Countering Kleptocracy: October 2023

Understanding transnational kleptocracy as a vehicle for theft, repression, and democratic erosion…and how we can respond. If you enjoy this newsletter, forward it to a friend or share on social media so that others can subscribe.


Kleptocracy in the Arts and Antiquities Trade // October 31

by Ariane Gottlieb, International Forum for Democratic Studies

In “Ode on a Grecian Urn,” the poet John Keats asserts “Beauty is truth, truth beauty, — that is all / Ye know on Earth, and all ye need to know.” Indeed, the enormous popularity of the arts and antiquities market speak to its ability to immortalize beauty and impart knowledge. Yet, underneath its ornate paintings and gilded treasures, the art world hides an ugly secret. Global kleptocrats have leveraged portions of the art and antiquities trade to launder money, subvert sanctions, and fund their malign activities. Transactions can be conducted amid high levels of secrecy. Due to a lack of rigorous safeguards, the true identity of buyers and sellers (i.e. beneficial ownership) is often difficult to discern, and oligarchs often rely upon shell companies or intermediaries to conduct transactions. Despite this weak link within rule-of-law frameworks, democracies can respond by closing loopholes within counter-kleptocracy safeguards, empowering law enforcement to combat this challenge, and supporting civil society to address knowledge gaps. Despite its artistic and historical value, the arts and antiquities trade has emerged as a veritable playground for malign actors. In 2021, the market was valued at $65 billion. Its enormous potential and a lack of sufficient anti-money laundering (AML) requirements incentivize kleptocrats to launder money by purchasing, storing, or selling art and antiquities. For example, financier Jho Lo—who siphoned billions of dollars from Malaysia’s state investment fund to enrich himself and his cronies—used his ill-gotten gains to buy $200 million worth of artwork. Even transactions at prominent auction houses can be conducted via intermediaries who do not disclose beneficial ownership, enabling sanctioned individuals to access the market. Russian oligarchs Arkady and Boris Rotenberg were able to circumvent sanctions enacted in 2014 by purchasing art via a U.S. intermediary and a network of shell companies. The funds generated from such activities are often used to bolster repressive actors via elite capture, SLAPP suits, and other kleptocratic activities. This market has emerged as a loophole within democracies’ counter-kleptocracy efforts. It has historically been excluded from policies mandating transparency within alternative sectors, allowing kleptocrats to conduct high-value transactions and launder money with impunity. Instead, AML, beneficial ownership, and other transparency requirements are often levied at the discretion of auction houses or private dealers. Although the four largest auction houses abide by AML regulations voluntarily, employees do not always discern the true identity of their buyers. Many museums have similarly failed to conduct due diligence on the origins of their collections. In one example, the art collector Douglas Latchford used secret offshore companies on the Island of Jersey in the British Isles to launder stolen Cambodian antiquities and sell them to institutions such as the Metropolitan Museum of Art. In recent years, transatlantic policymakers have taken steps to curb illegal activity. In 2021, the U.S. Congress passed legislation to bring the arts and antiquities trade under the same AML regulations as other industries. This measure helps ensure transparent beneficial ownership, outlines clear recordkeeping and reporting obligations, imposes compliance policies, and more. The European Union also moved to close AML loopholes in 2020, aiming to mitigate the threat of money laundering. Despite these steps, democracy practitioners can do more to encourage AML and rule-of-law safeguards. Loopholes in sanctions enforcement can be closed by imposing similar measures on the family members of targeted individuals. The ownership threshold for blocking companies linked to sanctioned individuals can be reduced or eliminated, so that oligarchs cannot derive profit from entities of which they hold minority ownershipLaw enforcement must be equipped with specialized knowledge and resources to combat illegal transactions. Support for civil society and independent media—whether through providing funding and resources or by giving a platform to leading experts—will also help address knowledge gaps that persist across borders. Kleptocrats’ exploitation of this industry proves that there is more to art than meets the eye. The international community must shore up this critical vulnerability to help stem opportunities for kleptocrats to launder their wealth and evade counter-kleptocracy strategies.

Image Credit: lolloj/Shutterstock

Tales from the Crypto: How the Baltic States Became the Hub of Money Laundering and Fraud (VSquare)

Cryptocurrency and online financial service companies are utilizing patchwork regulations in the Baltic states to commit illicit acts. In Estonia, shell companies have stolen the identities of citizens to claim their businesses as “EU-licensed.” Billions of dollars have been laundered, transferred illegally to sanctioned Russian actors, used to fund paramilitary groups and criminal organizations, and defrauded from Estonian citizens. Estonia’s efforts to tighten regulations, however, have incentivized these entities to migrate to Lithuania, demonstrating how counter-kleptocracy measures fall short if they are only enforced in one country.


How Financial Secrecy Undermines Democracy (Journal of Democracy)

A global “financial-secrecy system” threatens Western social and political stability, according to a new Journal of Democracy article by Charles G. Davidson and Ben Judah. Global elites have manipulated the capitalist system for personal benefit while diverting trillions of dollars in tax revenue from national governments, promoting extreme income inequality, and facilitating international crime and kleptocracy. Secretive flows of capital should be regulated to safeguard the legitimacy of the West’s democratic and economic institutions.


How Russia Perpetrates Kleptocracy and Human Rights Abuses in Sub-Saharan Africa

The death of Wagner Group chief Yevgeny Prigozhin has prompted questions about the future of Russia’s kleptocratic and influence activities in Africa. Amid the power vacuum that Prigozhin’s death left behind, Dmitry Sytii—Wagner’s Africa representative for the last five years—has arisen as a potential leader. Sytii reportedly operates front companies whose purpose is to extract natural resources from the Central African Republic; such activities are often used to fund Wagner’s presence around the region. Furthermore, the U.S. sanctioned Sudanese and Russian financial entities for providing support to the Sudanese paramilitary organization, the Rapid Security Forces, demonstrating how opaque kleptocratic entities bankroll violent actors and exacerbate conflict in Africa.

For more on the future of Russian influence in Africa, read Melissa Aten and John K. Glenn’s analysis in the Power 3.0 blog.

Hereditary Kleptocracy in Chad: A Special Report (Finance Uncovered)

One year after the brutal massacre of democracy protesters in Chad, President Mahamat Idriss Déby continues to preside over a deeply authoritarian klepto-state, according to Finance Uncovered. Facilitated by the regime of the son of the former president, Déby and the political elite maintain their power and wealth by exercising tight oversight of the petroleum industry. Finance Uncovered claims the Chadian leadership maintains this dynamic because the French government turns a blind eye toward these actions. Paris continues to prioritize security cooperation with the kleptocratic regime despite the severe human rights abuses and poor economic conditions in the country.


Red Flags in Real Cases: Enforcement and Evasion of Russia Sanctions (Wisconsin Project)

The Wisconsin Project, a nuclear arms control nonprofit affiliated with the University of Wisconsin, released analysis on the U.S. government’s use of “red flags,” or warning signals that a business transaction is concealing illicit activity. Although sanctions have helped curb the import of military technology into Russia since 2014, they also created a lucrative opportunity for those willing to circumvent such measures. The democracy community must pursue a stronger framework for cross-broader cooperation and push for strict sanctions compliance in the public and private sectors.


After Wagner: Russia’s Export of Kleptocracy to Africa

The Forum’s Melissa Aten and John K. Glenn offer insights into the future of Russia’s presence in Africa following former Wagner Group chief Yevgeny Prigozhin’s death. Russia’s security and economic engagement in the region is primarily geared toward resource extraction, exploitation, and the spread of malign influence—demanding a scaled-up response from civil society and the broader democracy community. For more on this topic, read J.R. Mailey’s contribution to the Forum’s report, “Kleptocratic Cooperation in Africa: How Russia and China Undermine Democracy.”


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