Bankrupting Kleptocracy: Financial tools to counter atrocities in Africa’s deadliest war zones

In several conflict-affected countries in East and Central Africa, the state has been hijacked and transformed from an institution that is supposed to provide social services and safeguard the rule of law into a predatory criminal enterprise that does quite the opposite. These criminal cells use state power to loot public coffers and natural resource wealth with impunity, and sideline or silence those who get in their way. Oversight institutions are co-opted, marginalized, removed altogether, or used as political instruments to go after opponents or independent voices. Leaders loot natural resources and divert state funds, funneling public money directly into the instruments of war and repression. Security forces use lethal force to quell protests, and countless journalists and activists have been attacked, intimidated, and harassed. These regimes often deny any sort of peaceful path to political turnover or meaningful power sharing, thereby encouraging the rise of armed opposition movements, which in turn lead to cycles of increasingly deadly force, marked especially in East and Central Africa by the commission of mass atrocities. Militias supported by and loyal to violent and corrupt regimes, meanwhile, are often used to carry out campaigns of violence and intimidation against political opponents. This abusive and predatory system of governance is called violent kleptocracy. And, for most citizens, this type of governance yields disastrous results; it stifles commerce and economic development, facilitates a wide range of criminal activities, and often catalyzes violence and violent extremism.

The perpetrators of these practices have found ample facilitation in the workings of the globalized economy. The deluge of documents revealed in the Panama Papers leak show just how easy it is for criminals and kleptocrats to move their ill-gotten gains without being detected—and this leak still only represents a small fraction of the total number of anonymous shell companies used by government officials and secretive investors.

Fighting corruption must become a cornerstone of U.S. engagement with countries that have been plagued by violent kleptocracy. The U.S. government should expand its support for the development of robust oversight institutions and accountability mechanisms and redouble its efforts to create and protect space for civil society and the press to act as watchdogs and articulate public concerns. However, in hijacked states, efforts toward this end are typically thwarted by elites who co-opt, sideline, or bypass institutions designed to restrain their ability to loot with impunity. As evidenced in South Sudan—a country with a legal and institutional framework for managing state assets and combating corruption that in many ways exceeds international best practice—corruption is neither a purely technical challenge nor solely the result of insufficient institutional capacity. Progress achieved through good governance initiatives is likely to be short-lived unless external interventions can fundamentally alter the incentive structures of those in power. Simply put: there must be consequences for kleptocrats, for those who obstruct reform, and for private sector actors that facilitate and enable their operations. The international community has the power to chip away at the environment of impunity that characterizes violent kleptocracies—and the United States is in a position to play a leading role. Achieving this objective will involve harnessing the tools of financial pressure at the U.S. government’s disposal to go after what often motivates violent kleptocrats in the first place: their ill-gotten gains.

The international anti-corruption architecture is insufficient for addressing the challenge of violent kleptocracy largely because current efforts largely fail to impose any consequences on kleptocrats themselves. However, given the interconnectivity of the global financial system, the size and primacy of the U.S. economy, and the significance of the U.S. currency in global trade and financial transactions, the U.S. government is in a unique position to target the assets of kleptocrats through the use financial pressure. These tools of financial pressure that have successfully been used for other national security objectives should increasingly be deployed in countering atrocities and conflict fueled by mass corruption. Specifically, financial pressure should be used to create leverage in support of political and diplomatic strategies developed in concert with international partners and organizations like the United Nations (UN), European Union (EU), and African Union (AU). Three types of tools could be particularly potent for building leverage in the fight against violent kleptocracy: targeted sanctions, anti-money laundering measures, and anti-bribery provisions.

Targeted Sanctions. Targeted financial sanctions are a potent tool to counter kleptocracy precisely because of their ability to impact the target the wealth of senior officials within kleptocratic regimes. This directly addresses the need to alter kleptocrats’ problematic incentive structures, which in this region are often oriented in favor of violent extraction of wealth and repression of dissent. Sanctions programs developed before the past decade often resembled blunt instruments and, at times, negatively impacted the target country’s population at large more than the regime officials whose behavior sanctions were meant to alter in the first place. Fortunately, there have been significant advances not only in the types of sanctions that can be deployed against foreign targets but also in the U.S. government’s sanctions administration and enforcement capacity. Targeted sanctions programs aiming to address crises in violent kleptocracies can and should include provisions that allow the administration to place sanctions on individuals who engage in public corruption, undermine democratic processes or institutions, or stifle free speech or peaceful assembly. These programs should target not only the kleptocrats themselves but also the non-state actors who enable and facilitate the kleptocrats’ abilities to loot and repress. In response to certain crises, the U.S. government can also consider placing sanctions on an entire business sector (known as “sectoral sanctions”) believed to be either financing conflict or subject to significant looting by regime elites.

Real leverage is only typically strongest when senior military and government officials (and not bureaucrats and low-level officials) are targeted, and when resources are committed to enforcing the sanctions, which is often not the case. This leverage is amplified significantly when targeted sanctions are imposed as part of a coalition. Multilateral sanctions are virtually always preferable because they can be more effective when broadly backed, allow for fewer loopholes for sanctions-busters to exploit, and are deemed as more legitimate than unilaterally imposed sanctions.

The U.S. government must also step up efforts to identify violations across the range of sanctions programs that are currently in place. This will involve working with third parties (civil society, press, banks, etc.) to identify lapses in enforcement or means through which designated entities are sidestepping sanctions. In the cases of Iran and Sudan, banks that have attempted to circumvent sanctions have faced steep penalties, including an $8.9 billion fine paid in 2015 by BNP Paribas. These hefty fines have served as a severe deterrent for banks, who, in turn, have greatly enhanced their internal controls and sanctions compliance regimes. This, in turn, has isolated the Sudanese regime in particular, creating greater leverage for potential diplomatic engagement on a wide range of issues.[i]

Crucially, regardless of the type of sanctions program, a key priority for the U.S. government is to ensure that it minimizes the humanitarian impact of sanctions; this means prioritizing the development of more effective licensing processes for certain types of exports like medicine and medical devices, as is provided for in the Trade Sanctions Reform Act (TSRA). The licensing process for each country should be as streamlined as possible in order to allow the provision of humanitarian services to reach the people most in need. Export and broader trade controls are also an element of sanctions that, if well-targeted, can impact the development of economic sectors that rely on advanced equipment and technology as well as the military.

Anti-Money Laundering and Asset Forfeiture. Numerous anti-money laundering (AML) statutes provide the U.S. government with the power to trace, block and, in some cases, seize the illicit proceeds of overseas corruption. Anyone who knowingly facilitates the movement of the illicit funds into or through the United States (including the U.S. financial system) is guilty of money laundering and could be subject to criminal prosecution as a result. The Treasury Department’s Financial Crimes Enforcement Network (FinCen) has significant authority to place enhanced due diligence requirements on financial institutions, investigate financial crimes, and even impose sanctions-like prohibitions on overseas entities believed to be involved in money laundering. Moving forward, FinCen should use these powers to identify banks, institutions, and classes of transactions that kleptocrats use to loot and launder state assets.

If kleptocrats attempt to launder their ill-gotten gains into the United States or through the U.S. financial system, U.S. authorities have the power to seize these assets. The launch of the Kleptocracy Asset Recovery Initiative in 2010 created a “dedicated, specialized team” of investigators from the departments of Justice and Homeland Security whose primary mission is to recover the assets looted by corrupt foreign officials that end up in the United States or pass through U.S. banks. Importantly, the U.S. government has recently enhanced the resources and staff allocated to this initiative, and it may become an increasingly potent tool to counter corruption.

Foreign Corrupt Practices Laws. Another foundational element of the U.S. framework for countering violent kleptocracy is the Foreign Corrupt Practices Act (FCPA). This law imposes a compliance requirement that places certain record-keeping and accounting requirements on U.S. firms doing business overseas and criminalizes bribery of foreign officials in order to gain a competitive advantage. Tools like the FCPA should be more vigorously deployed in countries marked by violent kleptocracy where its impact will be more effective and meaningful in terms of saving lives. However, one major shortcoming of the law is its emphasis on punishing the bribe-payers as opposed to bribe-recipients. Moving forward, however, FCPA convictions can and should trigger corresponding anti-money laundering probes into the movement of the funds and should result in the recipient of the bribe being placed under sanctions. This means that if a U.S. company is found to have paid an illegal bribe to a government official in, say, South Sudan or the Democratic Republic of the Congo (DRC), the government official who received the bribe would automatically be placed under U.S. sanctions and prohibited from traveling to the United States or engaging in transactions with U.S. businesses (including foreign companies listed on U.S. stock exchanges) or financial institutions. Additionally, a key objective of such prosecutions should be to obtain evidence (via plea agreements) about the recipients of bribes as well as the institutions and middlemen involved in receiving and processing illicit payments.

While potent, the tools of financial pressure must be continuously sharpened. In order to calibrate these tools to counter kleptocracy, the U.S. government should develop a comprehensive strategy for countering violent kleptocracy and establish a coordination mechanism for the deployment of tools of financial pressure. Steps must also be taken to ensure that the agencies responsible for administering the tools of financial pressure have access to sufficient staff, resources, and intelligence about foreign officials engaging in corruption. The U.S. government must also continue to cultivate international partnerships to investigate and prosecute the perpetrators of corruption and use a variety of international forums to push reform-minded governments around the world to enhance anti-corruption controls and bolster their own capacity to deploy tools of financial pressure.