How the US became the center of global kleptocracy

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Critics of President Donald Trump frequently use the word “kleptocracy” to describe his leadership, administration, and imprint on American policy writ large.

Before 2016 — before Trump’s election and presidency flipped assumptions about America’s liberal democratic project on its head — the word, which literally means “rule of thieves,” was mostly only used by academics and foreign policy wonks.

Thanks to Trump’s reign, though, “kleptocracy” is having an unprecedented moment.

It’s not hard to see why. As Vox’s Zack Beauchamp argued in 2017, “Trump’s kleptocratic instincts” share significant overlap with post-Soviet dictators and autocratic strongmen elsewhere, from his nepotistic corruption to his insistence on targeting opponents with all the levers of power at his disposal — as seen most obviously in his attempt to strong-arm a foreign government into trying to investigate a political rival.

All of that is, of course, true: Trump’s illiberalism, and his predilection for inserting and expanding corruption wherever he can, is hardly a secret.

But this administration is merely the culmination of the US’s decades-long slide toward becoming the center of modern kleptocracy. The US has become the world’s greatest offshore haven, allowing the crooked and the criminal to launder and stash their ill-gotten gains across the country — money ransacked from national treasuries and prone populations abroad.

For despots and their families, human traffickers and gun runners, there’s no better friend than the US, at least when it comes to hiding their finances from prying eyes, both at home and abroad.

All told, the US has become the key cog in the machine of modern kleptocracy worldwide, allowing illiberal regimes everywhere to flourish — and threatening America’s democratic experiment in the process.

How US states became masters of the shell game

The biggest single provider of anonymous shell corporations in the world isn’t Panama or the Cayman Islands. It’s not the financial secrecy stalwart Switzerland, or a traditional offshore haven like the Bahamas.

It’s Delaware. And the main reason is federalism.

Thanks to the US’s federal structure, company formation remains overseen at the state level, rather than in Washington.

So if you’re a budding autocrat interested in a bit of easy money laundering, you don’t turn to federal officials in Washington. Instead, you look to state officials in Dover, Cheyenne, or Reno to help construct anonymous shell companies to funnel and clean your illegitimate money.

And these states have taken full advantage. Since there are no regulations in the US requiring that shell companies identify their true owners — known as “beneficial owners” – American states have been under no compunction to try to peel back who may be behind the anonymous shell companies mushrooming across the country.

These states and their constituents are raking in fees — at last check, Delaware made some $1.3 billion annually from its company formation industry — so whenever, say, a human trafficker or extremist network sets up an anonymous company in Wilmington or Laramie or Carson City, they have little incentive to try to figure out who may be behind the companies.

Unsurprisingly, the anonymous company industry has been staggeringly profitable for these states. The revenues that Delaware, which pioneered targeting corrupt officials as potential clients for its anonymous shell company industry, continues to make represent about a quarter of the state’s annual budget.

For the world’s warlords, criminals, and autocrats, there’s no gift finer than an anonymous American shell company

Nevada, which actively marketed itself as the “Delaware of the West” in the early 1990s, directly linked company formation fees to funding teachers’ salaries. And Wyoming, which invented the limited liability company (LLC) in 1977, has been only too happy to capitalize on allowing shell companies to flourish in the state, generating millions of dollars for its general budget — yet another small state all too willing to participate in this “race to the bottom.”

All you need is 15 minutes, a bit of money — Delaware offers packages for around $100, pocket change for the crooked and corrupt racing to the state — and a willingness to conceal your identity, and an anonymous American shell company can be yours. It’s easier than getting a library card.

And what better way to purchase American real estate, perfectly anonymously — which almost all of the US (outside of a few major metro areas) continues to allow — than via an anonymous American shell company?

The criminal and corrupt of the world have taken notice. “Merchant of Death” Viktor Bout, the most prolific illicit arms dealer of the past few decades, used anonymous American shell companies to smuggle missiles and rocket launchers to rebels in Colombia.

Former Ukrainian Prime Minister Pavlo Lazarenko, who once joined Indonesian dictator Suharto and Serbian genocidaire Slobodan Milošević among the ranks of the world’s most corrupt leaders, relied on a network of anonymous shell companies in Wyoming to plunder Ukraine.

Even the ongoing impeachment saga in the US hinges in large part on anonymous Delaware shell companies, which Rudy Giuliani’s Ukrainian-born bag-men used to funnel foreign funds into American elections.

For the world’s warlords, criminals, and autocrats, there’s no gift finer than an anonymous American shell company.

Of course, other places — territories like the Cayman Islands or the Isle of Man, or countries like Panama or St. Kitts and Nevis — have sprouted their own anonymous shell company industries. (Many of which are, perhaps unsurprisingly, specifically modeled on their American precedents.)

But what separates the US is the sheer magnitude of operations. At last check, some 2 million companies were formed annually in the US, a greater pace than any other country or jurisdiction.

Tax Haven, USA

Still, it’d be too facile to blame the US’s collapse into a mecca of offshore secrecy on the states alone. While Washington hasn’t been able to capitalize (or crack down) on anonymous shell companies spreading like fungus across the country, Congress recently figured out another way to accelerate America’s evolution into a corrupt official’s best friend: taxes.

Specifically, a tax loophole big enough to welcome as many cheats, crooks, and criminals as you’d like.

While the US has been busy over the past decade making headlines for slapping debilitating fines on foreign banks actively participating in money laundering, all while prying open offshore jurisdictions like Switzerland, a lesser-known transformation has taken root in the US.

After all, all that dirty money the US targeted elsewhere — in Latvia, in Estonia, in Germany — had to find a new home somewhere. Why shouldn’t it be America?

The US opening its arms to a flood of shady foreign money might seem counterintuitive, given the US’s previous role (thanks to things like the Foreign Corrupt Practices Act) as a leader in the fight against corruption. But while the US targeted dirty money — and those enabling its flow — abroad, it simultaneously rejiggered its own finance-sharing regulations to try to attract much of that same money, turning the US into a behemoth in the world of tax havens.

This isn’t technically a new phenomenon: In 1984, Time magazine described the US as the “largest and possibly the most alluring tax haven in the world.” The Tax Justice Network, a UK-based anti-offshore advocacy organization, traces America’s transformation into a financial secrecy haven even further back, to the early 20th century.

But what really kicked things into overdrive was a law passed in 2010, under the Obama administration: the Foreign Account Tax Compliance Act (FATCA). This law all but assured the US’s role as a giant magnet for suspicious finance.

On its face, FATCA reads like a basic, multilateral approach to financial transparency. A range of US allies had already enacted something called the Common Reporting Standard, which allows governments to share information on foreign nationals who open bank accounts in other countries. According to the Obama administration, FATCA did much the same — and as such, the US didn’t need to join the Common Reporting Standard.

But there was one hitch: Whereas FATCA forced foreign governments to reveal American accounts abroad, the US was under no compunction, legal or otherwise, to share information on non-Americans opening up accounts in the US proper. So while the US would gain deep, detailed information on where Americans were opening bank accounts abroad, Washington was not going to reciprocate for governments elsewhere.

It didn’t take long for those tracking financial transparency to realize the bait-and-switch that had happened — and what it portended for where dirty money would suddenly start flocking to.

“Washington’s independent-minded approach risks tearing a giant hole in international efforts” at financial transparency, one analysis read, describing the result as a “disaster.” Bloomberg summed up the result in 2016, saying that the US — before Trump ever set foot in the White House — had become the “leading tax and secrecy haven for rich foreigners,” with some referring to the US as “the new Switzerland.”

Little surprise, then, that the Tax Justice Network, which described FATCA as “only slightly better than useless,” now ranks the United States second worldwide in its annual Financial Secrecy Index, just behind Switzerland. Thanks to measures like FATCA, they wrote, the US now accounts for nearly a quarter of the global market in offshore financial services.

The looming backlash

The US’s development into the world’s leading offshore haven — one recent estimate placed the total offshore wealth in the US at $800 billion, if not more — was the result of a series of clear, concerted decisions from policymakers across the country.

The Trump administration, of course, has further cemented America’s role as a pioneer in the world of offshoring (and helping roll back the US’s anti-corruption safeguards along the way). But Trump inherited a country that was already drowning in illicit funds, pilfered loot, and blood-soaked finances first swiped by authoritarian and autocratic governments and networks elsewhere.

When it comes to the US’s role as a massive laundromat for dirty money, the Trump administration is simply continuing a trend years in the making.

But that doesn’t mean that trend will continue in perpetuity. Ironically, Trump’s bombast and transparent corruption has already spurred unprecedented momentum in Congress toward finally cleaning up some of these American offshore vehicles and policies. For instance, the House passed a bill late last year that will finally eliminate anonymous shell companies from coast to coast.

Several of the top 2020 Democratic presidential candidates have also put anti-kleptocracy measures at the heart of their foreign policies, and worked to highlight the threats the US’s role as an offshore mecca plays not only to national security, but to global stability writ large.

(Trump’s latest brush with war, following America’s strike against Iranian figures in Iraq, only highlighted the link; Iranian officials relied on anonymous American shell companies, and anonymous American real estate purchases along the way, to spend years skirting sanctions and generating millions in revenue.)

When it comes to the US’s role as a massive laundromat for dirty money, the Trump administration is simply continuing a trend years in the making

Former Vice President Joe Biden, who represented Delaware in the US Senate for more than three decades, has publicly broken with his state’s track record as an offshore epicenter and called for the US to finally eradicate anonymous shell companies.

Sen. Bernie Sanders in 2018 specifically linked “the struggle for democracy… with the struggle against kleptocracy and corruption,” and has called for everything from an end to anonymous perpetual trusts, which allow trust owners to effectively hide their finances in perpetuity — perhaps the next frontier in American offshoring, as South Dakota has so gleefully illustrated — to expanding the Foreign Corrupt Practices Act.

And Sen. Elizabeth Warren recently issued the most comprehensive anti-kleptocracy plank any American candidate has ever authored. Her proposal runs the gamut of recommended fixes, from barring shell company formation to eliminating anonymous real estate purchases to expanding data collection for cross-border financial flows. Warren’s plan even specifically targets Americans — such as accountants, realtors, and lawyers — who offer the services the crooked and corrupt of the world take advantage of in the US.

It’s far too early to say that the worst days of America’s pioneering role in the world of offshoring is over. But there’s a swelling awareness of the unending damage the anonymous shell companies in Nevada and Delaware, anonymous real estate purchases in New York and California, anonymous trusts in South Dakota, and tax havens across the country have caused — and of how Trump, cresting a wave of rising authoritarianism, is a harbinger of what’s in store if action isn’t taken soon.

Casey Michel is a writer based in New York, whose work has been featured in Foreign Affairs, the Atlantic, the Washington Post, and the New Republic, among others. Find him on Twitter @cjcmichel.