On July 1, the presidency of the Financial Action Task Force (FATF) passed to Russia. Thus, with no fanfare, the body set up over two decades ago by the United States and other Western countries to lead the global fight against financial crime was placed in the hands of a country where, in the words of a 2012 report of the U.S. State Department, “corruption and financial crimes flourish.” Comprehensive surveillance of banking, business, and personal financial transactions worldwide will now be coordinated by Russia? How did we give the fox the keys to the henhouse on this one? The story of how it happened is a paradigmatic example of good intentions gone awry, with the efforts by the global community to coordinate against a common threat ending up empowering an authoritarian regime that is itself part of the problem.

The FATF is the paradigmatic soft-law regulatory body. Soft law regulation—called soft because it does not have binding effect—is increasingly pervasive in international law. The reasons are rather simple. Voluntary standards are far less costly to establish than binding treaty law since they do not involve the difficult policy decisions required in hard-law regulation. Soft law is viewed as less political, formulated by technocratic civil servants working with relevant domestic agencies rather than diplomats representing state interests in the negotiation of treaties.

But soft law can have a hard side. Precisely because of their nonbinding nature, soft-law norms tend to be formulated without the formal checks and balances of the hard-law legislative process. But without these political safeguards, technocrats who might not fully comprehend the tradeoffs in formulating standards—or who willfully ignore them—often formulate overly broad norms. That’s usually not an issue in the mature democracies. The broad norms are not meant for the United States and Europe anyway—in fact, they would violate key constitutional protections in these countries. But in countries without these domestic constitutional protections, powerful domestic interests can deploy them to entrench their power and harden their regime.

This dark side of soft law is on display in the development of FATF’s recommendations for combating financial crime. These standards have grown more expansive over time. Beginning with the war against drugs and organized crime, FATF’s mission has, since September 11, expanded to the global war against terrorist financing. With this expansion, FATF standards have increasingly focused on financial surveillance as a key instrument in fighting financial crime. Following the lead of the CIA, which in the months after September 11 had begun to monitor the Society for Worldwide Interbank Financial Telecommunication (SWIFT) data streams, the FATF urged its member states to enhance their domestic financial surveillance. In 2003, one specific recommendation the FATF made was that countries should ideally set up a powerful and centralized financial-intelligence unit, or FIU. The FIU should “have access to the widest possible range of financial, administrative and law enforcement information,” and it should be “operationally independent and autonomous.” Most countries balked at the idea of creating such a powerful body. One that did not—that had in fact already created one—was Russia.

In one of the important coincidences of history, FATF’s increasing focus on surveillance coincided with Vladimir Putin’s rise to power in Russia. Russia’s relationship to the FATF in the 1990s had been complex. As a nonmarket economy, the Soviet Union was completely outside the community of nations that founded the FATF in 1989. Even after the fall of communism Russia was largely ignored. By the mid-1990s, however, Russia was a major problem. The country was singled out as a haven for organized crime and money laundering and put on a de facto blacklist in an FATF report in 2000. To remove itself from the list, Russia was to follow a number of FATF demands. One of the demands was that Russia create a financial-intelligence unit.

Surely, Vladimir Putin must have thought Christmas came early that year. Putin himself was already engaged in an effort to create a special financial-surveillance agency—a “financial KGB,” as some called it. With his background as an officer of the Soviet secret service, Putin was trained in the strategic use of information to control others. Compromising information is gathered not for the purpose of prosecuting wrongdoers but in order to have leverage over them. It was a form of blackmail used by the KGB to recruit informers. Putin had already employed the information-gathering tool in the first phase of his post-KGB life when, as deputy mayor in St. Petersburg, he set up a large database of information on local businessmen and their activities. As president of Russia he aimed to scale the system up to the national level. His goal was to establish a federal agency with a monopoly on collection of sensitive financial information from all Russian businesses, including especially the largest and wealthiest.

So when the FATF posed its demands on Russia, Putin eagerly embraced them. First, he pushed through comprehensive anti-money-laundering legislation to make Russia compliant with FATF soft-law norms. He then created the powerful financial-intelligence unit that the FATF wanted. He dubbed it the Russian Financial Monitoring Service, or RFM. Putin built the RFM from the ground up with a handful of KGB veterans whom he personally trusted and who had experience in surveillance of financial and currency transactions. The new body’s staff had no loyalties to any preexisting bureaucratic entity. Launched in November 2001, RFM has ever since remained under Putin’s formal control.

The power and status of the RFM benefited greatly from the FATF affiliation. In 2002, RFM was accepted into the international umbrella organization for financial-intelligence units, the Egmont Group. A year later, Russia became a full member of the FATF. An FATF report called Putin’s RFM “exemplary” and praised its role in helping to set up a series of similar financial-intelligence units, first in Central Asia and later in Eastern Europe and Asia. In 2009, the FATF reported that RFM was a “cornerstone” of Russia’s struggle against financial crime. Two years later, Russia was listed as having one of the best financial-intelligence units in the world.

Although RFM was playing a key role in FATF’s expanding network of international financial surveillance, it was doing little to enforce Russia’s new legislation against financial crime. Then again, Putin never saw the main task of his financial-intelligence unit as gathering information to prosecute financial crime. On the contrary, it was an institution meant to ensure his control over Russian politics and business. RFM is Putin’s personal surveillance unit—one which was created to collect information on everybody but not to deploy this information unless necessary. With that information, RFM’s leadership—at any moment and with minimum effort—can influence what is happening. The KGB veterans at the head of RFM, like Putin himself, were following what one former security-service officer recently presented as the basic approach of the KGB, past and present: “Our job is not to intervene. Our job is to know everything about everybody. Everyone knows that we do, and they know what we can do if we see someone going too far. And that’s why they don’t go too far.” It is this surveillance that is at the very heart of Putin’s power. Armed with financial information, the regime can stifle dissent in far more secretive—and effective—ways than through direct repression.

As we debate the tradeoffs of surveillance in our own domestic politics, we also should recognize the same tradeoffs in our soft-law regulation of financial crime. Financial surveillance is clearly important in disrupting terrorist networks and organized crime. But taken too far, it can undermine pluralism, human rights and stable political change.

Clifford Gaddy, an economist, is a senior fellow in the Center on the United States and Europe at the Brookings Institution, where William Partlett is a nonresident senior fellow.