The Uks Kleptocracy Problem

How ser­vic­ing post-Soviet elites weak­ens the rule of law


The growth of London as a cen­tre for finan­cial and pro­fes­sion­al ser­vices coin­cid­ed with the col­lapse of the USSR and the rise of post-Soviet klep­toc­ra­cies in the 1990s. These states and their elites have since become a major source of clients for UK-based ser­vices firms and of investors in UK assets.

In keep­ing with glob­al stan­dards, the UK has offi­cial­ly adopt­ed a risk-based approach to anti-mon­ey laun­der­ing. However, fail­ures of enforce­ment and imple­men­ta­tion of the law – plus the exploita­tion of loop­holes by pro­fes­sion­al enablers – have meant that lit­tle has been done in prac­tice to pre­vent klep­to­crat­ic wealth and polit­i­cal agen­das from enter­ing Britain.

Based on exten­sive research on the laun­der­ing of mon­ey and rep­u­ta­tions by elites from the post-Soviet suc­ces­sor states, this paper details how the UK is ill-equipped to assess the risk of cor­rup­tion from transna­tion­al klep­toc­ra­cy, which has under­mined the integri­ty of impor­tant domes­tic insti­tu­tions and weak­ened the rule of law. It con­cludes by call­ing for the UK gov­ern­ment to adopt a new approach to this prob­lem focused on cre­at­ing a hos­tile envi­ron­ment for the world’s kleptocrats.

01 Introduction

Amid legal uncer­tain­ty as Soviet state insti­tu­tions unrav­elled in the 1990s, oppor­tu­ni­ties arose for the elites of the suc­ces­sor states to prof­it indi­vid­u­al­ly from the trans­fer of Soviet-era assets. The ensu­ing wealth trans­fers have pro­vid­ed much busi­ness for British pro­fes­sion­al ser­vices firms. But the pro­vi­sion of these ser­vices to post-Soviet klep­to­crats and their asso­ciates has under­mined the integri­ty of impor­tant UK insti­tu­tions and weak­ened the rule of law.

Financial and pro­fes­sion­al ser­vices firms have long made the UK a com­fort­able home for dirty mon­ey. The rapid dereg­u­la­tion and growth of London as a cen­tre for these ser­vices since the 1980s coin­cid­ed with the end of the USSR and the rise of the post-Soviet klep­toc­ra­cies. As Soviet state insti­tu­tions unrav­elled and Russia and oth­er suc­ces­sor states were gov­erned in the con­text of legal uncer­tain­ty, new oppor­tu­ni­ties arose for the elites of those coun­tries to prof­it indi­vid­u­al­ly from the pri­va­ti­za­tion and trans­fer of Soviet-era prop­er­ty, nat­ur­al resources and indus­tri­al holdings.

The ensu­ing trans­fers of wealth in the ear­ly years of post-Soviet inde­pen­dence required a host of wealth man­age­ment ser­vices to secure these new­ly acquired for­tunes and hold­ings, pro­vid­ing much busi­ness for British banks, law firms and wealth man­agers. The UK has since adopt­ed new mea­sures to tack­le illic­it finance and mon­ey laun­der­ing, but they have had lit­tle impact so far on stem­ming large-scale cap­i­tal flight from devel­op­ing nations. The devel­op­ment cost of such out­flows from post-Soviet states is well doc­u­ment­ed.1

Less under­stood is how the enabling of these trans­fers of wealth has affect­ed the rule of law with­in the UK itself. The con­cept of the rule of law can be defined, accord­ing to the Law Society of England and Wales, as char­ac­ter­iz­ing a sys­tem where ‘laws are made demo­c­ra­t­i­cal­ly, every­one is pro­tect­ed by and account­able to the same laws – includ­ing gov­ern­ment – with inde­pen­dent courts there to uphold these in a way that is acces­si­ble, fair and effi­cient’.2

Yet evi­dence is mount­ing that all are not equal before the law – and that the imple­men­ta­tion and enforce­ment of the law is not effi­cient. Weaknesses in the law, and cru­cial­ly the exploita­tion of these loop­holes by pro­fes­sion­al enablers in the ser­vice of klep­to­crats and their asso­ciates, have erod­ed the legal system’s capac­i­ty to assess the risk of cor­rup­tion, under­mined the imple­men­ta­tion and enforce­ment of new anti-cor­rup­tion mea­sures, trans­plant­ed author­i­tar­i­an agen­das and rival­ries to UK set­tings, and under­mined the integri­ty of impor­tant domes­tic institutions.

The UK is not alone in this com­plic­i­ty. Banking scan­dals in Denmark and Germany have demon­strat­ed how dark mon­ey from klep­toc­ra­cies pass­es with ease through Western finan­cial sys­tems,3 while inves­ti­ga­tions into European bod­ies have shown how malign influ­ence can be exert­ed by auto­crat­ic pow­ers.4

This paper draws on the authors’ knowl­edge of the UK, its leg­is­la­tion and links to Eurasia, and con­sid­ers the risks that work under­tak­en by the UK pro­fes­sion­al ser­vices sec­tor for post-Soviet Eurasian klep­to­crats pos­es for the UK’s rule of law and its for­eign rela­tions. It expos­es the reg­u­la­to­ry fail­ures and absences of enforce­ment and con­cludes by call­ing for a new anti-klep­toc­ra­cy strat­e­gy on the part of the British state.

What is kleptocracy? What is enabling?

Classically under­stood as ‘rule of thieves’, klep­toc­ra­cy has found a new gen­er­a­tion of ana­lysts in the last decade. The term has been pop­u­lar­ized in Oliver Bullough’s Moneyland,5 Tom Burgis’ Kleptopia,6 and Sarah Chayes’ Thieves of State,7 while it has also been wide­ly deployed by civ­il soci­ety orga­ni­za­tions.8 The UK’s Financial Conduct Authority (FCA) indi­rect­ly pro­vides a def­i­n­i­tion in its guide­lines on coun­tries with a high risk of cor­rup­tion: ‘a polit­i­cal econ­o­my dom­i­nat­ed by a small num­ber of people/entities with close links to the state’.9 A sim­i­lar term is ‘grand cor­rup­tion’ (i.e. ‘the abuse of high-lev­el pow­er that ben­e­fits the few at the expense of the many, and caus­es seri­ous and wide­spread harm to indi­vid­u­als and soci­ety’10), which may be used inter­change­ably with klep­toc­ra­cy, as both indi­cate the sub­ver­sion of polit­i­cal office for per­son­al enrich­ment and advan­tage. According to a recent def­i­n­i­tion employed in the Journal of Democracy:

Kleptocracy is a sys­tem in which pub­lic insti­tu­tions are used to enable a net­work of rul­ing elites to steal pub­lic funds for their own pri­vate gain.11

The geo­graph­ic focus of stud­ies of klep­toc­ra­cy is often the post-Soviet states, with the books men­tioned above cov­er­ing Azerbaijan, Kazakhstan, Ukraine and Uzbekistan among oth­ers. Meanwhile, influ­en­tial but con­tro­ver­sial recent books by the jour­nal­ist Catherine Belton and the aca­d­e­m­ic Karen Dawisha have both deployed klep­toc­ra­cy as the prism through which to under­stand Russia and its net­work of polit­i­cal­ly con­nect­ed oli­garchs.12 UK media tends to focus on Russia, yet the fact that klep­toc­ra­cy has gripped many of the oth­er post-Soviet states sug­gests a sys­temic problem.

Modish terms are freight­ed with con­no­ta­tions, but our approach to klep­toc­ra­cy emerges from the study of pol­i­tics and economies as they inter­twine and cross bor­ders. From this per­spec­tive, the term post-Soviet or Eurasian klep­toc­ra­cy is, strict­ly speak­ing, a mis­nomer.13 All klep­toc­ra­cies are by nature transna­tion­al and, as they merge with one anoth­er, are poten­tial­ly glob­al – an idea cap­tured in the titles Moneyland and Kleptopia.

This paper explores how the process of klep­toc­ra­cy out­lined in Moneyland occurs transna­tion­al­ly, with mon­ey flow­ing from post-Soviet Eurasia to the UK. Throughout this paper, ‘post-Soviet’ and ‘Eurasian’ are used to refer to the coun­tries of the for­mer USSR exclud­ing the Baltic republics, which have been EU mem­ber states since 2004. Transnational klep­toc­ra­cy is not essen­tial­ly Eurasian in char­ac­ter, and the paper some­times analy­ses oth­er regions. However, the post-Soviet region’s con­tem­po­rary his­to­ry – and its blend­ing of Soviet-era polit­i­cal prac­tices with Western finan­cial cap­i­tal­ism – pro­vides some of the most acute exam­ples of such klep­toc­ra­cy in action.

Kleptocrats are empow­ered to gain from the sys­tem through their polit­i­cal con­nec­tions and sta­tus and by a lack of insti­tu­tion­al over­sight and account­abil­i­ty. This paper dis­cuss­es a wide range of wealthy indi­vid­u­als from klep­to­crat­ic states who we refer to as ‘post-Soviet elites’ or sim­ply ‘elites’.14

‘Kleptocrats’ are gen­er­al­ly gov­ern­ment offi­cials, senior offi­cials or a close fam­i­ly mem­ber. ‘Oligarchs’ tend to refer to a mem­ber of the country’s busi­ness elite or a close fam­i­ly mem­ber, lack­ing for­mal pow­er but some­times with polit­i­cal influ­ence. And a polit­i­cal ‘exile’ includes those who were once klep­to­crats or oli­garchs but have since fall­en out of favour in their home countries.

Many of the finan­cial ser­vices pro­vid­ed by enablers are legal, while oth­ers are of uncer­tain legal­i­ty due to secre­cy and lack of prosecution.

Whether a per­son falls into a par­tic­u­lar cat­e­go­ry can often be dif­fi­cult to deter­mine. Accordingly, klep­toc­ra­cy is not just a sum of cor­rupt acts. It is also the set of insti­tu­tions, net­works and norms, both domes­tic and transna­tion­al, that facil­i­tates and struc­tures such activ­i­ties. A crit­i­cal aspect of any such sys­tem is how glob­al actors and insti­tu­tions estab­lish net­works to effec­tive­ly co-min­gle illic­it funds with legal ones. This ser­vice is known as enabling. The term cap­tures a vari­ety of behav­iours – some lic­it and some illic­it; some will­ing­ly com­plic­it and some reflect­ing neg­li­gence rather than delib­er­ate corruption.

The word ‘enabling’ is seen as pejo­ra­tive by those offer­ing such ser­vices. However, it is a term which grasps the phe­nom­e­non in prac­tice. This paper con­cen­trates main­ly on estate agents, lawyers, accoun­tants, and trust and com­pa­ny ser­vice providers – referred to as Designated Non-Financial Businesses and Professions (DNFBPs) by the Financial Action Task Force (FATF), an inter-gov­ern­men­tal body cre­at­ed to pro­mote glob­al stan­dards on pre­vent­ing mon­ey laun­der­ing and ter­ror­ist financ­ing – as it is these groups that have been found to be at high risk of exploita­tion for mon­ey laun­der­ing by the UK’s National Crime Agency (NCA), due to the ser­vices they pro­vide and in part due to a lack of prop­er mon­i­tor­ing.15 The paper also assess­es unreg­u­lat­ed pro­fes­sion­als, such as pub­lic rela­tions (PR) agents and wealth managers.

Many of the finan­cial ser­vices pro­vid­ed by enablers are legal, while oth­ers are of uncer­tain legal­i­ty due to secre­cy and lack of pros­e­cu­tion. Most of the ille­gal activ­i­ty by enablers takes the form of mon­ey laun­der­ing – i.e. the ‘pro­cess­ing of these crim­i­nal pro­ceeds to dis­guise their ille­gal ori­gin’.16 Anti-mon­ey laun­der­ing (AML) reg­u­la­tions refers to indi­vid­u­als involved in pol­i­tics as polit­i­cal­ly exposed per­sons (PEPs), a term that can apply to senior pub­lic offi­cials, their close rel­a­tives and busi­ness part­ners.17 This des­ig­na­tion is in recog­ni­tion of the fact that klep­to­crats and their asso­ciates have greater oppor­tu­ni­ties to earn mon­ey illic­it­ly through influ­enc­ing state busi­ness. We refer to PEPs through­out this paper when address­ing AML laws and their enforcement.

Elites linked to klep­to­crat­ic states also seek to pro­tect their rep­u­ta­tions to coun­ter­act cur­rent or future alle­ga­tions of malfea­sance. Therefore, enablers also under­take what can be described as ‘rep­u­ta­tion laun­der­ing’ – the process of ‘min­i­miz­ing or obscur­ing evi­dence of cor­rup­tion and author­i­tar­i­an­ism in the kleptocrat’s home coun­try and rebrand­ing klep­to­crats as engaged glob­al cit­i­zens’.18 Again, most of this activ­i­ty is legal. Together, the laun­der­ing of mon­ey and rep­u­ta­tions begets ‘a web of inter­re­lat­ed prac­tices that go beyond the eco­nom­ic realm to encom­pass var­i­ous social-net­work­ing and polit­i­cal tech­niques’, includ­ing ‘secur­ing the right for the klep­to­crat to reside over­seas, run­ning an aggres­sive image-craft­ing and pub­lic rela­tions cam­paign, and using phil­an­thropic activ­i­ties to ensconce the klep­to­crat in a web of transna­tion­al alliances’.19

How is kleptocracy enabled?

In Moneyland, Oliver Bullough high­lights how elites from klep­toc­ra­cies fol­low a three-step process: ‘steal-hide-spend’. While indi­vid­ual actions nec­es­sary to com­plete the sec­ond and third stages may be legal, cumu­la­tive­ly they are recast­ing bilat­er­al rela­tion­ships between the UK and the post-Soviet states and under­min­ing domes­tic delib­er­a­tive process­es that usu­al­ly safe­guard and scru­ti­nize pol­i­cy­mak­ing.20

The first step is the ‘theft’ itself, which in the post-Soviet peri­od con­sti­tut­ed the wil­ful seizure of puta­tive­ly pri­vate assets and the cre­ation of what in Russian is known as obshchak, the ‘shared trea­sure’ uti­lized by a crim­i­nal gang. Here, the lines between the state (espe­cial­ly the secu­ri­ty ser­vices), pri­vate busi­ness and crim­i­nal­i­ty were blurred just as these coun­tries were con­sol­i­dat­ing their domes­tic insti­tu­tions.21 In the peri­od after the col­lapse of the USSR, this theft was of such mag­ni­tude – Stealing the State, in Steven Solnick’s for­mu­la­tion22 – that it was only in cas­es where an elite had fall­en out of favour that they were con­vict­ed of an offence. As such, most klep­to­crats and asso­ci­at­ed indi­vid­u­als were not crim­i­nal­ly sanc­tioned in their home country.

In the 1990s, much depend­ed on the unwrit­ten but firm­ly estab­lished rules of the hier­ar­chy, where top polit­i­cal fig­ures act as a krysha (‘pro­tec­tion’; lit­er­al­ly ‘roof’ in Russian) for those low­er down the chain whose job it is to send mon­ey upwards in a sys­tem that resem­bles that of an orga­nized crime struc­ture.23 Then, dur­ing the 2000s and 2010s, these sin­gle sources of income were expand­ed as oli­garchs diver­si­fied their port­fo­lios and hold­ings through new domes­tic and inter­na­tion­al invest­ments, wealth man­age­ment and inte­gra­tion with inter­na­tion­al cap­i­tal mar­kets. Post-Soviet elites inter­min­gled illic­it and lic­it funds and exploit­ed the opac­i­ty of this cap­i­tal in mak­ing these invest­ments – and they have con­tin­ued to do so to this day.

The sec­ond step is ‘hid­ing’, often via off­shoring, where mon­ey is sent out of the host coun­try using com­plex struc­tures that obscure both the ori­gin of the funds and the ulti­mate own­er. This is typ­i­cal­ly the point at which enablers in rule-of-law set­tings first appear, help­ing the indi­vid­ual in ques­tion – who is usu­al­ly also a PEP – to set up a vari­ety of trusts, shell com­pa­nies and bank accounts. Such struc­tures are ‘lay­ered’ through mul­ti­ple juris­dic­tions (for exam­ple, a Singapore com­pa­ny, owned by a British