Book Exclusive: 'The Despot’s Guide to Wealth Management'

Book Exclusive: 'The Despot’s Guide to Wealth Management'
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Crooked leaders have been robbing their people blind since the dawn of time. Notions of honor among thieves as well as the concept of national sovereignty have long allowed other nations to turn a blind eye to even the most egregious kleptocracies. But that has begun to change in recent decades, as Cambridge Professor J.C. Sharman details in his new book, “The Despot’s Guide to Wealth Management.”

Drawing on “journalistic exposés, whistle-blower accounts, and government investigations” along with information dug up by his own private investigator, Sharman explores the rise of anti-corruption efforts. But the excerpt below shows how polished American bankers, lawyers and realtors still work to thwart the crackdown – to the benefit of one of the book’s central kleptocrats: Teodorin Obiang (above), vice-president and son of the president of the oil-rich, impoverished African nation Equatorial Guinea.

The Shell Game

At a public presentation in New York City in November 2014, the chief of the Department of Justice’s Asset Forfeiture and Money Laundering section, Jai Ramaswamy, outlined his views on the most serious obstacles to fighting international corruption. He began by noting that while guesses of the total global illicit economy (whatever they are worth) are in excess of $1 trillion, the United States confiscates only $1.5 billion a year of criminal proceeds, representing a “pin-prick.” The number-one problem was said to be beneficial ownership, that is, the ability to find the real person in control of shell companies.  Although untraceable shell companies pose a problem in many countries, there is strong reason to think that the United States, given its central place in the global financial system and the number of companies involved, is the worst in the world when it comes to regulating shell companies. The sustained failure to fix this problem represents a crucial weakness in efforts to hold kleptocrats accountable by targeting their foreign wealth. 

The basic problem with shell companies was illustrated in the Obiang case: his bank accounts and assets were held in the name of companies with no other purpose than to obscure the fact that Obiang controlled this wealth. Unless and until banks and law enforcement could discover the link between the ostensibly unrelated companies and Obiang, his illicit wealth was safely hidden. Those Corporate Service Providers forming companies in the United States are under no obligation to establish the true identity of the client who becomes the company owner. Because the only public documents on the shell company relate to the Corporate Service Provider, and this provider has no idea as to the identity of the real (beneficial) owner, the company is untraceable and thus a perfect means for hiding dirty money.

The United States has repeatedly committed to fixing its beneficial ownership problem in a variety of international fora since 2003, including the Financial Action Task Force, the Organization for Economic Cooperation and Development, the G8, the G20, and the Open Government Partnership, and has then repeatedly failed to honor these commitments. Reform has been stymied by domestic opposition, in particular the National Association of Secretaries of State, the American Bar Association, and the U.S. Chamber of Commerce, which have argued that any new regulation would be excessively burdensome to their members and would fail to stop criminals.

The use of untraceable shell companies in money laundering is often connected with the real estate market. For foreigners looking to launder and then hide money in the U.S. financial system, the door is wide open when it comes to real estate. Dogged and often brilliant investigative journalism has unearthed the modus operandi for such transactions, which closely fit the pattern of Obiang’s Malibu property.

Simply put, any foreign corrupt official wanting to place dirty money in the United States need only contact one of the specialized one-stop real estate firms that act as agent, attorney, and shell company provider. These firms will receive a foreign electronic bank transfer into their trust account. There the money is commingled with that of other clients, obscuring the trail. In any case, there is nothing inherently suspicious about, say, a $5 million transfer to buy a $5 million property. Banks must know their customer (in this case the real estate firm), but are under no obligation to know their customer’s customer (i.e., the buyer). In any case, the buyer will usually send the wire transfer through a shell company and/or law firm in the home country, or more commonly a third jurisdiction (one facilitator noted that at the upper end of the market, “Ninety-nine percent of the time they already have the money outside of their home country”). The American real estate agent then sets up a shell company (or perhaps a trust or a chain of interlocking companies and trusts) to own the property, and transfers the money to the account of the seller’s representative.

So common are these types of arrangements that those routinely intermediating such deals have been happy to speak on the record to journalists, regarding such attention as free advertising. Thus one New York agent noted of his foreign clients’ payments, “Sometimes they come in with wires, sometimes they come in with suitcases.” On being asked about the danger that this money represents the proceeds of corruption from abroad, he continued: “It’s something that is never discussed, but it’s the elephant in the room. Real estate is a wonderful way to cleanse money. Once you buy real estate, the derivation of that cash is forgotten.” Another explained, “Like somebody said, Karl Marx or whatever, if the capitalist is going to see a triple return, he’s going to close his eyes.” In 2012 foreigners invested $50 billion in U.S. real estate (though it’s unclear if this total includes foreigners buying through U.S. shell companies and intermediaries).

A New York Times investigation in 2015 confirms that “nearly half of the most expensive residential properties in the United States are now purchased anonymously through shell companies,” and that “the real estate industry does little examination of buyers’ identities or backgrounds, and there is no legal requirement for it to do so.” A Global Witness sting made public in 2016 confirmed this picture of lax standards.

In secretly recorded footage of meetings with Manhattan lawyers, including the then-head of the American Bar Association, an impersonator claimed to represent a minister of mines from a West African country who was looking to buy a $5–20 million property, as well as a private jet and mega-yacht for in excess of $50 million. The impersonator explained that the funds, described as “gray or black money,” came from “facilitation payments” that the minister had been given by foreign mining firms and that were well in excess of the minister’s salary, blatantly obvious hints that the money represented the proceeds of corruption.

Though some lawyers spoke of the need for checks on the source of the money, and though no deal was struck or money transferred, the advice issued by the dozen law firms approached outlines a familiar path for foreign corruption funds entering the United States. The law firms stressed the need for the money to come to the United States via a third country (Britain, Switzerland, Luxembourg, the Isle of Man, and the Cayman Islands are mentioned), because American banks would be wary of taking a large of amount of money from a senior official in a corruption-prone region. They recommended that assets be held in the name of U.S. shell companies to obscure the identity of the true owner, sometimes linked up with offshore companies or trusts. In several cases the lawyers also offered the use of their firms’ trust accounts to hide the money trail. In one case the price for facilitating these transactions was put at $40,000 to $50,000.

Lawyers and other intermediaries involved in suspect deals almost always escape scot-free, even after quite glaring sins of omission or commission. In a decision that speaks volumes of lawyers’ claims of self-regulation, despite being directly accused by the Department of Justice of involvement in a series of schemes to fraudulently open bank accounts for Obiang, and despite the wealth of evidence presented, the California Bar Association declined to take any disciplinary action against the law firm involved, even after a direct request from the Department of the Treasury.

When asked about the one-stop lawyer–real estate–shell company provider arrangements, an American Bar Association representative said the association “frowned upon” such conduct but had no means to prevent it and opposed any attempt at outside regulation in this area. The real estate industry is also a very powerful lobby, and is equally opposed to new regulatory requirements. The National Association of Realtors unconvincingly claims, “Any risk-based assessment would likely find very little risk of money laundering involving real estate agents or brokers.”

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