Countering Kleptocracy: September 15, 2022

The International Forum for Democratic Studies is launching the Countering Kleptocracy newsletter, a monthly publication which shines a light on how transnational kleptocracy serves as a vehicle for theft, repression, and influence for political elites—and how democracies can respond. Each edition will focus on kleptocratic adaptations; implications for democracy, security, and human rights; and countermeasures by state actors, journalists, and civil society.

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Kleptocracy’s Corrosive Impact on Democracy // September 15

by Melissa Aten, Senior Program Officer, International Forum for Democratic Studies

The Russian invasion of Ukraine has brought the issue of transnational kleptocracy to the foreground like never before. Maintaining a kleptocratic architecture along its border was a strong motivating factor for Russia’s aggression. In response, democracies moved quickly to freeze over $330 billion in assets held by Russian oligarchs and others linked to the Putin regime. Other measures designed to hold “the enablers” who facilitate kleptocracy in the democracies accountable have been proposed. This unified response is an important first step, but it is insufficient to truly tackle transnational kleptocracy.

In this context and at this crucial juncture, we are launching the Countering Kleptocracy newsletter, designed to highlight work we believe is vital to understanding the threat posed by kleptocracy and forging democratic responses.

One question the Forum and others have begun to answer is how does kleptocracy corrode democracy? Typically, kleptocratic rulers and their cronies loot resources from their own countries, move it through the international financial system, and spend it in other countries—often in democracies. In these democratic systems, the same rule of law norms that keep domestic financial systems safe from political interference are unfortunately exploited by kleptocrats as safe havens. This transnational laundromat cleans dirty money, but it also blemishes and corrodes the institutions of democratic accountability that the money touches in the process.

In source countries heavily captured by kleptocratic networks, resources needed to develop a democratic polity—education, health care, and the like—are stolen from the country’s citizens. Traditional mechanisms of accountability, such as the media, civil society, and the judiciary, are typically subverted or curtailed, and, in turn, human rights abuses run rampant.

In the destination countries, kleptocratic networks seek to influence policymakers, government officials, and public opinion in ways that raise the costs of holding them accountable for their theft and repression. Whether through direct lobbying, PR campaigns, or more indirect forms of reputation laundering, the goal of these activities is to allow kleptocrats to separate their identify from the illicit source of their wealth and recast themselves as “engaged global citizens.” The secrecy that is the bedrock of transnational kleptocracy means it is difficult to discern who is behind these shady activities, as the kleptocrat or oligarch is hidden behind a front or shell company. It could be legitimate discourse among everyday citizens, or it could be Vladimir Putin.

A second question being asked is what is an effective response to kleptocracy? If the democracies are serious about curbing kleptocracy, there must be increased support for the brave men and women who work tirelessly to expose kleptocratic networks in their countries. Civil society groups that focus on civic education, watchdog mechanisms, participatory budgeting, and other vehicles for transparency are laying the groundwork for a more just society when the influence of kleptocratic networks wanes in their countries. Civil society organizations and independent media in source countries can benefit from increased resources that are flexible and more holistic to cover needs like data and physical security, equipment and office space, and legal defense. Support should incentivize collaborativecross-border, and inter-disciplinary work.

Democracies are not just victims of transnational kleptocracy; they are also often willing participants. The powerful professional groups—lawyers, accountants, consulting firms, lobbyists, PR firms—that facilitate kleptocracy and make it easier for kleptocrats to move their loot through the international financial system are typically based in systems that offer rule of law protections. The democracies must raise the costs for these groups to continue doing business with kleptocrats and live up to democratic values of openness, fairness, equality, and opportunity domestically while still supporting democrats in other parts of the world that are desperately fighting for those same values.

What Is Kleptocracy and How Does it Work? (Chatham House)

In a new explainer, Thomas Mayne explores the key components which underpin transnational kleptocracy. In kleptocracies, high-ranking state or state-linked figures siphon vast troves of state resources, often funneling these ill-gotten gains outside of their countries via shell companies, foreign bank accounts, or overseas assets. Kleptocracy and dirty money corrodes democratic institutions, threatens national security, and permits opportunities for malign political influence—all at the expense of human rights.


Sanctioned VTB Bank and Putin Ally Andrei Kostin Behind Luxury Austrian Hotel (OCCRP)

The Russian state-owned bank VTB, known as Vladimir Putin’s “piggy bank,” has evaded international scrutiny and, now, sanctions through its opaque ownership of a ski resort in the Austrian Alps called the Hotel Tannenhof. OCCRP revealed that the resort has been controlled by proxies connected to VTB and its chair, Andrei Kostin, first through an Austrian couple and, since 2015, through two Cypriot companies. This case demonstrates the ease with which oligarchs and kleptocrats are able to bypass EU sanctions and scrutiny. The various hotel owners reportedly exploited Cyprus’ corporate secrecy laws and Austria’s transparency laws to conceal its true ownership.


The Illicit Financialisation of Russian Foreign Policy (University of Birmingham)

This report by Catherine Owen, Tena Prelec, and Thomas Mayne maps the strategies that Russian kleptocrats use to generate conditions conducive to illicit financial flow (IFF) overseas. The authors identify three principal tactics: malign political interference within domestic contexts, fabricating narratives in media ecosystems, and political violence that targets opponents. Nominally private actors, such as elites, business figures, organized crime figures, and others are the key drivers of the Kremlin’s foreign policy.


Proposed Reforms Offer the U.S. and U.K. an Opportunity to Combat Kleptocratic Influence

Recent proposed legislation in the U.S. known as the “ENABLERS” Act would empower regulators to require professional service providers—such as lawyers, accountants, company formation agents, and others—to adopt due diligence practices (such as “know your client” policies) and report suspicious activities to state authorities. In the UK, new reforms would allow courts to dismiss lawsuits from dubious characters who manipulate the legal system to silence the journalists who expose kleptocratic practices (such as the failed suit against former Financial Times reporter Tom Burgis).

Italy Is Leading the World in Seizing Oligarchs’ Assets (Foreign Policy)

While other nations have enforcement officers investigate financial misdeeds as one among many priorities, Italy has been particularly ahead of the curve with the “Guardia di Finanza,” a state law enforcement body which dates back to 1774 and is exclusively charged with combating financial crime. Nearly 60,000 investigators specialized in combating financial crime are spread out in 25 attachés around the world. They have already seized properties, aircrafts, and yachts linked to Russian kleptocrats that have stashed their loot around the world. Italian outposts benefit from increased collaboration with foreign law enforcement and intelligence agencies.


An Offshore Cold War: Forging a Democratic Alliance to Combat Transnational Kleptocracy” | Oliver Bullough, International Forum for Democratic Studies“

Countering Kleptocracy After Russia’s Invasion of Ukraine” | Power 3.0 Podcast Episode with Jason Sharman from the University of Cambridge

Event: “The Corrosive Impact of Illicit Finance: A Wake Up Call for Democracy” | The International Forum and the Centre for Financial Crime & Security Studies at the Royal United Services Institute

Three Essential Initiatives to Defend Democracy Against Corruption” | The National Democratic Institute’s Kristen Sample, The Hill

Sanctioning Pipelines and Oligarchs is Not a Silver Bullet to Stop Putin’s War in Ukraine” | Kate Watters of Crude Accountability, Power 3.0 Blog

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