Kleptocracy

Vadim Nikitin

  • Moneyland: Why Thieves and Crooks Now Rule the World and How to Take It Back by Oliver Bullough
    Profile, 304 pp, £20.00, September 2018, ISBN 978 1 78125 792 0
  • Dark Commerce: How a New Illicit Economy Is Threatening Our Future by Louise Shelley
    Princeton, 376 pp, £24.00, October 2018, ISBN 978 0 691 17018 3

I remember the first time I paid a bribe. It was the summer of 1993, and I was standing at the ticket counter of the Aeroflot office in Voronezh; I was nine years old. My parents had just handed in their passports at the window. ‘Biletov nyet,’ a voice barked from behind a brown computer console labelled ‘Robotron’. The rest happened quickly. I saw my father pick up my passport and – perhaps hoping I wouldn’t notice – silently insert a $20 note before instructing me to go up to the counter and ask the lady to check again. This time, the only reply was the sound of computer keys being punched, followed by the screech of a dot matrix printer. Three tickets to Murmansk were thrust into my hand. The elation of having beaten the system dissipated as soon as I boarded the plane: the blue and white Tupolev aircraft was all but empty.

By the late 1990s, Aeroflot was in a tailspin of debt, wage arrears and cash-flow problems. Had what was once the world’s largest airline been brought to its knees by a legion of corrupt saleswomen? Not quite. Around the time of my Voronezh shakedown, the CEO of Aeroflot inexplicably ordered the company’s international branches to channel their takings – hundreds of millions of dollars every year – through a previously obscure Swiss company called Andava, rather than remit them directly to headquarters in Moscow. From the commission it charged Aeroflot (significantly above the rates offered by big-name institutions for equivalent operations), Andava earned nearly $11 million in 1997 alone. It then loaned the money it received from the sale of Aeroflot tickets back to Aeroflot, with interest. The existence of this seemingly unnecessary arrangement was not revealed to management or to small shareholders until a Russian police investigation discovered that Andava was in fact co-owned by Aeroflot’s CFO and one of its major shareholders, who had links to the Kremlin.

Equal parts banal and uncanny, what happened in Voronezh was vanilla bribery – the sort of thing that determines a country’s ranking in Transparency International’s Corruption Perceptions Index (spoiler alert: Russia’s was, and remains, very low). The story of Andava was qualitatively different, a total institutional capture involving millions of dollars embezzled by insiders through hidden offshore entities registered in tax havens. Some of the money may also have gone towards Putin’s first presidential campaign in 2000, which probably seemed an excellent investment at the time.

Such schemes comprise what the journalist Oliver Bullough calls kleptocracy. Moneyland, his impassioned but at times specious book, depicts the universe inhabited by global money launderers and calls out the Western bankers, lawyers, property brokers and politicians who profit from it. Kleptocracy works like this: steal, launder, spend. Developing and post-Soviet countries are where most of the money is stolen, but it is here in the UK and in other apparently clean and well-governed places where it is laundered and spent – on things like luxury properties and private school fees. In allowing corrupt international elites to take advantage of its legal system, property rights and democratic institutions, Britain acts as an enabler of kleptocrats.

Bullough defines ‘Moneyland’ as a ‘virtual country where, if you are rich enough, whoever you were, or wherever your money came from, the laws did not apply to you’. This is because, in the age of globalised financial flows that replaced the gold standard-based Bretton Woods system, ‘money is international while laws are not.’ Which isn’t to say that it’s untethered to geography: ‘Wherever money is stolen from, it ends up in the same places: London, New York, Miami,’ Bullough writes. ‘And wherever it ends up, it is laundered in the same ways, through shell companies or other legal structures in the same handful of jurisdictions.’ Bullough’s core argument is that international criminal elites are using financial secrecy jurisdictions (often former British colonies), as well as Western legal, civic and political institutions, to launder money. The kleptocrats do this with the ‘enthusiastic collaboration of Western professionals’. A rogues’ gallery of smarmy lobbyists, tax lawyers, PR officers and estate agents hammers home the point.

Bullough peppers his book with allusions to Harry Potter, James Bond, Asterix and Tintin. Depending on your twee-tolerance, this is either charming or patronising. But his real strength is as a reporter, with an ear for a good quote and a bonhomie that loosens the tongues of even the most cynical of Moneyland’s satraps. An American lawyer who brags of having singlehandedly rewritten a corporate secrecy law in the interests of his rich clients compares himself to God, but adds: ‘I didn’t take the seventh day off.’ A British PR man involved in reputation laundering for elites from what he calls ‘pretty ropey’ jurisdictions, tells Bullough he has two aims, to make clients ‘unkillable’ – usually by encouraging them to become philanthropists (‘he made air quotes around the word “philanthropist”’) – and ‘un-writeabout-able’: ‘You try writing about one of my clients, seriously, we’d take you to the fucking cleaners.’

How did we get here? Bullough blames Eurobonds, financial instruments invented in the City of London in the 1960s to move dollars held in Swiss banks, known as Eurodollars, across borders without triggering currency controls. Although the bonds were listed on the London Stock Exchange, the fact that they were formally issued in the Netherlands and Luxembourg made them exempt from UK taxes. Also known as bearer bonds, they were fully anonymous and could be redeemed by anyone who possessed the physical certificates. This game of jurisdictional Twister, as Bullough puts it, resulted in the creation of a ‘bond paying a good rate of interest, on which no one had to pay tax of any kind, and which could be turned back into cash anywhere’. The initial customers for the Eurobond were known in banking circles as ‘Belgian dentists’, solidly bourgeois European tax-dodgers who hid a portion of their wealth in Swiss banks but wanted greater access and higher returns. There were other beneficiaries too: Jewish refugees, Nazi war criminals, South American despots and even the Soviet government.

Here, Bullough draws a distinction between the ‘naughty money’ of the Belgian dentists, the ‘scared money’ of Jewish and other vulnerable groups, and the ‘evil money’ of international kleptocrats and dictators. ‘In the early days,’ he writes, Moneyland ‘had been a device used by rich Westerners to shield their cash from governments wishing to take it from them … This was naughty, perhaps, but few would argue that it was actually evil. The true revolution happened, however, when these tricks were deployed in countries without the rule of law, or the robust political institutions of the West.’ As globalisation led countries to compete with one another for the right to harbour increasingly untethered international capital by offering ever higher secrecy and lower taxes, the balance shifted decisively in favour of ‘evil money’.

In the book’s strongest chapter, Bullough shows the effects of kleptocratic capital flight on its countries of origin. Visiting the Cancer Institute in Kiev, he finds a dilapidated institution ravaged by cronyism, embezzlement and fraud. A doctor complains that the hospital recently bought a respirator for €130,000 above asking price, money that immediately disappeared. Mothers whose children are being treated for cancer describe doctors using hand gestures to ask for bribes: ‘Two fingers is two thousand. Three fingers: three thousand.’ Meanwhile, Ukraine’s health ministry was found to have overpaid by up to 300 per cent for HIV and TB drugs in 2012 alone, with officials suspected of pocketing the difference. Following the overthrow of the venal president Viktor Yanukovich in 2014, an idealistic new health minister tried to reform the state procurement network and refused to buy equipment from the corrupt suppliers. Yet it proved impossible to find clean ones. Within months, hospitals began to run out of medicine and he was sacked. ‘I fought the old system for seven months,’ he told Bullough. ‘But as soon as I was removed, the old system took its place again.’

It’s a feat of reporting, even if Bullough didn’t need to go as far as Ukraine to see Moneyland’s devastating social costs. A 2017 study published by the British Medical Journal linked health and social care budget cuts to nearly 120,000 excess deaths in the UK since 2010. Last year, the Office for National Statistics revealed that life expectancy has stopped rising for the first time since records began in 1982, and even fell in several parts of the country. At the same time, the net worth of Britain’s thousand richest families has more than doubled since 2009, to £547 billion, according to estimates by the Institute for Fiscal Studies.

Three years ago Private Eye produced a map of all the British property acquired by offshore companies from 1999 to 2014. It found that many aristocratic families had transferred the titles to their estates to entities based in tax havens. And this trend is likely to continue: in October, the Financial Times reported that British multimillionaires have begun moving their family trusts outside the UK in anticipation of higher taxes and capital controls if the Tories are voted out. One wealth manager called the trend a ‘direct response to the threat of a Corbyn-led government’.

Such flagrant tax dodging by the British elite is not surprising – why should foreign kleptocrats have all the fun? But its consequences undermine Bullough’s distinction between ‘naughty’ and ‘evil’. Bullough also lets the West off the hook while appearing to excoriate it when he argues that the UK is merely an enabler of the international kleptocrats. He is of course right to condemn British bankers, lawyers and estate agents for abetting international money laundering in their demented pursuit of the offshore pound. Yet by narrowly focusing on the UK’s role as a servicer of foreign corruption – a second-order offence – he pays little heed to the way its elites use Moneyland for the same purpose as foreign kleptocrats. After all, whether one calls it ‘capital flight’ and ‘transfer pricing’ (naughty) or ‘money laundering’ (evil), the ends are the same: moving money from one jurisdiction to another while concealing its origin and its ownership. There is a discomfiting Orientalism at the heart of Bullough’s tale: a fundamentally upstanding but flabby and decadent West is being led into temptation by an exuberantly rapacious, lawless and institutionally backward Other. In reality, the system Bullough claims that international kleptocrats are taking advantage of has allowed Western commercial and political interests to continue to exploit the developing world.

This point was made persuasively in Nicholas Shaxson’s book Treasure Islands, Tax Havens and the Men who Stole the World.[*] An Africanist, Shaxson saw in the Western-dominated offshore world nothing less than colonialism by another name. Economically, the abuse of transfer pricing by multinational corporations (to the extent that intra-company cashflows account for more than two-thirds of cross-border trade) echoes the exploitative practices of the East India Company. It also results in close to $160 billion in losses to developing countries each year. Politically, allowing local kleptocrats access to Moneyland buys the loyalty of former colonial elites.

Indeed, the illicit flow of money and goods across borders – as well as the fight against it – has been inseparable from international power politics for centuries. This is one of the arguments advanced by Louise Shelley in Dark Commerce. Shelley considers a range of practices, from illicit trade and people smuggling to intellectual property theft and cybercrime, which have been facilitated by the decline of national borders. While Bullough emphasises the flow of corrupt money between the developing and the developed world, Shelley shows that corruption doesn’t lie on a simple East-West or North-South axis. One of the most lucrative criminal industries today is the illegal trade in rhino horn, which mostly takes place between South Africa, on one side, and China and Vietnam, on the other. Shelley presents a devastating case study of a commodity that costs up to $60,000 per kilo, at least 25 per cent more than gold. The trade is not only driven by cultural factors. In Vietnam, health officials are believed to be bribed by transnational criminals to prescribe rhino horn as a cancer treatment.

Similarly, a great deal of illicit commerce takes place within and between developed countries, often commingling with legitimate business. ‘The licit and the illicit are not distinct,’ Shelley writes, ‘and they intersect more often than many realise.’ As much as a tenth of America’s 600-odd cloud computing repositories, including those of Amazon and Google, have hosted malware and other malicious products. The illicit economy shares many of the negative structural qualities of the legitimate business world. For example, women face a glass ceiling in the dark economy and are disproportionately used as drug mules and couriers. Bitcoin and other cryptocurrencies, ‘many of them created with the deliberate intention of supporting criminal activity’, have bred official corruption of the kind usually associated with the developing world: an agent of the US Drug Enforcement Agency and another from the US Secret Service were jailed recently for extorting large quantities of bitcoins from the founder of the dark web network Silk Road.

The fight against Moneyland received an unexpected boost last spring after a former Russian spy, Sergei Skripal, and his daughter, Yulia, were poisoned in Salisbury by suspected Russian agents. After decades of inertia, the UK government declared war on dirty Russian money. ‘The use of London as a base for the corrupt assets of Kremlin-connected individuals is now clearly linked to a wider Russian strategy and has implications for our national security,’ the parliamentary Foreign Affairs Committee declared. Any action to curb money laundering should be welcomed. But when anti-corruption policy is founded on national security considerations, it can cut both ways. One example of this is the Al Yamamah arms deal, a contract worth £43 billion to supply British jets and missiles to Saudi Arabia, signed in 1985. Following allegations that BAE Systems had paid Saudi royals as much as £1 billion in kickbacks, the Serious Fraud Office (SFO) launched an investigation in 2003. Yet after the Saudi government reportedly threatened to cancel another arms contract and end intelligence co-operation, the SFO’s director closed down the probe in 2006, citing the risk of ‘real and imminent damage to the UK’s national and international security’. Three top Saudi officials implicated in the scandal went on to buy mansions in the UK through offshore companies. Until his death in 2011, Sultan bin Abdulaziz, a former defence and aviation minister described by Private Eye as ‘instrumental in the Al-Yamamah and other corrupt deals’, owned what was then the most expensive property in the UK, a £300 million Knightsbridge mansion, through a Curaçao shell company.

And what would happen to the government’s resolve to stamp out Russian kleptocrats should the West wake up one morning to find someone they like in the Kremlin? We know the answer already, because we’ve been there before. The Aeroflot-Andava affair is absent from Bullough’s book, even though it was an early example of Moneyland in action. Behind that scheme were Aeroflot’s CFO, Nikolay Glushkov, and his patron, the oligarch Boris Berezovsky – éminence grise to Boris Yeltsin. The capital flight facilitated by Andava via Swiss and other offshore entities was illegal in Russia, which had instituted strict capital controls. However, shortly after Yeltsin’s son-in-law was appointed Aeroflot’s CEO in 1997, Andava was able to obtain a special waiver from the Russian central bank.

Berezovsky was an enthusiastic early backer of Putin, believing him to be a faceless Yeltsin loyalist who could be easily controlled, and claimed to have used Andava money to finance his first presidential campaign. Later, having fallen out with Putin, he proclaimed himself a victim of authoritarianism: he and Glushkov were given asylum in Britain, despite fraud charges against Berezovsky and a conviction for Glushkov, who spent three years in Russian jail. Both would eventually end up dead, Berezovsky suspended by his scarf from the shower rail at home in 2013 and Glushkov mysteriously strangled two weeks after the Skripal poisoning. Another Berezovsky associate, Alexander Litvinenko, succumbed to radiation poisoning in 2006.

If we are going to be serious about corruption, enforcement must be decoupled from questions of national security and political allegiance. Until then, Moneyland will always find willing enablers, even if some of its denizens will fall victim to changing political winds. In 2015, a few months after international sanctions were imposed on Russia following the annexation of the Crimea, I got a call from the compliance department of a major international bank. The business intelligence consultancy I was working for at the time was contracted to perform due diligence on the bank’s high-risk customers – many of them from the former Soviet Union. Due to the ‘tricky situation’, the compliance officer told me, they were going to begin ‘dumping the Russkies’. It sounded like bad news for the company, but then he asked whether we had any good Portuguese-speaking analysts. The collapse in crude prices was driving Angola’s oil-rich elite to stash their wealth abroad in anticipation of tighter currency controls. ‘We’ve got a whole load of fresh Angolans coming your way.’

[*] Treasure Islands was reviewed by David Runciman in the LRB of 14 April 2011.