dirty money is an ongoing threat on both sides of the atlantic
30 Luglio 2020 | news
Neil Bhatiya Tuesday, July 28, 2020
Editor’s Note: Guest columnist Neil Bhatiya is filling in for Kimberly Ann Elliott, who will return next week.
Two developments last week, in the United Kingdom and the United States, highlighted how their common adversaries are still exploiting the global financial system, using long-known loopholes to raise and move illicit money in order to undermine international security and the rule of law. While American and British authorities have often been slow to realize the full magnitude of this threat, their recent actions suggest they may finally be taking it more seriously.
First, the British Parliament’s Intelligence and Security Committee released its long-awaited report on Russia’s political interference in the U.K. While it addresses the entirety of the Russian campaign to meddle in British politics, including the alleged use of chemical weapons on British soil by Russian military intelligence, the report devotes significant attention to the role of Russian money inside the country. The prevalence of all that money and how it was spent in places like London may have led to an underappreciation of the threat from Russian interference.
As the report succinctly concluded, “the U.K. welcomed Russian money, and few questions—if any—were asked about the provenance of this considerable wealth.” With the British government evincing little interest in regulating the flow of this often dirty money, a wealthy subset of the Russian diaspora inserted itself into British politics and society. Their huge wealth, among other things, underwrote an entire industry of enablers who could use legal and financial instruments to effectively launder Russian money and reputations. Many of these Russians were close to President Vladimir Putin.
The U.K., as the report states, has now moved into “damage limitation” mode. While it has some tools at its disposal, the parliamentary committee concluded that Whitehall has not been embracing them properly or providing adequate resources to the relevant authorities. In the financial realm, while the U.K. has developed its own sanctions program, and deployed sanctions against targets in Russia, Myanmar, North Korea and Saudi Arabia, it has only narrowly focused on human rights abuses and not corruption. By contrast, U.S. sanctions under the Global Magnitsky Act, on which the U.K. effort is modeled, is meant to be used against both.
The British government has refocused the efforts of its National Crime Agency and the Home Office’s Serious and Organized Crime Group to target the threat of dirty money at home. Use of unexplained wealth orders, which can compel individuals to justify that property or financial resources they possess were acquired legitimately, have now been in use for a couple of years. The committee hopes that Parliament gives both agencies the budgets needed to fulfill these roles. In addition to resourcing, many observers may still be concerned about the political will required to go after what has until now been a reliable source of candidate and party donations.
The second development over the past week concerns U.S. efforts to constrain North Korea’s ability to expand its weapons of mass destruction and ballistic missile programs. As documented by both U.S. intelligence and United Nations experts, North Korea continues to expand its weapons capabilities, thanks in large part to a variety of illicit revenue streams. On July 23, the Department of Justice announced a civil asset forfeiture complaint against four unnamed front companies for their role in helping North Korea evade U.S. and international sanctions. The complaint targeted some $2.3 million worth of funds that had been frozen as they transited through the U.S. banking system.
While American and British authorities have been slow to appreciate the threat of dirty money, their recent actions suggest they may finally be taking it more seriously.
American sanctions have effectively cut off North Korea from the legal use of the U.S. dollar. However, much of the international trade that Pyongyang needs to conduct to keep Kim Jong Un’s regime afloat still ultimately has to be settled in U.S. dollars, as it is the dominant currency for international commerce, whether licit or not. To get around that, North Korean state agencies have deployed an international network of front companies and trusted overseas representatives to build an entire shadow economy. It can deliver the regime not only revenue from restricted trade, including luxury goods and natural resources, but also help procure specific weapons components.
The network that the Department of Justice uncovered last week operated no differently. North Korean entities—including one of its intelligence agencies, known as the Reconnaissance General Bureau, and its Foreign Trade Bank—set up a number of front companies to act as go-betweens to transact in U.S. dollars on their behalf. Because none of the front companies were sanctioned entities, it would have been harder for U.S. banks to detect that the transactions represented illegal activity. Front companies feature quite prominently in these networks, because there are many jurisdictions, including the United States, that do not require identification of the beneficial owners of a corporate entity when it is legally formed. Criminals, money launderers and sanctions evaders of all types have embraced these essentially paper entities to conduct their business.
While progress has been made to target these North Korean front companies and other sources of dirty money, much more work remains to be done. The United States may take some significant steps in the coming months. The House of Representatives version of the Fiscal Year 2021 National Defense Authorization Act contains several provisions designed to enable U.S. law enforcement to better track illicit financial flows. One provision, for example, would finally require beneficial ownership reporting to the Financial Crimes Enforcement Network, or FinCEN, the U.S. financial intelligence unit, so that law enforcement can more thoroughly discover who is behind front companies.
Because of the continued economic turmoil from the COVID-19 pandemic, as well as November’s looming elections, there is a great deal of uncertainty for how quickly any of these changes can take place in Washington, let alone if they actually make it into a compromise measure that the full Congress would vote on. In the end, Congress should follow the same lessons highlighted by the British Parliament’s recent report: to further ensure that the federal agencies responsible for fighting dirty money are adequately resourced to actually fulfill their delegated responsibilities. Making sure that’s the case requires not only an assessment of how overstretched the Treasury Department is currently, but of other agencies and departments that have to process new sources of information and coordinate with overseas partners, like the State Department and Justice Department.
U.S. adversaries will no doubt adapt to any new financial restrictions, attempting to exploit other sectors or technologies. But the United States and its allies can match those evasions with their own adaptations to try to safeguard not only the global financial system but their own democracies and international security at large. It’s clear that these illicit actors, whether aligned with Russia, North Korea or another adversary, will not hesitate to seize on any advantage they can.