason, the new administration should scale up its ability to lift restrictions sustainably. This will mean developing expert bureaucracies within the Treasury and State departments specifically focused on lifting restrictions and delivering “carrots” to countries that adopt sound anti-kleptocracy benefits. It will also mean providing significant funding through U.S. and international development agencies so that former target countries have the resources and know-how to remake their economies. This process will require political restraint as well: Policymakers must think twice before adopting punitive measures that are hard to lift on the back-end. For example, a meaningful “carrot” policy will depend on Congress giving the nimbler executive branch flexibility in shaping and adapting anti-kleptocracy initiatives to changing political and diplomatic circumstances. Together, these measures will ensure the successful transition away from the kleptocratic world order.
Integrating formerly kleptocratic states into a global monetary order means building a system they want to come back to. A Biden administration will have to find ways to tie together global development, liquidity provision, and financial regulation to solve kleptocracy’s underlying causes. This will mean developing a strategy to manage, or even surpass, the centrality of tax havens to today’s global payment system. Such an approach will yield benefits beyond just the fight against kleptocracy. Renegotiating the global monetary system to rely less on offshore centers to finance trade and development will also reduce the U.S. trade deficits created by global demand for dollar-denominated assets.
The battle against kleptocracy is more than a contest over corruption or development in faraway countries. It is a vital front in the war to make the world more habitable for the global middle class, which includes America’s own long-suffering workers. A focus on kleptocracy is a first step to reconciling U.S. domestic and foreign policies and making the world more just, and safer, for Americans and others.
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