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7 December, 2017

“It is important to develop rhetoric about kleptocracy as a cultural and moral issue”

Kleptocracy Initiative Executive Director on European and American havens for ill-gotten money, their impact on democratic systems and the ways to dismantle them

Interviewed by Anna Korbut

“After the fall of the Iron Cutrain, the West has seen destructive import of corrupt practices and norms, and their effect on its values”, says a September report from Hudson Institute’s Kleptocracy Inititave. Focusing on how non-state actors export kleptocratic norms to the West, it argues that the post-Cold War flow of money and values was not a one-way affair. Post-Soviet kleptocracies like Russia or Azerbaijan, as well as China and other countries around the world, whose ruling elites now possess far-reaching financial and political interests in the West, have been increasingly assaulting the West’s value system with their money. Moreover, the West has been allowing and encouraging that by providing havens for it. The Ukrainian Week speaks to Kleptocracy Initiative Executive Director Charles Davidson, based in Washington, about European and American havens for ill-gotten money, their impact on democratic systems and the ways to dismantle them.

Kleptocracy affects the countries where the money is stolen first and foremost. How do you assess its impact on the countries where the money is hidden?

When I testified at a Helsinki Commission hearing on Combatting Kleptocracy with Incorporation Transparency on October 3, I said that the following: “The most dangerous threat to our national security is the aggression of authoritarian regimes that actively seek to undermine our freedom and democracy, and to export authoritarianism into the OSCE region and around the globe. What is at stake is the survival of our civilization. These regimes have already upended the post-World War II international order via invasion and violation of treaties, perverted a rules-based global system of relatively fair economic exchange via intellectual property theft and corrosive business practices, and attacked our government’s computer systems. And these regimes are sharing best practices and increasingly behaving like an axis of evil.”

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Western diplomats are increasingly ignored when they warn of corruption across Eurasia: this anti-corruption talk is increasingly taken as hypocrisy despite decades of diplomatic effort to support more democratic and transparent societies in Eurasia

The point I make to young Ukrainians is the West’s role in facilitating grand corruption. We are beating up Ukraine and others to be less corrupt. Yet, we are assisting the oligarchs in the looting. This is nuts, but it is part of a much broader problem in the West. We are doing the same thing vis a vis Russia, China, and even ourselves in a way: we allow systems of secretive and anonymous companies that enable our own citizens to drop out of being part of the polity. In an earlier statement, a testimony before the US House Committee on Foreign Affairs in December 2016, I spoke about corrupt officials or kleptocrats seeking to secure their illicitly gained assets at a safe haven, with rule of law protecting property rights. The West, generally speaking, has provided this haven. Western diplomats are increasingly ignored when they warn of corruption across Eurasia: this anti-corruption talk is increasingly taken as hypocrisy despite decades of diplomatic effort to support more democratic and transparent societies in Eurasia.

Where does the US rank in the list of havens for kleptocratic money?

We are number one. The best article I know that summarizes this is titled Corruption: Moving money out of purgatory by Kara Scannell of the Financial Times (published on July 5, 2016 - Ed.). It wasn’t always like that.

We had the big scandals of US tax evasion (investigations into it starting in 2008 – Ed.), in particular the UBS AG case. A UBS banker, Bradley Birkenfeld, was a whistleblower about massive tax evasion by Americans – about 50,000 accounts or more that the bank was servicing. The scandal revealed how this was done, the trips that the UBS bankers would take to the US under tourist visas and false pretenses, the famous incident of a banker smuggling diamonds in a tube of toothpaste. That led to the creation of a special group at the Internal Revenue Service in the US dedicating itself to going after this.

As a result, UBS paid a big fine and there was a big diplomatic scandal. A lot of Americans were caught on tax evasion. A lot of people then paid the taxes; a whole system was set up for people to voluntarily disclose their evasion. A big clean-up was done in Switzerland, but that was from the standpoint of the US. We took measures that led to the shutting down of Wegelin, the oldest Swiss private bank. Many others were hurt; a lot of fines were paid. Switzerland is still a huge haven for all of these things. All that activity involved just US clients, and I’m not sure they are the biggest part of their business. But it did have effects.

So it is also a terrible thing for the US – from the political standpoint, and in terms of its soft power, prestige and credibility – to have done that, and then to allow evaders and kleptocrats to come here using our secrecy services.

Do you see a possibility of a consolidated international effort to tackle this?


The core of the matter is the international offshore financial system. I was one of the early entrants into the anti-offshore movement, co-founding a think tank called Global Financial Integrity in 2006 with Raymond Baker. GFI is small but very influential, its numbers widely quoted by The Economist, the World Bank etc.

This offshore secrecy system is not understood. One of the reasons is that it is secret.  Unless you are a practitioner in that field or you are using it. The people who are using it don’t advertise it. Yet, they all know that it’s wrong. That is an interesting thing about it: unless people who do bad stuff follow an ideology or are convinced that what they do is right, it can crumble pretty fast. I’ve had a lot of experience with such people. They may have many excuses to justify what they are doing. But none of them are proud of it. I have never encountered anyone who said “Yes, I’m a fantastic provider of services to murderers and criminals and tax evaders, and I’m really happy about this, and I’m educating my children to do the same thing.” That is actually a considerable vulnerability of this system. Very few people want to be doing something that is despicable and wrong. But they do it for money, and there is no social censure. So to some extent, the best way to start getting rid of this offshore system is not necessarily laws, although there is a lot going on in the US Congress around that, but public awareness.

I can give you an example of a first-term congressman I met a couple of months ago. A Russian oligarch was misbehaving in his district. So he educated himself about Russian kleptocracy and introduced a bill to push back against the nefarious influences of that kleptocracy and Putinism in Eastern Europe.

The legislative part of the US government has woken up to these things. One example, the bills in both the Congress and Senate that are gathering steam to do away with anonymous companies.

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But a very important part of the reform is for young people and the Fourth Estate to start rhetoric about it as a cultural and moral issue, among other things. If democracy is governance that is supposed to emanate from the will of the people, the voters, then you won’t get legislation or executive action without expressing this will. Look at Barack Obama – he was constantly looking at the polling on this or that issue, far too much probably. But for public opinion to turn on this issue, it needs to become much better known.

In my testimony for the House Committee on Foreign Affairs I stressed that people within the electorate need to understand the link between authoritarianism and kleptocracy, and the system of financial secrecy and offshore systems much more broadly.

There was a Ben Judah article where he spoke to average Ukrainians.  They were very conscious of the West’s role in facilitating the grand corruption in their country. That’s not something Americans have been aware of, even people in the political thought class. When I talk to them about this, they find it hard to believe, because of their ignorance of offshore finance.

People have to feel that something is wrong and needs to change. Take the Protestant Reformation: it started with just a spark and grew like wildfire. We have seen similar things historically. But we have become far too cynical, at least in my country, about political change and things getting better. We have become used to things getting worse. Anybody who is optimistic is thought of as being stupid. Although I think that is changing.

If we look at the practical reforms of executive steps that can be taken, we in the US are the most behind in terms of the legal possibilities for owning assets anonymously.

The low hanging fruit to correct the aspect where we lag behind Europe is in regards to anonymous or shell companies. The Anonymous Companies Act, that is now in Congress has very good chances of passing, especially after the Magnitsky and Global Magnitsky Acts⃰ ⃰ did almost unanimously. Recently, Senator Marco Rubio jumped in to co-sponsor the bill in the Senate. There are a lot of bills being proposed on the Hill that would support this legislation in various ways.

How much resistance do you expect to such initiatives?

There is resistance. A lot of it is not expressed candidly because it is hard to have good arguments in favor of anonymous companies. A big surprise has been that major banks have come out in favor of the Anonymous Companies legislation. Their own think tank, The Clearing House, has supported it. It wouldn’t come out in favor of something its constituents don’t support. HSBC, an international British bank, has recently put out a quarterly report where it slipped into a paragraph saying that they are in favor of the beneficial ownership legislation. So, things are changing.

This is partly because of public pressure, and partly because societies are starting to fall apart and there are people on top realizing that they are part of the problem. Bankers are not stupid. They know that they are making money, but if things get too bad, they won’t anymore. Even if it starts with two-three people, they will have lunch with colleagues tomorrow, and suddenly it’s 4-5. Then it grows.

To my knowledge, the only constituency in the whole country against this legislation is the U.S. Chamber of Commerce. They don’t give any good reason for it, or they give false statements in terms of how it can affect small businesses. Why they are opposing it is anybody’s guess.

How can countries like Ukraine plundered by their own kleptocrats persuade Western havens to reject or expose their corrupt money?

It is only power that can achieve anything. What I always tell young Ukrainians and other delegations coming here is that they should make noise. They should not be bashful about bashing American delegations and people; they should tell them how the grand corruption is happening. US officials should hear that when they come to Ukraine. A lot of US officials don’t really know about this. A lot of these US officials have had careers that did not bring them into contact with this world. There has not been enough publicity about it – although a lot more now than there has been before.

In the case of Ukraine, the US is a relatively minor player. Austria certainly plays a big role. London does too. But the US has political power – still. If we pass the Anonymous Company Act, we will have the ability to put pressure on the others just as we did with the Foreign Corrupt Practices Act. One idea brought about by an external party, which we happily embraced, is to have FCPA penalize not just the bribe givers, but the bribe takers. That would be a powerful tool to add to the arsenal, and a political statement, too.


Charles Davidson is Executive Director of the Kleptocracy Initiative at Hudson Institute, and Publisher and CEO of The American Interest LLC. He co-founded The American Interest magazine. In 2006, Mr. Davidson co-founded the think tank Global Financial Integrity and is its former Board Chair.

⃰ Sponsored originally by Sen. Ron Wyden (D), the co-sponsored by Sen. Marco Rubio (R), the True Incorporation Transparency for Law Enforcement (TITLE) Act was introduced to the Senate in June 2017 and has now been referred to the Committee on the Judiciary. If passed, it would prevent individuals from using anonymous shell corporations to engage in illicit activities like money laundering, sex trafficking, fraud and terrorist financing. 

⃰⃰ ⃰ The Global Magnitsky Human Rights Accountability Act was in December 2016. It authorizes the US President to impose financial sanctions and visa restrictions on foreign persons in response to certain human rights violations and acts of corruption.

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