Russian Illicit Finance Blog Series: Introduction

Jeremy Lennon. Jeremy is the International Rule of Law, Governance, and Security Intern for the Fall 2020 Semester. Jeremy recently graduated with a degree in Comparative Politics and Government and is interested in security, governance, and development in the Former Soviet Union.

This will be the first in a series of blogs looking at the relationship between corrupt Russian elites and the Western financial system. Although Russian political elites are by no means the only geopolitical adversaries of the United States to take advantage of inadequate American regulations in the non-banking financial sector (one need only look at the Manhattan skyscraper that was recently discovered to be owned and controlled by the Iranian Revolutionary Guard), the Russia example best illuminates the loopholes that allow these perverse relationships. It also highlights the paradoxical reliance that illiberal political leaders have on liberal institutions. Finally, it demonstrates how advanced democracies of Europe and America, due to both a misunderstanding of the issue and domestic political considerations, have largely failed to respond to these developments.

No serious Russia expert would argue that it is a capitalist or liberal country. Both of these myths suffered hard deaths as scholars increasingly realized the limits of Vladimir Putin’s early-2000s market and political reforms. The recognition of the shadow war against western institutions took longer to understand; this was finalized by the 2014 annexation of Crimea and the Kremlin’s efforts to interfere in the 2016 U.S. presidential election.

As US-Russia relations hit a new low following Russia’s annexation of the Crimean Peninsula and the U.S. increasingly tried to coordinate international pressure on Russia, economists and Russia policy experts repeatedly pointed out that Russia’s leaders are dependent on the U.S.-supported global financial system to maintain their own wealth. Due to the PATRIOT ACT’s anti-money laundering statutes, moving illegal funds through banks is often too difficult; therefore, shell corporations, in the form of anonymous LLCs, have become the primary vehicles through which to move illicit wealth.

Existing legal mechanisms, such as the Magnitsky Rule of Law and Accountability Act of 2012 and the Combating America’s Adversaries Through Sanctions Act of 2017, allow the U.S. government to freeze an individual’s assets held or traded on the dollar, which effectively means that the US government can box a person out of the global financial system.

Yet this has only been done in a limited fashion as Russian oligarchs and political leaders, including Putin himself, continue to launder their ill-gotten financial gains through a series of intermediaries before safely hiding them in American domestic real estate markets. This contributes to their maintenance of power in Russia, not to mention the shameless stripping of Russia’s assets and natural resources by those charged with protecting them. It also contributes to the breakdown of rule of law in the United States via the proliferation of corruption throughout the global financial system, rising property costs, and a weakening of the United States’ international security posture.

In short, this has been a quiet disaster for the U.S., one which the country’s leaders have been slow to recognize and act on. This blog series will explain how this process plays out from when the first Ruble is stolen in Russia, to when it is safely hidden in Miami and New York real estate. This series aims to explain both how and why this happens.

What follows will be a series of blogs that examine different aspects of this phenomenon. These will cover why weak rule of law in Russia stimulates capital flights, how money laundering works, how corruption is used as a tool of Russian foreign policy, and policies that the U.S. could adopt to combat this problem.

I hope that this will serve as an accessible, yet informative, look at one of the strange externalities of globalization, the complex relationship between liberal and illiberal regimes, and the gaping regulatory holes that enable these dynamics.


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