The Contagion of Graft
Tags: Diplomacy, International Relations, Politics, Corruption, Congress

The Biden Administration needs to take bold steps to combat global corruption or all its top foreign policy priorities will be jeopardized.

Nearly $1 trillion is paid out in bribes by individuals and businesses each year, the World Bank estimates. Globally, nearly $2.6 trillion — five percent of the World Gross Domestic Product — is the annual cost of corruption, according to the United Nations.

President-Elect Biden has indicated that he will make the fight against corruption a core foreign policy priority. It needs to be an essential part of every foreign policy initiative, starting from the first month of the administration. Success in fighting against corruption is inextricably linked to success in responding to the pandemic, promoting economic recovery, addressing climate change, and curbing authoritarianism.

Nepotism, cronyism, embezzlement, and kickbacks distort public spending choices, drain public finances, and undermine public trust in government — imagine how this could play out in the collection, distribution and acceptance of a COVID19 vaccine and other global health priorities. Shell companies and ghost ownership allow authoritarians to solidify their power by hiding their ill-gotten wealth. As authoritarians become more powerful, it is essential to “follow the money” and expose the corruption, just as the Panama Papers revealed how Russian President Putin and his cronies shuffled at least $2 billion through banks and offshore companies. Corruption incentivizes trafficking in arms, drugs, and people, which can cause instability and conflict; and diverts scarce natural resources like water, worsening the effects of climate change. Some of the most climate-vulnerable countries fare worst on Transparency International’s Corruption Perception Index.

A Biden Administration comprehensive anti-corruption strategy would use all its levers of power. USAID programs could, for example, encourage and support multi-stakeholder initiatives that help governments invest in e-government, open data, and greater transparency. The IMF, in its September 2019 report on the true cost of global corruption, noted that in Chile and South Korea, electronic procurement systems have improved transparency and curtailed corruption, and in Colombia and Costa Rica, online platforms track the physical progress of infrastructure projects, increasing the transparency and accountability of these projects.

One of the most potentially effective tools is the Global Magnitsky Act, designed to sanction human rights abusers, but also is used to go after those engaged in corruption. The Trump Administration has used this Act, but often in an ad hoc, and sometimes blunt, manner, such as in Lebanon. The Biden Administration could better employ the Act’s asset freezes, travel bans and lockouts from financial systems as part of a systematic, global anti-corruption strategy. The United States government could also push for greater enforcement of the 1997 OECD Anti-Bribery Convention. Early in my diplomatic career, I worked on getting international buy-in for this convention; France at that time allowed companies to take tax deductions for bribes paid to foreign officials. While most exporting countries now have foreign bribery prohibitions, and global corporations have adopted ethics and compliance programs, enforcement of laws is lacking among the signatories of this Convention.

We also need to have a more sophisticated understanding of corruption in all its forms. While the Departments of Treasury and Justice have significant expertise, collecting and analyzing information about money-laundering, shell companies, and other financial tools to hide wealth requires a more robust whole-of-U.S. government approach, including the State Department and the intelligence agencies. Empowering and instructing the intelligence services to track money flows, increasing the programming budget of the State Department to address global corruption and training diplomats about all the manifestations of corruption are also required.

As the Biden Administration develops its anti-corruption strategy for abroad, one domestic action would profoundly resonate internationally. Cracking down on shell companies within our own borders would be a critical step in the U.S. government’s ability to combat global corruption.

According to Transparency International, the U.S. is one of the world’s largest havens for illicit cash. In its 2019 Financial Secrecy Index, the Tax Justice network ranked the United States second only to the Cayman Islands in terms of financial secrecy. A 2019 report by the Global Financial Integrity think tank highlights that in many of the states, it is harder to be approved for a library card than it is to be approved for a business license, and noted the high level of suspect incorporations in Delaware, Nevada, and Wyoming. The U.S. has no beneficial transparency ownership laws, while 81 foreign jurisdictions do. (A beneficial owner is a person who enjoys the benefits of ownership although title is in another name.)

As a national security professional, I worked most of my career on issues involving corruption, earning the moniker of the “dirty money tracker”. Often when I would meet with foreign officials to warn about the corrosive effects of illicit finance, I would get the response: “What about the United States?” I would receive a history lesson about American hypocrisy — how the U.S. is a tax haven for fugitives and criminals and a favored location for shell companies. The ability of diplomats to make a convincing case abroad about the destructive effects of corruption is undermined by our practices and example.

The good news is that there is bipartisan consensus to rein in limited liability companies, also known as shell companies, and to create a beneficial ownership registry. Introduced by Senators Doug Jones (D-Al), Mike Rounds (R-SD) and Mark Warner (D-Va), The Illicit Cash Act, which would require millions of business entities to reveal their true owners to the federal government, was included in the omnibus defense bill, which will be brought for a Senate floor vote next week. Passage of this Act would be a powerful tool in the fight against global corruption since criminals and nefarious state actors will have fewer places to hide their wealth. “It is past time to put an end to the secrecy that allows drug cartels, human traffickers, arms dealers, terrorists and kleptocrats to exploit the United States’ banking system in order to carry out anti-American activities,” Senator Warner stated. The House-passed National Defense Authorization Act included language on beneficial ownership.

A forceful anti-corruption campaign in the first months of the Biden Administration at home and abroad would change perceptions of the United States and would strengthen the hand of the U.S. government in all of its top foreign priorities. This is a unique opportunity at a critical moment for the U.S. to reassert leadership.