With Joe Biden’s inauguration as president, the United States has entered a new era of governance. After four years in which the White House seemed to care little about conflicts of interests, Biden has focused on corruption as a national security threat. He needs to follow through on his stated commitment to fight international corruption.
In his programmatic article in Foreign Affairs in March/April 2020, “Why America Must Lead Again: Rescuing U.S. Foreign Policy After Trump,” Biden presented his foreign policy program. One important commitment is to “organize and host a global Summit for Democracy to renew the spirit and shared purpose of the nations of the free world” in his first year in office, bringing “together the world’s democracies to strengthen their democratic institutions.”
Laudably, Biden promised to “issue a presidential policy directive that establishes combating corruption as a core national security interest and democratic responsibility,” and he undertook to “lead efforts internationally to bring transparency to the global financial system, go after illicit tax havens, seize stolen assets, and make it more difficult for leaders who steal from their people to hide behind anonymous front companies.”
President BidenJoe BidenFighter jet escorts aircraft that entered restricted airspace during UN gathering Julian Castro knocks Biden administration over refugee policy FBI investigating alleged assault on Fort Bliss soldier at Afghan refugee camp MORE has got it right. The Mueller report showed how Russian offshore finance and oligarchs were deployed by the Kremlin to interfere in and after the 2016 U.S. election. As Biden put it, “The lack of transparency in our campaign finance system, combined with extensive foreign money laundering, creates a significant vulnerability. We need to close the loopholes that corrupt our democracy.” Corruption and dark money facilitate not only tax evasion but also corruption, national security violations and many crimes. Russia and many other authoritarian kleptocracies master corruption both at home and abroad. The West must change the game to win.
But we are new to this game. The very idea of money laundering arose in 1989, and the United States did little about it until the terrorist attacks on 9/11, which inspired the adoption of the Patriot Act, designed to combat terrorist funding. That is no longer a major concern, while there are trillions of dollars of dark money floating around in offshore havens. Gabriel Zucman, University of California at Berkeley professor, estimates that one-tenth of the world’s financial wealth is held in offshore havens, and Russian offshore wealth is usually estimated at $1 trillion. This money is largely anonymous and can be used for any purpose, including illegal purposes. The U.S. government can no longer accept this but needs to act swiftly to protect democracy in the world.
The administration should insist on five basic principles. First, the U.S. cannot effectively do this alone. It needs to act together with its democratic allies, the European Union (EU), Japan, Canada, Australia and Switzerland. They should all reframe their view of money laundering as a national security threat and strengthen their defenses against illicit finance.
The second principle is transparency. Fortunately, the U.S. has just adopted the Corporate Transparency Act as part of the new National Defense Authorization Act. It requires all LLCs to provide the Financial Crimes Enforcement Network (FinCEN) in the Department of the Treasury with timely and efficient access to beneficial ownership information, which will be available to law enforcement and banks, though not to the public. This system will take about three years to establish. Similarly, in June 2018 the European Union (EU) imposed a legal requirement to submit information on ultimate beneficial ownership to public registries. (This requirement also covers Switzerland and Norway.) These registries have now been established, but in some places, notably in the important offshore tax haven of Luxembourg, non-governmental organizations complain that the ultimate beneficiary owners are usually missing.
The third principle should be the swift reporting of relevant transactions to the regulatory agencies. The U.S. has just gone through the FinCEN files scandal. The real scandal was that while banks offered FinCEN plenty of incriminating information, FinCEN rarely acted. The banks did not have to submit any information about suspicious transactions for one month, and nobody seemed to care if they were delayed. The situation is worse in Europe, where information is limited to the separate nations.
Fourth, the weakest link is enforcement, which must be strengthened. The U.S. has FinCEN, but it is far too small and seems to be dysfunctional. It needs to be reformed and strengthened. In Europe, the situation is far worse because the money laundering agencies are entirely national and weak. The European Commission is painfully aware of this shortcoming after repeated scandals of massive money laundering in respected European banks, which have been revealed by FinCEN. It is preparing a proposal to establish a strong joint EU anti-money-laundering agency, with which FinCEN should cooperate closely.
Finally, culprits have to face credible fines. The U.S. did so after the global financial crisis of 2008-9, penalizing banks for all kinds of misdemeanors, compelling them to build up big compliance departments that policed themselves. U.S. fines for money laundering have convinced European banks to follow them. Yet, in recent years U.S. fines for money laundering have dwindled and are no longer a credible threat to money launderers. They should be raised again, and European authorities need to catch up.
Why is this so important? As President Biden has stated: “An insidious pandemic, corruption is fueling oppression, corroding human dignity, and equipping authoritarian leaders with a powerful tool to divide and weaken democracies across the world.”
Anders Aslund is a senior fellow at the Atlantic Council in Washington, D.C. His latest book is “Russia’s Crony Capitalism: The Path from Market Economy to Kleptocracy.”