Combating Kleptocracy

The increased focus on countering kleptocracy following the full-scale Russian invasion of Ukraine in February 2022 has involved the deployment of dedicated sanctions programmes against Russia by Ukraine’s allies. These programmes have triggered a dramatic increase in the rate of designations of individuals and entities and have led to a greatly increased commitment of resources and activity across a range of countries. This commitment also includes an increase in legislative, regulatory and operational capacity to enhance the response to modern kleptocracy more broadly. While the fight against kleptocracy did not start here, the shock of Russia’s unprovoked aggression confronted Western leaders with the reality of their apathy over preceding decades.

“Modern kleptocracy” refers to acts of kleptocracy occurring in the modern financial age, particularly in the past two decades, benefiting from the globalisation of finance. There is no doubt that significant energy, time and resources have been deployed, overdue legislation has been introduced, and the lower evidentiary threshold of sanctions (rather than criminal prosecution) has been used to disrupt kleptocrats connected with the Russian government. However, this paper concludes that focus must be sustained to achieve the ultimate goal of confiscating assets and dismantling the architecture that facilitates kleptocratic activity, whatever its source.

Modern kleptocracy is not unique to Russia. Funds stolen from national exchequers across the world, funds that should be spent on health care, education and sanitation, continue to find their way into real estate and other investments in Western financial centres. Governments must ensure that their efforts do not suffer from the tunnel vision brought on by a crisis and must instead facilitate long-term internationally coordinated and concerted action to combat modern kleptocracy in all its forms.

Introduction

Calls for governments to take steps against kleptocrats are longstanding. Whether it is politicians highlighting the use of London, for example, as a playground for oligarchs and others who have amassed ill-gotten gains, or the exposure, through leaks such as the Panama Papers and the Luanda Leaks, of the enablers of illicit money movements, or dogged reporting by investigative journalists, the evidence against financial centres such as London, Panama and Cyprus has – in the eyes of most – been irrefutable.

Yet until recently, despite these political calls and journalistic endeavours, little had been done to meaningfully address the problem. The past two decades in particular have seen the emergence of what might be termed “modern kleptocracy” – that is, kleptocrats operating with impunity, seemingly above the law and benefiting from the globalisation of finance. This persisted until Russia’s full-scale invasion of Ukraine in February 2022, which both catalysed a wide coalition of nations to take action that targeted Russia-related kleptocracy, and laid the ground for a more concerted effort against kleptocracy more broadly.

The “unprecedentedly tough” nature of the sanctions arrayed against Russia in the aftermath of the 2022 invasion is well documented. The sanctions are aimed at restricting the funding and resourcing of the Russian military and its illegal war of aggression. But wider consideration of the lessons that might be learned from this broad-based use of sanctions, and the introduction by Ukraine’s allies of other measures to target kleptocracy, is only now beginning to emerge. Some scholars are considering how the Russia sanctions regimes might inform future sanctions use against China, should circumstances in the Indo-Pacific escalate. Others are considering how assets belonging to oligarchs might be not only frozen but seized, for the benefit of Ukraine, while others are considering how to ensure that sanctions are sufficiently targeted to avoid disrupting trade and finance that supports genuine humanitarian activity.

This paper examines the response of Ukraine’s allies – including their use of sanctions – over the past two years in a wider perspective. The author hopes that this perspective offers those in policy circles who are currently focused on combating Russian kleptocracy ideas for how they might expand their ambitions to removing the appeal of international financial centres, not only for Russian kleptocrats, but for all those seeking to hide ill-gotten gains.

The paper is composed of three chapters. Chapter I reviews the emerging response to kleptocracy in the years before Russia’s full-scale invasion of Ukraine. Chapter II highlights relevant elements of the sanctions regimes put in place by many of Ukraine’s allies since February 2022 to target Russian kleptocrats. Chapter III considers other mechanisms to combat kleptocracy that have emerged since Russia’s invasion. The paper concludes with recommendations for policymakers that might enable them to achieve a step change in responding to kleptocrats – and their wealth – that is long overdue.

Methodology

The research for this paper draws primarily on a review of the literature on kleptocracy that has emerged over the past decade since the issue rose to contemporary prominence, and the literature on the action related to kleptocracy and corruption taken by governments before and after the February 2022 invasion. The literature review was conducted between November 2023 and January 2024. The paper also draws on the findings of a RUSI-led project on Russia-related sanctions implementation, which has been running since June 2022. The collected data was supplemented by half a dozen virtual interviews with subject-matter experts in the US conducted between January and February 2024 to clarify issues or seek further information relating to literature published by the interviewees. A validation meeting to discuss the paper’s preliminary findings with a group of government and non-government experts took place in Washington, DC in February 2024.

I. The Response to Modern Kleptocracy Before February 2022

Kleptocracy, defined as “a society whose leaders make themselves rich and powerful by stealing from the rest of the people”, is a longstanding and widely explored issue. It is not the place of this paper to provide a detailed analysis of the history, origin and semantics of this Greek-origin term; others have offered extensive explanations. But in the context of this paper, it is important to note that although the concept of kleptocracy is not exclusive to Russia, the collapse of the Soviet Union provided ample opportunity for the flourishing of the modern form of kleptocratic behaviour that has drawn the attention of politicians and civil society.

Whether the context is the former Soviet Union, Africa, or other regions where high-level political power is allegedly abused for personal financial gain, the post-Cold War globalisation of finance has provided ample tools and opportunities for those seeking to profit from their positions of power to do so and create a form of kleptocracy for the modern financial age. Kleptocrats use the international financial system to hide their financial tracks and seek to use their wealth to exert influence for themselves or their political masters. The UK’s 2023 Economic Crime Plan underlines this, defining kleptocracy as:

[A] highly corrupted political regime where power has been consolidated for the benefit of a small elite. It is characterised by widespread theft of national wealth and resources to subvert domestic political systems. Kleptocrats exploit open financial centres and professional services in developed economies to help corrupt elites enjoy their ill-gotten gains overseas … The UK is not unique in facing this threat, but as a global financial centre and popular destination for investment we have an important role in tackling it.

Yet, since the end of the Cold War, cities such as London have laid out the welcome mat for money – regardless of its provenance. Consider, for example, the 2011 establishment of the City of London–Moscow International Financial Centre Liaison Group, “heralding a new – and potentially lucrative – relationship between the two cities”, and the priority seems clear.

But while the City of London, its professional service providers and real-estate agents, and those in other financial centres may have been courting this new and questionable money, politicians and policymakers have not been entirely inert.

As far back as 2000, under the leadership of Kofi Annan, the UN was starting its journey towards creating what became the UN Convention Against Corruption (UNCAC), which came into force in December 2005. And the Sustainable Development Goals agreed by the international community a decade later included the ambition to “significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime” as well as “substantially reducing corruption and bribery in all their forms”.

Building on this, and reflecting a speech he made in Singapore in July 2015 in which he asserted that “London is not a place to stash your dodgy cash” and that “[t]here is no place for dirty money in Britain”, in May 2016 then-UK prime minister David Cameron hosted a global anti-corruption summit. And whilst the word “kleptocracy” appears nowhere in the post-conference communiqué or declaration, the conference sentiment was clear: there should be no impunity for those who steal assets, and the countries present committed to restricting these people’s ability to operate in their countries.

With the summit coming just a month after the revelations of the Panama Papers that exposed the abuse of company registration secrecy to hide asset ownership, one key outcome was for countries to commit to “enhancing transparency over who ultimately owns and controls [companies], [in order] to expose wrongdoing and to disrupt illicit financial flows”. Progress in this regard has been slow, but, nonetheless, by highlighting this important feature of combating corruption and kleptocracy, the stage was irrevocably set for a key piece of kleptocratic architecture to be dismantled.

While Cameron was making his case for tackling corruption and – by extension – kleptocracy, the US had already put in place operational measures to directly confront kleptocratic behaviour. In 2010, the US Department of Justice (DoJ) launched the Kleptocracy Asset Recovery Initiative “aimed at combating large-scale foreign official corruption and recovering public funds for their intended – and proper – use: for the people of our nations”. This initiative has recorded considerable success in the period since it was created.

Alongside this law enforcement focus on kleptocracy, a number of policy developments in the US also put in place further measures for responding to kleptocracy. In 2016, FinCEN (the US financial intelligence unit, part of the US Treasury Department) issued Geographic Targeting Orders requiring certain businesses to identify the natural persons behind legal entities used in all-cash purchases of certain residential real estate in a list of US jurisdictions, a list that is continually expanding. These orders help authorities crack down on illicit financing schemes “exacerbated by a perception that real estate can be a safe way to park value and obfuscate the source of illicit funds”, and have proved valuable to a range of law enforcement agencies, although their failure to cover commercial real estate leaves an obvious gap.

A widely acclaimed landmark achieved in the US in 2016 was the passing of the Global Magnitsky Human Rights Accountability Act. The Act authorises “the President to impose economic sanctions on, and deny entry into the United States to, foreign individuals or entities identified as engaging in human rights violations or corruption”, an authority that has subsequently been expanded via Executive Order 13818, and extensively used. Reflecting the US, one of the first steps taken by the UK to demonstrate its post-Brexit independent sanctions policy was the introduction of its own “global human rights” sanctions regime, followed in 2021 by a further regime targeting corruption with the purpose of “prevent[ing] and combat[ing] serious corruption”, including “misappropriation of property involving public officials”.

While these regimes provide important mechanisms via which the US and the UK can signal disapproval, bar t violators from entry, and draw the attention of the private sector to targets that should be frozen out of their financial systems, such designations do not always advance efforts to confiscate the proceeds of corruption, particularly when assets are not held within the reach of the sanctioning country. Indeed, at the time of introducing the UK’s anti-corruption sanctions, then-foreign secretary Dominic Raab pointed to the lower standard of proof required to issue sanctions as compared to the criminal standard required to prosecute – a suggestion that signalling matters, even if pursuing asset confiscation for the benefit of those countries from which kleptocrats have stolen funds proves challenging. Furthermore, in the case of the UK, despite this lower standard of proof, the use of its anti-corruption regime is widely viewed as underwhelming.

While the EU has introduced a human rights regime, it has yet to bring forward an anti-corruption sanctions tool, despite calls from the European Parliament in 2021 and the proposal of European Commission president Ursula von der Leyen in 2022 to include corruption in the EU’s human rights regime.

The second notable event in the US during this period was the passing of the Anti-Money Laundering Act 2020; this includes the Corporate Transparency Act, which requires FinCEN to create a federal-level beneficial ownership registry, a commitment that finally went live in January 2024. Bringing increased transparency to company ownership in the US is an important further step in the dismantling of the architecture of modern kleptocracy, and starts to bring the US into better alignment with the globally required standards of the Financial Action Task Force already in place among its allies.

Since then, the Biden administration has placed a particular focus on combating corruption, including designating the fight against corruption as a core US national security interest, targeting “the globe-trotting kleptocrat who offshores an embezzled fortune” and making extensive use of the various anti-corruption sanctions that authorities have introduced in recent years, with more than 40% of their use targeting kleptocrats.

Alongside these US policy developments, in June 2021, a bipartisan group in the US Congress announced the creation of the Caucus against Foreign Corruption and Kleptocracy (CAFCAK) to “educate and mobilize Members of Congress on the cross-jurisdictional nature of foreign corruption and identify bipartisan opportunities to work together to curb kleptocracy”. This group has acted as a focal point for a range of kleptocracy-focused legislative successes and the anchor for wider collaboration between like-minded individuals in legislatures on either side of the Atlantic.

Meanwhile, although lagging behind the US on the development of sanctions, the EU has made consistent advances in identifying vulnerabilities in the integrity of its financial system and responding with repeated money-laundering directives. Most recently, in 2021 – and agreed between the EU Council and the European Parliament in January 2024 – the European Commission announced its latest, and most comprehensive, response to financial crime. A wide-ranging anti-money-laundering package brought forward a number of measures that will, among other things, strengthen the EU’s response to kleptocracy when fully implemented. For example, of relevance to combating kleptocracy, entities covered by regulation will be expanded from an existing list covering financial institutions, banks, real-estate agencies, asset management services and casinos to include traders in luxury goods and high-value items such as luxury cars, aeroplanes, yachts and artworks. Certain professional football clubs and related agents will also become subject to regulation. In addition, transparency of beneficial ownership, curtailed by the European Court of Justice in November 2022, shows signs of being restored, and real-estate registers across the EU will be made more easily accessible to competent authorities.

Lastly, and returning to UK politics, since David Cameron’s short-lived engagement with the challenge of dirty money, the UK’s political leadership has chosen to (mostly) ignore the country’s role as a central facilitator of kleptocracy – but this is not to say that Parliament has too. Of particular note has been the House of Commons Foreign Affairs Committee, which in 2018, following the poisoning of Sergei Skripal and his daughter in Salisbury, produced a scathing report that noted, despite the strong rhetoric from the government following the poisoning, that “President Putin and his allies have been able to continue ‘business as usual’ by hiding and laundering their corrupt assets in London”, and called on the government to “show stronger political leadership in ending the flow of dirty money into the UK”. This report, “Moscow’s Gold”, was supplemented by a further report from the Committee in the wake of Russia’s full-scale invasion of Ukraine, which shone a light on “The Cost of Complacency” by assessing “the consequences of the complacency of successive Governments towards illicit finance and the adequacy of the current Government’s response”, and starkly stated that:

London’s role as a global financial centre is tarnished by its reputation as a hub for illicit finance. The consequences for our national security and the integrity of our institutions and services are laid bare by the current war in Ukraine; assets laundered through the UK are financing President Putin’s war in Ukraine.

In another example, the UK Parliament’s Intelligence and Security Committee, which provides parliamentary scrutiny of the intelligence and security activities of the UK intelligence community, published its Russia report in July 2020, which called, among other things, for immediate action to tackle “the illicit financial dealings of the Russian elite and the “enablers” who support this activity”.

Such calls from parliamentarians went largely unheeded until February 2022 and Putin’s full-scale invasion of Ukraine.

II. Ukraine, Russia Sanctions and Their Use Against Kleptocrats

While the response to modern kleptocracy covers a range of legislative, regulatory and operational measures, the immediate focus of Western allies following Russia’s full-scale invasion of Ukraine was on the use of sanctions, including targeting oligarchs and others who had long been the subject of calls for action from politicians and civil society campaigners.

The sanctions deployed by Ukraine’s allies have fallen into a number of categories. Initially, stung into action by the Kremlin’s invasion, Western countries deployed tried-and-tested financial sanctions, freezing the assets of individuals close to President Putin who, in the words of UK sanctions legislation, and consistent with that of other allies, were or had been involved in “obtaining a benefit from or supporting the Government of Russia” or in “destabilising Ukraine or undermining or threatening the territorial integrity, sovereignty or independence of Ukraine”. Allies also immobilised the assets of the Russian central bank and blocked access to the international financial markets for many of Russia’s financial institutions. In this initial phase, huge focus was placed on “the oligarchs” and their ostentatious wealth. Properties in London were frozen, yachts were seized in Mediterranean ports, and trophy assets such as football clubs were threatened with closure.

But as the war progressed, Ukraine’s allies realised that while freezing assets might restrict the Russian economy, it was difficulty in procuring critical components – including, importantly, the micro-electronics and technology needed for its missile and drone programme – that perhaps threatened the Russian military most severely. Thus, the focus of most sanctions activity has switched to trade rather than financial restrictions, with efforts to disrupt supplies of a list of 50 goods deemed critical for Russia’s military prioritised.

This does not mean that the focus on the oligarchs and their wealth has receded – indeed, the focus on trade has also directly impacted those oligarchs whose businesses are part of the Russian military–industrial complex. Ever since February 2022 and the first oligarch asset freezes, politicians and civil society activists have called on these assets to be not only frozen but also seized and used to benefit the Ukrainian people. In his State of the Union address in March 2022, President Biden committed to finding and seizing the “yachts” and “luxury apartments” of “the Russian oligarchs and the corrupt leaders who’ve bilked billions of dollars off this [Russian] violent regime”, concluding: “We’re coming for your ill-begotten gains.”

Considerable time and investment have been applied to reviewing legal means by which these assets can be confiscated within the bounds of “the rule of law”. As explored further below, new requirements have been introduced in the EU, reinforcing the reporting obligation where assets have been frozen to include assets that have not yet been frozen (for example, if they have been concealed), and including a requirement to report all “funds or economic resources belonging to, owned, held or controlled by [listed persons or entities] which are located within EU jurisdiction”, setting the stage for a more muscular anti-evasion and confiscation regime. A similar requirement was also introduced in the UK at the end of 2023. Perhaps most eye-catching of all, Canada has passed legislation that expands the country’s ability to confiscate assets where “a grave breach of international peace and security has occurred, gross and systematic human rights violations have been committed in a foreign state or acts of significant corruption involving a national of a foreign state have been committed”, opening the way for more expansive (though not as yet fully tested) confiscation activity.

While in Ukraine – a country at war – martial law has allowed for a widening of the criteria under which assets can be confiscated, to date, no solution has been found by which the Gordian knot of property rights and the rule of law can be sufficiently separated to allow for the large-scale asset confiscations called for by so many. Indeed, thus far, a mere $5.4 million, confiscated from oligarch Konstantin Malofeyev, has been transferred for the benefit of Ukraine, Malofeyev having been judged to have attempted to move money and evade sanctions.

Nevertheless, goaded into action by Russia’s war, political leaders and policymakers have set about building new structures and passing revised laws to strengthen the resilience of the financial system against kleptocratic abuse, and designing better responses for when these defences fail.

III. Widening the Lens in the Response to Modern Kleptocracy

As this paper has shown, efforts to combat modern kleptocracy did not start with Russia’s full-scale invasion of Ukraine, and they are not restricted to the use of sanctions. But it certainly is the case that the invasion accelerated responses to cases of Russian kleptocracy and made it no longer tolerable for those allies of Ukraine that had previously hesitated on taking action – for example, passing stronger legislation – to continue to do so. The resulting action has fallen into two categories: legislative and operational developments.

Legislative and Regulatory Developments

In the months that preceded the Kremlin’s full-scale invasion, Western leaders threatened “‘massive’ economic consequences” for Russia’s economy as soon as the “first Russian toe-cap” crossed into Ukraine. While sanctions did follow, Ukraine’s allies had to scramble to ensure their national legislation met their rhetoric, having underestimated the impact of applying economic and trade restrictions on a country so closely integrated into most Western economies. Many countries rushed to pass new legislation to allow for the effective implementation of sanctions and reorganised their national sanctions architecture to reflect their close ties with Russia. For example, Lithuania was quick to redraft its sanctions law, and in May 2022 it published an updated version that put the Financial Crime Investigation Service, the country’s financial intelligence unit, at the helm of sanctions implementation. Germany had to undergo a much deeper reform by completely overhauling its national anti-money-laundering system and establishing a dedicated Office for Sanctions Enforcement after two Sanctions Enforcements Acts. Many countries have yet, two years on, to introduce the legislation necessary to criminalise the growing prevalence of sanctions evasion, and none apart from the US have seized assets from oligarchs.

Regarding transparency, the EU suffered a significant blow at a critical time. In November 2022, the European Court of Justice ruled in favour of limiting public access to beneficial ownership registries. Some member states were quick to suspend access, whereas others, with legislation already in place to enable more universal access, maintained the registries’ operation. Recognising the damage caused by this ruling to the EU’s reputation and to efforts to identify and disrupt kleptocracy and wider financial crime activity, as noted earlier, in January 2024, the EU Council and the European Parliament agreed further steps that should once again allow members of the public with a legitimate interest, including media and civil society, to access the registries.

In the UK, while legislation for implementing sanctions was in place, the long-overdue reforms called for by parliamentarians were quickly rushed into legislation. In March 2022, the Economic Crime (Transparency and Enforcement) Act 2022 was passed, giving effect to some key and much-needed tools for combating modern kleptocracy, including powers to accelerate sanctions decision-making (such as the introduction of an “urgent procedure” allowing the UK to fast-track designations to align with allies); strengthening the UK’s underwhelming and ineffective Unexplained Wealth Order regime; and, most importantly, establishing “a public register of beneficial owners of non-UK entities that own or buy land in the UK, operated by the Companies House registrar”. This last development paved the way for heightened transparency of property ownership in the UK, removing a widely used avenue for hiding the proceeds of modern kleptocracy.

In late 2023, further legislation was passed, notably introducing powerful reforms to the operations of Companies House, the UK’s corporate register. Although this register has been open to public inspection for a number of years, the quality of the data it holds has repeatedly been revealed to be poor. A key component of this reform is the requirement for data held by the register to be verified, thus removing a loophole widely abused by kleptocrats.

As noted earlier, Canada introduced legislation in May 2022 to enable the confiscation of assets in cases related to certain breaches of international peace and security. In the US, progress on implementing the Anti-Money Laundering Act 2020, including the Corporate Transparency Act, has continued, and while some striking new legislation has been introduced – such as the Foreign Extortion Prevention Act, which criminalises demand-side bribery by foreign officials – other critical anti-kleptocracy initiatives have foundered. Notably, in the face of strong opposition from lawyers’ groups, the failure of the bipartisan ENABLERS Act to secure Senate approval in December 2022 has left the US at odds with the wider international effort among its allies and partners to tackle the professional service providers that have been widely revealed to facilitate the illicit financial activities of the corrupt, kleptocrats and criminals by devising money-laundering and sanctions evasion schemes.

Meanwhile, alongside introducing legislative changes aimed at more effectively operationalising sanctions implementation, EU countries have been bringing in new sanctions powers. In April 2022, Poland adopted its own Sanctions Act introducing a national sanctions list, and in October of that same year, Czechia approved its own Magnitsky law, joining Estonia, Lithuania and Latvia, which had already introduced their domestic versions prior to February 2022. The EU’s own directive on criminalising sanctions evasion is coming closer to introduction.

While the legislative and regulatory armoury was being strengthened, so too was the operational response to modern kleptocracy, as countries – unilaterally and in partnership – created new entities to directly target Russian kleptocrats and their wealth.

Operational Developments

On the day of Russia’s invasion, as part of the package of response measures announced to the UK Parliament, then-prime minister Boris Johnson committed to “set[ting] up a new dedicated kleptocracy cell in the National Crime Agency (NCA) to target sanctions evasion and corrupt Russian assets hidden in the UK, and that means oligarchs in London will have nowhere to hide”. Reporting later in the year by the BBC revealed that the “K Cell” aims to “introduce friction” into the life of sanctioned oligarchs and other wealthy individuals with close ties to the Kremlin. This exclusive focus on Russia, as explored further below, draws attention to an important consideration in the fight against modern kleptocracy – the divide between the attention paid to Russian kleptocracy, and that paid to the proceeds of corruption and kleptocracy emerging from the many other affected geographies.

As the workings of K-Cell were revealed, a new dimension in the fight against modern kleptocracy emerged – particularly for countries with overstretched and under-resourced law enforcement capabilities. Whereas the success of law enforcement responses is normally judged by prosecutions, K-Cell takes the view that “changing behaviour is seen as success as much as an appearance in court”, claiming that intelligence is revealing that people are “choosing not to invest corrupt funds in the UK as a result of [the NCA’s] work”. There is also the suggestion that “enablers like lawyers may also become nervous of the reputational damage of working with sanctioned oligarchs”, although evidence of this behavioural change has yet to be presented.

There was a similar development on the other side of the Atlantic in March 2022, with the US authorities announcing the launch of Task Force KleptoCapture, committing to “surging federal law enforcement resources to hold accountable corrupt Russian oligarchs”. In contrast to the UK’s K Cell, the Task Force made a clear commitment to seeking arrests and prosecutions via the use of the “most cutting-edge investigative techniques … to identify sanctions evasion and related criminal misconduct”. Since its launch, the Task Force has achieved the forfeiture of $5.4 million belonging to Russian oligarch Konstantin Malofeyev, noted above, and has “obtained judgments to forfeit nearly $700 million in assets from Russian enablers and charged more than 70 individuals for violating international sanctions and export controls levied against Russia”.

Besides the Task Force, the US 2021 Strategy on Countering Corruption rapidly took shape after February 2022. The 2022–26 Strategic Plans of the State Department, USAID and the DoJ all prioritised anti-corruption initiatives and increased their dedicated staff. In April 2022, FinCEN issued an advisory urging financial institutions to focus efforts on detecting the proceeds of foreign public corruption.

Lastly, recognising the cross-border nature of kleptocracy, these various national initiatives are seeking to coordinate and collaborate in their efforts to “detect and disrupt the movement of ill-gotten gains, and to deny [violators] the ability to hide their assets in jurisdictions across the world”, creating the so-called “Russian Elites, Proxies, and Oligarchs” (REPO) Task Force. Working alongside the REPO Task Force, the European Commission set up the “Freeze and Seize” Task Force to ensure the effective implementation of sanctions within the EU against Russian and Belarusian oligarchs.

More broadly, as noted by one US government official, prior to the full-scale invasion of Ukraine by Russia, cross-border collaboration on money laundering and other financial crime cases was sluggish. However, since February 2022, on cases related to sanctions evasion, there has been a marked improvement in the responsiveness and speed of requests from partner countries for information related to specifically Russian kleptocracy investigations, resulting in some notable law enforcement successes.

In addition to developments in the public sector, the raft of sanctions imposed on Russia after February 2022 completely redrew the perimeter of sanctions implementation for the private sector. Financial institutions have significantly boosted the resources of their sanctions compliance departments to deal with the breadth of the sanctions they are required to implement. This broad scope of the sanctions regimes has also meant that many non-financial businesses across different industry sectors have been exposed to sanctions obligations for the first time, requiring them to develop sanctions knowledge, hire staff and invest in screening resources – investements that should, in relevant sectors, be harnessed to further efforts to combat modern kleptocracy.

Conclusion

This paper has sought to outline what lessons the international community has learned in its fight against modern kleptocracy from the response to two years of Russian aggression in Ukraine.

While there has been considerable activity linked to Russia’s full-scale invasion, it is important to note that the past two years of effort have been limited in two ways.

1. The overwhelming focus of the measures developed over the past two years is on specifically Russian kleptocracy. While some initiatives – such as those aimed at greater transparency of property and company ownership – are universal in their application, the resources invested in investigating and prosecuting modern kleptocracy are almost exclusively focused on that emanating from Russia and associated with the Kremlin’s war in Ukraine.

2. The second limitation has to do with who is developing and enforcing these increased measures against kleptocracy. The measures are primarily restricted to those countries allied with Ukraine, and thus do not include countries that are noted facilitators of the illicit financial flows associated with modern kleptocracy, such as the UAE and Türkiye.

The result is that the much-needed wider application of pressure against modern kleptocracy has been neglected, notwithstanding the introduction of new legislation (for example, relating to Companies House reform in the UK) and other measures (such as, in the US, the proposed broadening of regulation to cover investment advisers). A key indicator of this failure can be seen in the limited number of designations by the UK under its global anti-corruption sanctions regime in the last two years.

The second important observation relates to outcomes. While oligarch assets have been frozen, little progress has been made on the investigations and evidence-gathering needed to secure asset confiscations, particularly in Europe, and prosecutions for sanctions evasion remain rare, despite ample evidence that evasion is occurring.

UNCAC, a “legally binding universal anti-corruption instrument”, has formed a central pillar of global efforts to combat corruption and, by extension, the kleptocrats that abuse their connections with, or positions of, power since it entered into force in December 2005. Authorities in the US had been alive to the issue for over a decade since the Kleptocracy Asset Recovery Initiative was formed by the DoJ as part of the US’s commitment to meet its obligations under UNCAC, and parliamentarians and their equivalents on both sides of the Atlantic had been seized of the matter, even if their leaderships had not. But finance is global, and where the US led operationally, other financial centres – including, notably, given its centrality to global finance, the UK – failed to follow.

Combating kleptocracy matters – not only, of course, for the countries from which funds are looted, but also for the national security of those countries to which the proceeds of kleptocracy flow. As the 2023 updated UK Economic Crime Plan notes, illicit finance linked to corrupt elites from Russia and other kleptocratic jurisdictions and hostile states undermines a nation’s reputation and enables broader national security threats such as the subversion of democratic processes and institutions.

Since Putin’s full-scale invasion of Ukraine, political leaders have been shamed into action, passing long-overdue legislation and creating task forces and other initiatives in an attempt to make up for lost time. Whether they will succeed remains to be seen, but kleptocracy is not unique to Russia. Funds stolen from national exchequers across the world, funds that should be spent on health care, education and sanitation, continue to find their way into real-estate and other investments in Western financial centres. We should certainly strive to identify and confiscate ill-gotten gains from those that have supported and benefited from the patronage of President Putin, but so too must we ensure that the tools and mechanisms that have facilitated their financial dealings are no longer available to kleptocrats and the corrupt from elsewhere across the globe.

In its 2023 Serious and Organised Crime Strategy, the UK government commits to “combat[ing] kleptocracy by improving financial sanctions design and implementing, enforcing and strengthening our response to kleptocracy”. But what does this mean in practice? And how can the legislative, regulatory and operational steps taken over the past two years and reviewed in this paper – born of a desire to address more than a decade of neglect – be solidified to ensure that the ability of kleptocrats to abuse Western financial services and investment markets can be curtailed once and for all?

This paper proposes the following actions for accelerating the fight against modern kleptocracy, based on the steps taken over the last two years, motivated by two years of Russian aggression in Ukraine.

• Sustain focus: Russia’s full-scale invasion of Ukraine triggered a strong response from Western allies related to specifically Russian modern kleptocracy, yet history shows that new crises (such as the Hamas terrorist attack on Israel and subsequent Israeli response) can quickly distract policymakers and divert law enforcement resources.

• Avoid tunnel vision: While considerable resources have been dedicated to targeting specifically Russian kleptocracy via sanctions, reforms with broader application have been introduced. These must be leveraged to ensure that modern kleptocracy writ large is addressed and that efforts are not confined to Russia.

• Promote international cooperation: International cooperation to combat modern kleptocracy has strengthened since February 2022. Initiatives established since the full-scale invasion must be formalised and expanded to respond to kleptocracy in all its forms, and not confined to Russia sanctions-related activity.

• Enhance operational capacity: While some new resources have been introduced in Europe, capacity to respond to modern kleptocracy remains short of what is required to create a sustained and effective response.

• Strengthen legislation: Countries have discovered that freezing kleptocrat assets is the easy part. Stronger legislation is required to support the investigation of modern kleptocracy, and thus ensure that assets are not only frozen but also confiscated and returned to their rightful beneficiaries.

• Dismantle the enabling architecture: Too much of the architecture that can be abused by kleptocrats (including corporate secrecy and professional enablers) is allowed to persist. Efforts to dismantle this architecture must be accelerated, and valuable legislative initiatives, such as the US ENABLERS Act, must not be allowed to fail.

• Take responsibility: International financial centres must acknowledge that they fuel kleptocracy by offering the tools and expertise necessary to move and hide stolen funds. Thus, those responsible must work harder to use newly acquired legislative, regulatory and operational tools to remove the loopholes and vulnerabilities abused by kleptocrats. This includes the necessity of following through on enforcement via prosecutions and asset confiscations, rather than imposing sanctions as a sole solution.

• Support democratic resilience: The fight against modern kleptocracy is a whole-of-society effort. All of society must be empowered in this fight.

In sum, Russia’s full-scale invasion of Ukraine has energised governments in their efforts to combat modern kleptocracy. Steps taken over the past two years have paved the way for greater success, but the focus must be sustained, broadened beyond Russian modern kleptocracy, and made permanent if these efforts are to bear fruit.

Tom Keatinge is the Director of the Centre for Finance and Security at RUSI.