Democracies Remain Blind to the Threat from Illicit Finance

By Tom Keatinge (Centre for Financial Crime and Security Studies)

This article was originally published in Rusi.

An entrenched focus on the proceeds of crime has left democracies exposed to the threat of illicit finance.

For over 30 years, led by the Financial Action Task Force (FATF), the international community has developed policies and standards for combatting financial crime. This mission, begun as a taskforce of the G7 in 1989, was rooted in an attempt to disrupt the flow of money being laundered through the banking system in connection with the drugs trade between South and North America.

The success – or otherwise – of the FATF and its mission is open to debate. Its Recommendations have led to the introduction of standardised laws and policies around the world, most of which are beneficial and have certainly strengthened the integrity of national financial systems – and by extension the global system too.

Yet, this system – regardless of whether it has been successful or not – contains a significant gap, one that has been brutally exposed in recent years. While the FATF’s mission has been to galvanise states and their private sectors to identify and disrupt criminal finance, finance that is less obviously criminal (often referred to as ‘malign’) has been allowed to flow almost without question. Indeed, it could be argued that such finance has – perhaps unintentionally – been encouraged by incentives and policies designed to attract investment and boost economic development.

Only now are political leaders and policymakers waking up to the risks posed by the seeds they have sown and the extent to which their myopic view of illicit finance has left democracies vulnerable to the influence of malign finance. The steps they need to take are manifold, and some will require political leaders to shine a harsh light on their own activities and shortcomings.

First, let’s consider the causes of the gaping vulnerabilities. A series of tactical and strategic decisions have combined to leave our financial borders open to the unencumbered flow of questionable finance. From easy-to-come-by golden visas that provide legitimacy, to the drive of countries such as the UK, the UAE, Switzerland and other wannabe regional money centres to promote themselves as the financial service provider and destination of choice, decision-making has favoured those seeking to move their money around the world – with both benevolent and malign intentions. These vulnerabilities are well documented and, despite the delayed recognition, are slowly being addressed. There should be no let-up on this progress, and civil society should focus relentlessly on tracking the commitments made by leaders and holding to account those whose actions do not match their words.

Second – and this is where the gaps start to emerge – there is the use of this money once it reaches its preferred destination. Investment in property, yachts and art is well understood. More can be done to ensure that such assets are not used for money laundering and that better beneficial ownership information is required, but awareness of these issues among policymakers and political leaders has grown considerably, and progress – glacial though it is – is being made.

However, this progress in identifying illicit finance is predicated on the belief that the funds can be proved to be the proceeds of crime (in this case, often corruption and kleptocracy). What if the funds cannot obviously be tied to criminal activity, or if the country from which the funds are alleged to have emerged is unwilling or unable to collaborate in supporting investigations? And what if these funds are not used to buy trophy assets but are ‘invested’ in purchasing influence, positioning oligarchs and the sons and daughters of kleptocrats at dinner tables and canapé receptions with politicians and Western elites in return for their financial generosity?

Herein lies the vulnerability that neither the FATF nor its acolytes around the world have grasped. The threat posed by illicit finance is far broader than the laundered proceeds of narco-barons or the moving of terrorist funds. Uncontrolled finance can threaten and pervert democracies. From funds used to create political unrest in Moldova, to ‘donations’ made to the Conservative party in the UK, the bribes allegedly paid to MEPs in Brussels, or the funding of disinformation campaigns, the checks and policies that have been developed are very often of no use.

Put simply, while the international illicit finance community has been dedicating itself to the pursuit of ‘criminal’ finance, democracy has been increasingly threatened by the purchase and sale of influence. To date, the self-appointed guardians of the integrity of the financial system have failed to rise to the challenge.

So, what needs to be done?

First, there must be much more systematic tracking of the commitments made by political leaders on tackling illicit finance and other responses to corruption. G7/G20 communiqués come and go, filled with commitments that are forgotten as soon as they are published. A global, civil society-led initiative should be created to track these commitments and to highlight both progress and failures to deliver.

Second, the extent to which influence can be bought by unaccountable funders of politicians, political parties and other influential bodies (such as universities and cultural institutions) needs to be researched and exposed. The openness of our societies has left them vulnerable to external financial influence, with those responsible for guarding against this threat often also being those that benefit. This conflict must be confronted.

Third, and connected, a proper link must be created between the work of investigative journalists and law enforcement agencies. Organisations such as the Organized Crime and Corruption Reporting Project or the International Consortium of Investigative Journalists and the police/investigative authorities are uncomfortable bedfellows. Yet some of the most important government investigations are often triggered by the work of the third sector (consider the continued investigations, seven years later, based on leads from the Panama Papers). As happens in the US and the UK with Magnitsky sanctions proposals, a focal point – such as a think tank – should be funded and supported to turn the work of investigative journalists and civil society activists into information packages that can be digested by law enforcement authorities.

Fourth, greater investment should be made in empowering young people with an awareness of the threat posed to their futures by illicit finance. Too many entrenched and vested interests exist among the leadership and elite of wealthy democracies; too many leaders in developing countries act with impunity to enrich themselves. Educational and awareness-raising campaigns should be targeted at young people in Western democracies to bring home the extent to which their futures are being sold and stolen. The response to illicit finance is a battle that will take a generation to succeed, and thus engaging young people must be a core component of the response.

Fifth, greater focus should be placed on the role of international financial centres (IFCs) in facilitating the global flow of illicit finance. For example, whereas the FATF reviews countries every 10 years, a biannual, bespoke review of IFCs should be conducted, holding them more closely to account for making progress on securing the international financial system.

And last, the ‘untouchable’ role of the FATF must be confronted. There is no doubting the success the FATF has had in raising anti-financial crime standards around the world. But while the threat posed by illicit finance has expanded exponentially and the nature of the threat has broadened, the FATF’s development has remained linear, myopic and unaccountable to those who suffer from the impacts of illicit finance. In 2022, the FATF published the outcome of its strategic review. Its failure to grasp its own fundamental shortcomings is a clear indication that it is time for a radical rethink of the global response to illicit finance. This is not to argue that the FATF should be abolished, but its governance, focus and responsibilities need to be revisited, and its unquestioned position of leadership should be challenged. Just as the FATF judges the effectiveness of countries’ responses, so too must its own effectiveness be independently assessed.

Over the past two years, the extent to which democracies are challenged by illicit finance has been harshly revealed. The threat has been there for decades, but the illegal Russian war in Ukraine has forced the issue to the surface, making it unavoidable for policymakers and political leaders – who nevertheless seem unable to confront the challenge with any confidence. Existing policies and structures, such as the FATF, have likewise been found wanting. Meanwhile, those in civil society and investigative journalism, and the young people whose futures are being sold and stolen, are largely ignored.

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