The Mintz Group recently launched an app called Kleptocrat. Given my particular interest in large scale corruption, I downloaded it and played with it. While the concept may have been informed in years of experience doing due diligence, tracing assets, mapping shell companies across the world, and trying to right the consequences of corruption, I found it lacking and thought appropriate to give a real life example of The Perfect Kleptocrat, the one that gets away with it.
Our character went to school with the son of someone who eventually became a minister responsible for granting hundreds of millions of dollars worth of contracts. There are no briefcases full of cash exchanging hands, given parties involved trust on each other. When the minister had gotten sufficient power to grant procurement contracts -without bidding is a must- his son tells him his school friend is in the procurement business, coincidentally right in the sector his father is involved. Oh, there’s a national emergency: decades of poor maintenance and worse planning result in power blackouts that blight the country. This is also a must, for it allows the minister to ignore current legislation regarding calls to bid by State institutions.
Expenditure of billions of dollars of public funds becomes thus the personal discretion of the minister. Another must: a country with an illustrious history of never, ever, prosecuting the corrupt, like Venezuela. And yet another requisite: a petrostate, loosely defined as a nation rich in natural resources whose society, in large part, is convinced that wealth does not need to be created, but is there to be looted. In that state of emergency, where no authority has ever bothered to check appropriate expenditure of public resources, our kleptocrat fashions himself as THE solution, and walks into the minister’s office with minister’s son in tow. Minister’s son involvement guarantees that due diligence, background checks and credentials are not needed.
Upon discussing bribes -in kind and in cash-, minister promises to grant procurement contracts. Depending on how the whole operation turns, more contracts, from other State institutions, could be had with assistance from other operatives close to the minister.
Given that this is a known State enterprise, with legitimate budgets, staff, audit office, bank accounts, etc., our kleptocrat gets a few shell companies in traditionally opaque offshore jurisdictions, such as Panama, Barbados, and Spain to get the gig going. Being a contractor of a State entity helps our kleptocrat open accounts in banks, both local and international, whose KYC and approach to compliance has traditionally been either weak, or non existent. Having other school friends who, at this point, are working as “wealth management advisors” in banks like JP Morgan is another crucial piece of the puzzle.
With fresh shell companies in hand, the minister and the kleptocrat hammer the deal. Hundreds of millions of dollars are wired, from a State enterprise accounts to kleptocrat’s accounts, often in same banks. An internal transfer. Everything happens internationally: dollar denominated invoices are paid into dollar denominated accounts far from the reach of local authorities.
Another twist: our kleptocrat operates in a country where there’s foreign exchange controls. Access to forex is very limited to, basically, those with government connections. That, however, is another money spinner, for our kleptocrat gets paid in USD at preferential rate of exchange, but spends in Bolivares (BsF), the rapidly depreciating and worthless local currency. This gives the kleptocrat the chance to become an important player in the thriving black market: local businesses desperate to get access to USD can purchase hard currency from our kleptocrat, who gets paid locally in BsF and instructs his bankers to wire equivalent USD -at black market rate- abroad.
The issue of lacking the capacity to actually carry out the work is solved by our kleptocrat rather easily: he grabs contracts with one hand and subcontracts with the other. He shops around and finds the most appropriate outfit. It helps if that outfit already has a presence in the country. Please keep track of must-haves here: subcontracted outfit is an equally dodgy American company, with an operational track record in developing, and utterly corrupt, nations. Finding derelict, dilapidated, or barely-functional equipment is this outfit’s bread and butter.
And thus the theft happens: minister grants contracts for installed power (in megawatts), but never defines costs or exact figures for such. Therefore, our kleptocrat charges, basically, whatever he wants. And he does. Reversing the initial mechanism, he grabs quotes from subcontractor with one hand, and presents proforma invoices to the minister with the other with a huge overprice added. Say a bunch of used turbines are quoted to our kleptocrat for $207 million: he turns that into a $277 million proforma invoice, which of course, gets paid. A $70 million overcharge in one invoice, in one transaction, in one day.
Hundreds of such transations take place. Our kleptocrat gets creative, and identifies new overcharging ways. Instead of selling entire turbines, he has them dismantled and presents them on a piecemeal basis. He also adds “service costs”, mind you a supposedly brand new piece of equipment has to be acquired with further service charges. All in all, our kleptocrat and his partners pocket close to one billion USD.
One billion USD buys loads of stuff and people nowadays. Everywhere. Our kleptocrat is a very ambitious chap. He wants recognition, international standing. And so he goes on a spending spree. Symbolically, he buys Aristotle Onassis penthouse in New York City. He fancies himself as the new Midas. He goes to Spain, whose jet set and power brokers welcome him with open arms. He takes them hunting, in a country retreat he owns, frequented by the King of Spain. Life is good.
Venezuela, a petrostate remember, descends quite rapidly into pariah state status. A blessing, really, for our kleptocrat. In such state of flux no one is coming after him, no one’s paying attention. The government is run by a criminal organization, a cartel friendly to our kleptocrat. The minister, as promised, introduced others through whom he gets more corrupt connections. Having “concluded” power plant deals, oil becomes the next step. With direct line to decision makers, our kleptocrat works his way into a strategic partnership with Petroleos de Venezuela and, crucially, Russia’s Gazprom. Russian officials, Venezuelan officials, our kleptocrat and his associates, surely a match not even Jim Mintz could have foreseen.
Oil concessions are granted. Representatives of our kleptocrat, such as former US Ambassador to the Dominican Republic, go to market with kleptocrat’s share of output, offering 75,000 barrels per day of oil. 75,000 barrels at today’s prices is $3,825,000. That’s per day. Even if income generated is to be divided with Gazprom, start multiplying that by days passed since, roughly, end of 2013. That’s billions. Using today’s prices, $5 billion give or take.
Folks from Bloomberg Billionaire Index get in touch. They say they’ve heard our kleptocrat has become a billionaire, and want to ask whether there’s any truth to that allegation. I reply confirming the obvious, supporting own estimations with leaks from kleptocrat’s own bankers putting his personal wealth, in 2013, at $600 million.
A lot has happened since then. For example, a $250 million investment into Pacific Energy, a Canadian energy company operating in Colombia, went bad. But that’s pocket change for our kleptocrat. Not all is bad though. A €50 million invesment into a Spanish sunglasses startup works wonders with Spanish media, where our kleptocrat is presented as some sort of maverick tycoon. Even football icon Leo Messi gets charmed by our kleptocrat.
Having all that cash presents tremendous opportunities spanning the globe. By now, our kleptocrat has a remarkable international network. He’s into banking, postal services, oil, fashion, internet, property… His operations are varied and vast. He is courted, everywhere he goes.
The initial billion, whose legitimacy never came into question, has already been through the cycle a number of times. It is clean money. It buys credibility. Former bankers with respectable reputations as well as admired entrepreneurs have become partners and employees, as do former chief prosecutors, diplomats, and award winning journalists from the WSJ. Royalty and influential figures become barbecue friends. No one questions, no media wants to expose his past… The experience gained in Venezuela provided our kleptocrat with a unique understanding of the world: nobody questions money. Money, regardless of origin, is the ultimate presentation card and opens all doors, all over the world.
The graph above is a simplification though. Each entity is a big network in itself. Hundreds of companies, in dozens jurisdictions, make prosecution impossible. Funds misappropriated in Venezuela ended up financing ventures set up under the noses of American, Swiss, French, Spanish, Colombian, Canadian, Venezuelan, Portuguese, Russian and African authorities. No authority ever asked uncomfortable questions, given provenance of funds: JP Morgan, BNP Paribas, Royal Bank of Canada… and no difficulty was ever presented in any bank, brokerage or clearing house, considering that it was PDVSA, or CORPOELEC, or GAZPROM, or some other official institution making payments. Often, transactions are carried through a network of banks that have made a business of precisely ignoring money laundering.
Bribes are paid into special-vehicle accounts associated to shell corporations registered across the world. A truly sophisticated operation, none of that briefcase full of cash nonsense as in the game. Many of the kleptocrats partners / associates are money laundering experts disguised as bankers.
As per enjoyment of the loot, well, let me defer to wife of a relative and close associate of our kleptocrat, who said on the record that a $1.5 million apartment in Miami that she spent another $2 million renovating, was merely used to store some of her clothes. Private jets, yachts, art, designer clothes and accesories, jewelry, racing horses, helicopters, exclusive resorts… there’s nothing these people can not afford to do or buy.
Our kleptocrat will get away with it, pretty much as other kleptocrats have done. London, New York, and Paris are chock full of them. Wealth syphoned from the developing world does not stink. However noble the purpose, Mintz’s app remains an unreal game. In real life kleptocrats hardly ever get caught. Only American authorities show an interest in theft of this scale, alas they are overwhelmed by the complexity, jurisdictional issues, and lack of cooperation and interest from counterparts in other countries. Black money guarantees freedom from prosecution, and while hope springs eternal, fact is there are less and less investigations and prosecutions. Besides, if authorities in those countries where misappropriation of funds has taken place aren’t investigating or prosecuting, why would authorities in other countries do so?
American and English legislation, FCPA and Bribery Act, allow a degree of freedom when it comes to launching fresh investigations regardless of jurisdiction. However, is Wall Street, or the City of London for that matter, about to become unfriendly territories to the world’s dirty money? I don’t think so. The loss would be monumental, market crashing. After all, there are far many more kleptocrats than Steve Jobs in this planet.