The sanctions imposed on Russia in response to its aggression in Ukraine highlight the crucial role of transnational finance in enabling corrupt and autocratic regimes to flourish. Assets held abroad by specific members of the Russian elite have been frozen because they “shared in the corrupt gains of the Kremlin,” as U.S. Deputy National Security Adviser Daleep Singh explains, “and they will now share in the pain.”
But after-the-fact efforts to identify and freeze the foreign assets of individual oligarchs are not enough: we also can and should do more to stem the massive influx of dirty money from throughout the world into Western economies.
The breadth and depth of the sanctions announced so far have been constrained by fears of collateral damage not only to the Russian populace but also to Western economies. The reluctance of Germany and others to face energy shortages, for example, has prevented use of the “nuclear option” of fully blocking Russian access to SWIFT, the worldwide electronic banking network used to pay for imported gas and oil.
Further steps to target the wealth of the corrupt elite, however – such as ending their ability to launder money by means of anonymous shell companies – would inflict no harm on the public. The only collateral damage would be to the accomplices: the bankers, lawyers, brokers, and accountants who help corrupt elites to shift and hide assets, pocketing a slice of the loot for themselves in the process. These enablers shared in the corrupt gains, too, and they should share in the pain.
It is not only Russian oligarchs who rely on enablers-for-hire. Of over 130 billionaires whose hidden offshore wealth was revealed in millions of leaked documents in the Pandora Papers, Russians top the list with 52, but the rest come from across the globe. In country after country, transnational plunder networks manipulate states and markets alike to extract wealth and stash it away from prying eyes.
The kleptocrats whose money courses through these networks include ruling elites from countries wracked by desperate poverty. In our book, “On the Trail of Capital Flight from Africa,” we and our co-authors examine the financial alchemy by which oil in Angola, cacao in Côte d’Ivoire and minerals in South Africa are spun into private fortunes and illicitly spirited abroad, giving rise to the “paradox of plenty,” resource-rich lands with many of the world’s most impoverished people. In the past five decades, sub-Saharan Africa has lost more tha $2 trillion to capital flight; the hemorrhage now averages $65 billion a year, more than the annual inflow of official development aid.
There are two broad ways to attack the problem of dirty money. The first is an after-the-fact, piecemeal approach that targets individuals whose transgressions have moved the authorities to act. Task Force KleptoCapture, established last week by the Biden administration, is a ramped-up version of this tactic. But finding concealed assets is time-consuming and costly, and such efforts seldom manage to freeze more than a small fraction of the ill-gotten gains.
The second strategy is a pre-emptive, across-the-board assault on the transnational plunder networks that enable illicit financial flows. Rather than waiting for kleptocrats to cross a line – say, by invading a neighboring country – this approach focuses on the systemic vulnerabilities they exploit in the international financial system. The economic crime bill introduced last week by the UK government is a belated step in this direction.
Ending collusion with kleptocrats is not just a matter of moral righteousness, though it is morally right. Nor is it just a matter of altruistic concern for those who suffer under their misrule. It is also in the self-interest of law-abiding citizens in the countries that now serve as havens for capital flight.
Our book describes the repercussions from turning a blind eye to dirty money. One example is the turmoil in European financial markets in 2014 following the collapse of Portugal’s Banco Espírito Santo, a scandal triggered in part by its unsecured loans to Angolan elites. Another is the vast inflation in real estate prices in metropolitan centers like New York and “Londongrad” driven by purchases by oligarchs from around the world, making it difficult or impossible for local residents to afford housing in their own cities. A 2015 New York Times investigation revealed, for example, that more than 54 percent of luxury real estate sales in Manhattan were to offshore shell companies with anonymous owners.
The Russian invasion of Ukraine is a wake-up call in more ways than one. We shouldn’t wait for kleptocrats to get uppity before moving to disable them. We ought to do it as a matter of course – and a matter of principle.
James K. Boyce and Léonce Ndikumana are economists at the University of Massachusetts Amherst and the co-editors of “On the Trail of Capital Flight from Africa: The Takers and the Enablers” (Oxford University Press).