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The Global 1% Is Destroying Democracy

Unraveling a web of dark money

Whitney Milam
Aug 12, 2018 · 11 min read
Photo: cherrybeans/iStock/Getty Images Plus

“Wherever you live in the world, you’ve been robbed. Not by a hidden bandit, but a global kleptocracy: the super-rich who’ve managed to rob the poor blind in every corner of the globe for the past seven decades.” — Michelle Chen

We’re living in a time of global income inequality on a scale never before seen in history. Money is concentrated in the hands of fewer and fewer people around the world, and every year they have more of it than ever before. According to the 2018 World Inequality Report, those belonging to the wealthiest 0.1 percent of the global population have, since 1980, increased their combined wealth by as much as the poorest 50 percent. The combined net worth of all 2,208 of the world’s known billionaires is twice that of the poorest 2.5 billion people. By 2030, members of the wealthiest one percent of the global population are projected to hold 64 percent — a full two-thirds — of the world’s wealth.

It wasn’t supposed to turn out this way. The world’s top economists sat down in Bretton Woods, New Hampshire, in 1944, to figure out how to prevent the world economy from ever again becoming as destabilized as it was in the years leading up to World War I. They envisioned a global financial system that would stop countries from manipulating their exchange rates, curtail unrestricted international cash flows, and lock speculative capital behind national borders.

At first, financial globalization — which generated international institutions like the World Bank and the International Monetary Fund, and tied currencies to the U.S. dollar, which was tied to gold — worked exactly as intended. It laid the economic foundation for a period of unprecedented prosperity and stability in the second half of the 20th century.

But this is a very different century — and in the decades since Nixon deflated the dollar’s value in gold in 1971, leading to a return of the old unregulated order and to our current floating exchange rates, the Bretton Woods system that was created 70 years ago has fallen apart.

The story of how we got here is a story of untold wealth hidden around the globe, and of a small number of unimaginably wealthy people — many of whom are authoritarian leaders who have perfected the art of enriching themselves at the expense of their people — gaming the international system to protect that wealth.

To understand the ways corrupt elites around the world have been exploiting this dark side of globalization, and the corrosive impact of that exploitation on democracies, the first thing you have to understand is the global network of financial secrecy enabling it.

“Not only can you not understand the world economy without placing corruption and kleptocracy right at the heart of it, you can’t understand contemporary authoritarians without placing corruption right at the heart of it, and you can’t understand contemporary foreign and domestic threats to the United States and the West without addressing corruption.” — Naomi Fowler

Kleptocracy, meaning “government by thieves,” is the use of state resources and power for personal interests — and there’s never been a better time to be a kleptocrat. Authoritarian leaders like Vladimir Putin (whose estimated $200 billion personal fortune on a $112,000 official salary might make him the kleptocrat-in-chief) use their proceeds from looting the state to stay in power, by keeping their corrupt cronies prosperous and under control. As one Russia expert points out, corruption costs Russia up to six times as much as all of the sanctions that were imposed after Putin’s invasion of Ukraine — and it’s the people, not the elites, who are paying the price.

A lack of democratic checks and balances or rule of law allows authoritarians to get away with robbing their people, but it also ensures that illicit wealth is unlikely to be safe at home. So, today’s kleptocrats hide their stolen money overseas, stored away in places where it can be protected by norms that don’t exist in their own countries.

The process usually goes like this:

  1. The kleptocrat steals a private fortune from public funds.
  2. Using Western bankers, businessmen, and lawyers as intermediaries, the kleptocrat launders money or has it secretly transferred through offshore bank accounts and shell companies, the true ownership of which is obscured.
  3. Finally, the stolen fortune lands in high-value assets in the West — frequently in the form of luxury real-estate in major Western cities, secured by Western property laws.

Ultimately, kleptocratic corruption is enabled by democratic systems. Weak transparency measures in the West allow elites from corrupt authoritarian countries to construct a mask of legality and respectability so that their illicit cash can circle the globe incognito.

After all, offshore banking and anonymous shell corporations are perfectly legal, and in a digitized world that’s more interconnected than ever before, these methods have never been easier. Estimates of total offshore wealth vary, but they’re in the trillions, with Forbes estimating last year that a full 10 percent of global GDP is kept offshore.

Money is less transparent than it’s ever been, and the United States has become one of the leading jurisdictions in the world for moving, hiding, and legitimizing stolen wealth.

“Americans thought that globalization would export the hygienic habits of this nation’s financial system and its values of good government to the rest of the world. But over the past three decades, the opposite transpired: America has become the sanctuary of choice for laundered money, a bastion of shell companies and anonymously purchased real estate.” — Franklin Foer

Anonymous shell companies and international money laundering aren’t exactly everyday concerns for most Americans. So, why should the average American care about the massive amounts of dirty money flowing into the United States?

To start with, ask anyone renting — let alone trying to buy — a home on an average salary in New York, San Francisco, or Miami. The rise of ultra-rich absentee foreign buyers seeking “non-primary” residences (a house or apartment purchased as an investment, not out of any intention to actually live there) has distorted the real estate market, contributed to a shortage of affordable housing, and made homes in major U.S. cities nearly impossible to afford for ordinary U.S. citizens. In midtown Manhattan, for instance — where the average rent is over $4,000 a month — nearly one in three residences are unoccupied at least 10 months out of the year.

It gets worse. More than $2.6 trillion is currently stashed offshore by the 500 largest American companies, costing American taxpayers nearly $700 billion in unpaid taxes. The annual cost of offshore tax avoidance by multinational companies is $94 billion to $135 billion, while overseas tax evasion by individuals drains an additional $40 billion to $70 billion a year from the American public.

Meanwhile, Republicans in Congress just passed a tax relief plan for those same corporations and individuals, a bill that — according to the UN special rapporteur on extreme poverty — “overwhelmingly benefited the wealthy and worsened inequality,” putting America on the fast track “to become the most unequal society in the world.” Not satisfied with that, Trump seems determined to ensure the fast track gets even faster: he’s now seeking an additional $100 billion tax cut for the wealthy. There’s more than one way to plunder public funds from the people.

Every hard-working, tax-paying American who’s not a multi-millionaire or billionaire should be angry that his or her hard-earned tax dollars are being stolen by people infinitely richer than he or she is. But this isn’t just about tax evasion and overpriced real estate. The fact that the United States is hosting a corrupt and corrupting infrastructure to hold the world’s dirty money poses a serious threat to our national security — and to democracy itself.

It’s become increasingly clear that shadowy corporations and foreign governments alike are using untraceable dollars to buy influence in our political process. In 2016, the NRA reported spending more than $35 million on political advertising — but did not report a single donor. We now know that the NRA used a shell company to funnel millions of dollars to the same campaign consultants used by four Republican Senate candidates. We also know that Maria Butina, the Russian agent who was recently indicted, spent years ingratiating herself with the NRA as part of her efforts to influence American politics. Foreign agents like Butina and special interest groups like the NRA are exploiting loopholes in campaign finance laws, casting a shroud of secrecy and corruption over our political system.

Far from strengthening our democratic defenses, the Trump administration has been actively weakening them.

Whether the NRA — which donated $30 million to ensure a Trump Presidency in 2016 — was acting as a conduit for money from the Russian government is still unclear. What is clear is that the NRA is only part of an alarming larger trend. Even as we continue to see proof of attempted Russian interference in our elections, 40 percent of political ads run by outside groups do not report their donors.

Far from strengthening our democratic defenses, the Trump administration has been actively weakening them. Treasury Secretary Steven Mnuchin has announced that the government will no longer require dark money groups to report their donors to tax authorities, making it harder to determine when foreign money is passing through. Trump has called the Foreign Corrupt Practices Act (FCPA) a “horrible law” because it prevents U.S. companies from making secret payments to foreign officials — and an investigation by the New Yorker has suggested Trump himself violated the FCPA through a Trump Organization hotel deal in Azerbaijan.

It’s no surprise that an ethically-challenged leader whose former campaign manager is on trial for charges of unregistered foreign income and tax evasion enabled by a web of offshore companies — and whose daughter and son-in-law hold key positions in government, wielding political influence in ways that enhance their personal and business interests — would seek a crackdown on transparency and accountability measures. Trump is happy to blur the legal and ethical lines between business, politics, and taxpayer money — especially when he is under ongoing investigation for possible campaign coordination with the Russian government.

Putin’s Russia, after all, has been highly successful at weaving an international web of corruption to disrupt democracies — and Putin himself, as the Panama Papers revealed, is at the very center of that web. In addition to its use of state-sponsored disinformation campaigns to sow discord and undermine trust in democratic institutions abroad, the Kremlin uses its proceeds from looting the Russian people to financially sponsor and influence Western business and political elites, ensuring that Putin and his oligarch henchmen see all democratic systems — from social media platforms to finance to politics — as easy to exploit at minimal cost.

“Russia thinks the West is no longer a crusading alliance” willing to stand united against threats to democracy at any cost, writes journalist Ben Judah. “Russia thinks the West is now all about the money.”

Democracy has been corrupted.

Don’t despair just yet, though; it’s not too late for democracies to fight for their survival by fully engaging in the global resistance against systemic corruption.

Take Russia, for instance: the reliance of corrupt elites on the very Western institutions Putin is seeking to weaken provides the perfect opportunity to strike back. As one analyst summarizes:

Russia’s powerful oligarchs are extremely dependent on access to the Western financial system. Preventing oligarchs from safely taking their money out of the country is one of the easiest ways to hit Russia’s power players where it hurts.

No one knows that better than Bill Browder, an American-born financier whose lawyer, Sergei Magnitsky, was murdered in a Russian prison after uncovering a $230 million fraud committed by Russian government officials. Since then, Browder has led a global campaign to expose government-backed corruption and to pass the Magnitsky Act, which imposes visa bans and asset seizures on government officials involved in violations of human rights. “If they’re not able to travel, if their children aren’t able to attend Western schools, if their bank accounts are getting frozen, there are personal consequences that make them very scared,” explains Browder.

Putin hates the Magnitsky Act so much that a Kremlin-linked Russian lawyer arranged the 2016 meeting in Trump Tower (you know, the one that’s under ongoing investigation) specifically to attempt to convince the Trump campaign to overturn the Magnitsky sanctions. Putin has repeatedly attempted to use Interpol to arrest Browder, and in his recent press conference with Trump, he openly called for Browder’s extradition to Russia. The Magnitsky Act strikes at the very heart of Putin’s ability to keep his corrupt cronies rich and satisfied so that he can stay in power — which is why it’s so critical that similar measures are made a political priority.

The U.K. has been leading the way in transparency reform, drafting new legislation that will attempt to combat money laundering by forcing offshore owners of British property to reveal their true identities or face jail sentences and unlimited fines. America should follow that example; making it illegal to own property, companies, and other entities with total anonymity means ending the ability of authoritarians and criminals to launder money around the world.

Transparency legislation has a critical role to play in countering global kleptocracy, and education must follow.

There have been other promising recent developments: two dozen U.S. attorneys general signed an open letter calling for the end of anonymous shell companies, and a bipartisan group of U.S. Senators is calling for a nationwide expansion of the Treasury Department’s Geographic Targeting Orders (GTOs), which force transparency on luxury real estate purchases.

Transparency legislation has a critical role to play in countering global kleptocracy, and education must follow. “Improved education about the threat of transnational corruption is needed in the so-called ‘gatekeeper’ professions — lawyers, bankers, realtors, PR executives, and others who are frequently approached to launder money and reputations,” argues one expert on kleptocracy. “Legislation sets the tone, but only improved societal awareness and an accompanying shift in cultural norms can reverse the rot.”

There has already been a clear shift in public mood around the world when it comes to corruption. In the past five years, more than 10 percent of the world’s countries experienced a change in leadership driven by mass anti-corruption protests — countries as different and diverse as South Korea, Armenia, Malaysia, South Africa, Iceland, and Peru. Even Putin’s Russia isn’t immune to populist anger at corrupt elites: The past year has seen a record amount of anti-corruption protests in cities and towns across Russia. The ultimate outcome of this trend in global politics remains to be seen, but it does provide a reason for hope.

We’re still operating within the original frameworks of globalized financial institutions, and the wealthiest, most corrupt people in the world have figured out how to take full advantage of the loopholes in the rules.

It’s time to close the loopholes fueling global corruption. It’s time to rewrite the old rules for a new age. Ultimately, if a 20th-century system no longer works for the 21st century, we must push to overhaul it.

Written by

Lover of history, literature, democracy. http://whitneymilam.com

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