Table of Contents
Kleptocracy refers to a government whose corrupt elites, known as ‘kleptocrats,’ abuse their political, social and/or economic position to steal undue wealth from their home country and compatriots.
Kleptocrats often steal by tax evasion. In other words, they conceal their wealth so they do not have to pay what they actually owe to their government.
Further Defining Kleptocracy
In the 21st century, kleptocracy exists on a global scale.
It’s a corrupt, transnational financial system founded on money laundering. The United Nations (UN) estimates money laundering amounts to 2%-5% of the annual global GDP, or $800 billion – $2 trillion in current US dollars.
For the Journal of Democracy, the National Endowment for Democracy’s Christopher Walken and Melissa Aten published an article covering the rise of kleptocracy. Walken and Aten explain the kleptocratic process as follows:
“Knowing that their wealth is unlikely to be safe at home, today’s kleptocrats launder their money overseas, storing it in settings where it is protected by strong rule-of-law norms lacking in their own countries. This looted money, channeled through a complex web of offshore accounts and shell companies to obscure the beneficial owners, often lands in high-end real estate in major Western cities such as London, New York, and Miami.”
The quote above reveals some key points about how a kleptocracy works:
- Corrupt elites generate the “looted money” in a kleptocratic country, which are developing (i.e. lack financial regulations) and/or are more developed but lax with financial regulations
- The assets prove extremely difficult to trace and pin on the beneficiary because it changes ‘hands’ so often
- The laundered funds ultimately end up in Western jurisdictions, where they will be protected by “strong rule-of-law” norms
With the ‘clean’ money, kleptocrats can freely use it for their personal benefit. The majority of kleptocracies exist in developing countries, and countries with lax financial regulations. With the consistent.
DID YOU KNOW?
In 2016, Columbia professor James S Henry published research for the Tax Justice Network, claiming “more than $12 trillion had been siphoned out of Russia, China and other emerging economies into the secretive world of offshore finance.”
Kleptocracy in Four Steps
Throughout the money laundering process and after, kleptocrats rely on Western businesses to facilitate their stealing. The role of these service providers cannot go ignored. They bring knowledge of legal and financial loopholes in their own jurisdictions to keep the kleptocracy thriving.
1. Creating the Shell Company
Kleptocrats or their representatives use anonymous shell companies to hide the origins and ownership of the looted assets. This is how the assets get laundered.
Oftentimes, the assets will go through multiple shell companies, each headed by a nominee with no or little relation to the actual owner (e.g. a single director, a board of directors, other shell companies, etc.). The nominee puts their name on all forms, preserving the anonymity of the kleptocrat.
2. Moving the Funds
After going from one shell company to the next, the assets finally get transferred into the Western financial system. Kleptocrats use accounts that have weak or nonexistent anti-money laundering (a.k.a. AML) regulations.
3. Fund Integration
When the kleptocrat actually uses the funds in a secondary financial transaction, the laundered money becomes fully integrated and ‘safe’ for the kleptocrat. We use ‘secondary financial transaction’ because the kleptocrat must first purchase an asset and then sell it in order to establish a legally defensible origin of the laundered funds.
Historically, kleptocrats have favored the luxury real estate market to complete the money laundering process.
Why?
To return to the Journal of Democracy, professors Alexander Cooley, John Heathershaw, and J.C. Sharman examined the money laundering process foundational to a kleptocracy. On the topic of kleptocrats integrating funds through the housing market, they write, “In the United States, the National Association of Realtors… successfully lobbied for exemption from the Anti–Money Laundering (AML) disclosure requirements of the 2001 Patriot Act.”
With brokerage fees, realtors obviously have much to gain when they can move properties. Especially with luxury real estate, as houses go for millions. It appears, according to the evidence cited by the aforementioned professors, some in real estate would go as far as to protect the kleptocracy in order to boost sales.
4. Reputation Laundering
Although not exactly part of the money laundering itself, ‘reputation laundering’ can help keep the kleptocracy out of the news and public eye.
Kleptocrats can manufacture and control a positive image by working with public relations firms. Also, they usually have the wealth to hire an all-star team of lawyers in the event journalists start following the paper trails.
To quote Cooley, Hearthershaw, and Sharman once more, “Critically, this normalization of ‘everyday kleptocracy’ depends heavily on transnational professional intermediaries: Western public-relations agents, lobbyists and lawyers help to recast kleptocrats as internationally respected businesspeople and philanthropic cosmopolitans. The resulting web of relationships makes up a ‘transnational uncivil society,’ which bends global-governance institutions to work in its favor.”
Billions of government revenue are being held in tax havens.
Don’t believe us? See what your fellow citizens are saying on the Zero Theft Movement platform…
The United States, a Kleptocrat’s Dreamland?
Creating a company in the U.S. at one point was easier than getting a library card.
Global Shell Games, an experiment whose findings were eventually published as a book, involved professors Michael Findley, Daniel Nielson, and James Sharman “posing as twenty-one different international consultants…approach[ing] nearly 4,000 services in over 180 countries to discover just how easy it is to form an untraceable company.”
Among the 3,700 corporate service providers in 182 countries the professors approached, the U.S.-based providers had the fewest requirements to set up an untraceable company. Many even offered to set up the shell corporations, despite the authors indicating intentions to use these false businesses as fronts for terrorism and/or corruption.
For more on the methodology and findings, you can read the media summary here.
According to a 2016 report from the Financial Action Task Force (FATF), a global money laundering and terrorist financing watchdog, the United States actually has a robust anti-money laundering framework. But “the regulatory framework has some significant gaps, including minimal coverage of certain institutions and businesses (investment advisers (IAs), lawyers, accountants, real estate agents, trust and company service providers (other than trust companies).”
A lack of transparency in the U.S. financial system, in short, creates opportunities for the kleptocracy to survive. Up until the recent passing of the Corporate Transparency Act of 2019, the U.S. did not have a beneficial ownership registry—meaning, the identity of kleptocrats (and anyone standing to benefit from any business) did not have to be reported and known. The American Bar Association initially lobbied against creating a beneficial ownership registry, arguing that it would violate attorney-client privileges.
DID YOU KNOW?
A 2012 Global Witness study, aired on CBS’ 60 Minutes, found that only 10 of 1,722 U.S. incorporation agents refused to create an anonymous company for a suspicious customer.
A Case of the Kleptocracy? Bradley Birkenfeld and UBS
UBS in Switzerland
By Thomas8047, CC BY 2.0 via Wikimedia Commons
”Excerpt from Lucifer’s Banker, quoted in The Atlantic
American private banker and whistleblower Bradley Birkenfeld shook the world when he, according to CBS News, “expos[ed] widespread tax evasion at Swiss bank UBS AG.”
The Department of Justice sentenced Birkenfeld to “40 months for aiding billionaire American evade taxes.” The agency detail the Birkenfeld’s exploits in its press release:
“While at UBS, Birkenfeld assisted an American billionaire real estate developer evade paying $7.2 million in taxes by assisting the developer conceal $200 million of assets hidden offshore in Switzerland and Liechtenstein. While at UBS, Birkenfeld routinely traveled to and had contacts within the United States in an effort to assist wealthy Americans conceal their ownership in assets held offshore and therefore evade the payment of taxes on the income generated on the money hidden offshore.
“In order to assist wealthy Americans who concealed assets at UBS in Switzerland, Birkenfeld admitted that he and others advised U.S. clients to place cash and valuables in Swiss safety deposit boxes; purchase jewels, artwork and luxury items using the funds in their Swiss bank account while overseas; misrepresent the receipt of funds from the Swiss bank account in the United States as loans from the Swiss bank; destroy all off-shore banking records existing in the United States; utilize Swiss bank credit cards that they claimed could not be discovered by United States authorities; and file false U.S. individual income tax returns that omitted income earned by their clients and fraudulently misrepresented that their clients did not have an interest in and signature authority over accounts held offshore.”
After the sentencing, Birkenfeld was interviewed by 60 Minutes’ Steven Kroft.
Birkenfeld asks, “I gave them the biggest tax fraud case in the world. I exposed 19,000 international criminals. And I’m going to jail for that?…I am the only one going to prison. Out of 19,000 accounts and no Swiss bankers.”
The Effects of Kleptocracy on American Citizens?
Again, the kleptocracy spans the globe. Technology and globalization has allowed kleptocrats to launder money from their comfortable Italian leather couches.
While the harmful effects of kleptocratic systems have been well-documented in emerging countries, we should not forget that many kleptocrats live among us. They are benefiting from this corrupt global network.
So how does this all affect us, the average American citizens?
The kleptocracy creates two major issues for the average American citizen:
- They might have to shoulder more of the tax burden in order to compensate for lost government revenue (i.e. money the government uses to run the country and provide services to citizens), otherwise social services will be even worse due to reduced spending and/or the federal debt will increase
- Economic inequality increases, as the kleptocrats can continue to save much more at the expense of the average citizen’s income, retirement fund, quality of life, etc.
With the enactment of the Corporate Transparency Act and the National Defense Authorization Act, the country is making necessary reforms to prevent rigged behavior.
But we can collectively take action to help expedite the process and expose kleptocrats making unethical profits at our expense.
That’s where we, the Zero Theft Movement, come in.
We seek to eradicate crony capitalism from the U.S. economy by working as a community to identify, debate, and decide exactly where the economic foul play is occurring through investigations and voting.
Citizens author theft proposals, and the community decides whether that investigation has convincingly proven (1) theft is or isn’t occurring in a specific area of the economy, and (2) how much is being stolen or possibly saved. Through direct democracy, we can collectively decide where the problem areas are and start working on addressing them systematically.
Standard Disclaimer
The Zero Theft Movement does not have any interest in partisan politics/competition or attacking/defending one side. We seek to eradicate theft from the U.S economy. In other words, how the wealthy and powerful rig the system to steal money from us, the everyday citizen. We need to collectively fight against crony capitalism in order for us to all profit from an ethical economy.
Terms like ‘steal,’ ‘theft,’ and ‘crime’ will frequently appear throughout the article. Zero Theft will NOT adhere strictly to the legal definitions of these terms (since congress sells out). We have broadly and openly defined terms like ‘steal’ and ‘theft’ to refer to the rigged economy and other debated unethical acts that can cause citizens to lose out on money they deserve to keep.