In the waning days of the Trump presidency, veto-proof majorities in the U.S. Congress passed historic bipartisan anti-corruption legislation in concert with his successor’s priorities. The Anti-Money Laundering (AML) Act of 2020, filed as an amendment to the National Defense Authorization Act for 2021, lays the foundation for action on the presidential policy directive President-elect Joe Biden says he will issue to establish “combating corruption as a core national security interest and democratic responsibility.”
Kleptocracy – the systemic theft of public funds by corrupt government officials – thrives on easy access to anonymous shell companies, luxury real estate, and other financial mechanisms primarily rooted in the United States and other consolidated democracies. Able to secure their wealth beyond the reach of vengeful domestic forces, kleptocrats like former Kyrgyz President Kurmanbek Bakiyev and his son, Maxim Bakiyev, can flee to lavish lives in exile when their hold on power collapses. Although the United States eventually confiscated and returned $4.6 million in assets allegedly stolen by the younger Bakiyev to Kyrgyzstan, he appears to retain political asylum in Britain and lives in a $4.3 million mansion in a posh London suburb.
Corrupt asset recovery programs in the United States and elsewhere, while important, have clearly proven ineffective at addressing the scale of the global problem. Fortunately, the critical role that the American financial system plays in empowering the rapacity of corrupt foreign officials means the U.S. government is well positioned to alter the perverse incentives that have long encouraged schemes like the multibillion-dollar looting of a Malaysian state investment fund, known as 1MBD, in the first place.
The most lauded provision of the AML Act is the creation of a beneficial ownership registry intended to end the practice of anonymous shell companies. Long understood in the public imagination as a faraway problem of tax havens in tropical locales, a series of high-profile leaks in recent years have demonstrated that the United States is the world’s leading host of anonymous shell companies used to facilitate the illicit financial flows of kleptocracy, organized crime, and terrorism.
The registry will aid national security, intelligence, law enforcement, and regulatory bodies whose investigations into organized crime and terrorist financing are presently hampered by the inscrutable webs of shell companies used to conceal the origins and beneficiaries of a variety of as assets. Ending the anonymity abused by kleptocrats and terrorists will disincentivize professional intermediaries in U.S. jurisdictions from participating in money laundering schemes and help honest gatekeepers in the financial, legal, and real estate sectors comply with the law.
However, unlike the United Kingdom’s pioneering beneficial ownership registry created in 2016, the U.S. database will not be available to the public. Making beneficial ownership registries public arguably enhances the accuracy of beneficial ownership information by affording journalists and civil society organizations the ability to help scrutinize and verify the data. While the new U.S. registry will provide federal, state, local, tribal, and international law enforcement with a potent new tool to investigate illicit financial flows, anti-corruption advocates will undoubtedly continue to push for a public registry.
Despite its shortcomings, the beneficial ownership registry and other AML Act provisions will help Biden follow through on his stated commitment to “lead efforts internationally to bring transparency to the global financial system, go after illicit tax havens, seize stolen assets, and make it more difficult for leaders who steal from their people to hide behind anonymous front companies.” With a registry enshrined in U.S. law, American diplomats will be better equipped to enlist other countries to help end the practice of anonymous shell companies.
On the international front, the AML Act also formalizes and expands the U.S. Treasury’s Financial Attaché Program, which helps foreign governments meet the legislative and regulatory standards set by the Financial Action Task Force (FATF), the international policymaking body created by the G-7 to counter money laundering and terrorist financing. The bill also creates similar foreign financial intelligence unit liaisons to establish relationships with foreign officials involved in anti-corruption work to facilitate capacity building around anti-money laundering and counter terrorist financing regulatory frameworks.
In a complementary section of the annual defense spending bill, the Kleptocracy Asset Recovery Rewards Act could close enforcement gaps in the array of existing whistleblower programs at U.S. agencies, which may have minimal jurisdiction over money laundering schemes that transcend borders. The legislation expands whistleblower protections and authorizes the payment of substantial rewards to individuals who provide information on foreign government corruption that leads to successful asset recovery.
Without whistleblowers, the massive scale of money laundering and its critical functionaries would remain largely obscure. Just last week, the U.S. Treasury designated former Kyrgyz customs chief Raimbek Matraimov for Global Magnitsky sanctions, which target corrupt foreign officials and human rights abusers. The designation was made based on his central role in a $700 million money laundering scheme painstakingly detailed last year by investigative journalists. Matraimov has long been notorious for his corruption in Kyrgyzstan, but it was not until one of his former employees, Aierken Saimaiti, provided journalists with a trove of documents and information that the complex details of the scheme were brought to light. The journalists were able to verify many details of the operation using public records across Europe and the United States, but publicly accessible beneficial ownership registries would have further empowered and enhanced their investigation. What’s more, Saimaiti was gunned down in an Istanbul café in November 2019, highlighting the need for international whistleblower protections.
The Matraimov investigation is just one of many in recent years. The avalanche of reporting on the Panama Papers – some 11.5 million documents leaked from a Panamanian law firm in 2016 – provided rich details of the international networks of lawyers, accountants, bankers, realtors, and other service providers that play central roles in laundering illicit money via shell companies and other offshore vehicles. The aftershocks of investigations related to the Panama Papers continue to reverberate, bringing the resignation of Mongolia’s capital city council chairman, Sandui Tsendsuren, in August 2017; inspiring an Indonesian government decree in March 2018 that all companies must reveal their true owners; leading to the prosecution of a former South Korean general and a former defense contractor on bribery charges in March 2019 related to a Turkish arms deal; and much more. Subsequent separate leaks including the FinCEN Files in September 2020 have provided further windows in the sordid world of dark money.
The FinCEN Files leak comprises approximately 2,100 suspicious activity reports filed by banks and other financial institutions to the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) detailing over $2 trillion worth of transactions. The files show that JPMorgan Chase, the largest U.S.-based bank, moved more than $1 billion for Jho Low, the fugitive banker behind the 1MBD scandal that brought down the Malaysian government of then-Prime Minister Najib Razak who was later sentenced in July 2020 to 12 years in prison in the first of several corruption trials against him. Since 2013, JPMorgan and other banks flagged over 100 suspicious transfers from Low’s companies including the purchases of luxury properties in New York City and paintings by Vincent van Gogh and Claude Monet.
The FinCEN Files – just a tiny snapshot of the millions of suspicious activity reports submitted to FinCEN – indicate that, unconcerned by occasional U.S. fines, international banks continue to process huge sums of funds they have self-identified as suspicious. The leak also suggests that FinCEN, the core U.S. agency tasked with the global anti-money laundering fight, lacks the capacity to take action on the deluge of suspicious activity reports and other information it receives. Although the AML Act does not provide FinCEN with greater resources, it does include reforms to suspicious activity reports and currency transaction reports, potentially addressing some of the shortcomings revealed by the FinCEN Files.
In addition to significant measures targeting anonymous shell companies and incentivizing whistleblowing, the AML Act also brings the antiquities sector under the anti-money laundering obligations of the Banking Secrecy Act and requires an assessment of the role of art dealers in money laundering. However, this does not mean either market is guaranteed to be regulated. The real estate sector has enjoyed exemption from similar due diligence obligations for nearly 20 years despite rampant abuse of the market by kleptocrats like Jho Low, helping drive the inflation that prices many Americans out of property ownership. A conspicuous absence in the new legislation is any mention of the multitrillion-dollar U.S. private equity industry whose hedge funds, money managers, and investment councilors have no due diligence requirements.
The expansions and reforms made to the U.S. anti-money laundering system by the new legislation provide the Biden administration with an upgraded set of authorities to lead the global fight against corruption and its negative impacts on security and democracy. However, the decades the landmark U.S. Foreign Corrupt Practices Act spent on the books before it was consistently enforced; the arbitrary, decades-long exemption of real estate agents from due diligence requirements; and the apparent lack of capacity revealed by the FinCEN Files tell a long story of insufficient enforcement by the American executive branch on anti-corruption. Further legislative action would be useful, but a sea change in anti-corruption efforts will depend on whether the Biden administration follows through on its commitments by properly staffing and resourcing the appropriate U.S. agencies to take advantage of the broad set of legal authorities Congress has already provided.
With robust enforcement, the United States can undermine the stability that financial secrecy provides for kleptocrats, criminals, and terrorists in the Asia-Pacific and beyond. Denied lavish safe harbors funded by ill-gotten gains in the event they need to flee domestic turbulence, kleptocrats will face greater incentive to limit corruption and direct funds into public goods and services. And where government officials and their interlocutors remain audacious enough to loot the state, the United States will be better positioned to lead international investigations and responses to the transnational threats posed by kleptocracy.
Ian J. Lynch is an independent foreign policy analyst with a Masters in Middle East, Caucasus, and Central Asian Security Studies from the University of St Andrews in Scotland. He previously developed girls’ education programs in Afghanistan from 2013-2018. He tweets at @Ian_J_Lynch.