Kleptocrats' Loot Could Rebuild Ukraine

Bloomberg View

April 15, 2014

The International Monetary Fund has pledged about $18 billion in loans to help stabilize Ukraine's beleaguered economy. That amount is a fraction of the $35 billion that Ukrainian Prime Minister Arseniy Yatsenyuk says is needed from the international community to avert a default over the next two years.

It shouldn't be this way. Ukraine's financing hole is itself only a fraction of the loot former President Viktor Yanukovych, his family and close personal allies are accused of embezzling: $20 billion of the national gold reserves and a further $70 billion funneled to offshore entities around the world. The recovery of even a small part of these national assets would go a long way toward covering the financing shortfall, and could avert the need to implement punishing austerity measures.

Unfortunately, recent cases — including Nigeria and countries that experienced the Arab Spring such as Egypt and Tunisia — demonstrate that gaps in global collaboration make it difficult, if not impossible, for nations to repatriate even small amounts of stolen assets.

A big reason is the weakness of the global regime for fighting money laundering, which is administered by the Financial Action Task Force. This club of 36 countries is currently led by a Russian official who is an adviser to his own government. His dual role may itself be a drag on effective asset recovery.

The FATF has identified 40 recommendations for combating money laundering and nine special recommendations for countering the financing of terrorism. These have become part of the international standards and codes overseen by the IMF and the World Bank.

Only 11 states are considered to be noncompliant with the FATF’s recommendations. But why do some “compliant” countries appear to have a role in the laundering of Ukrainian assets? These include such familiar havens as the Seychelles and the British Virgin Islands, as well as Austrian banks, U.K.-registered limited liability partnerships, and Russian and Central Asian banks and nonfinancial firms.

The reason is the practice of mock compliance by nations that formally adopt international financial standards on their legislative and regulatory books but fall short of substantively implementing them. This flaw could be addressed in two ways.

First, international efforts to monitor substantive compliance with anti-money-laundering standards must be enhanced. International agencies shouldn’t settle for the mere inclusion of anti-money-laundering laws in national legislation. Making sure these laws are enforced could be achieved through a review process that takes into account the analysis of international law enforcement specializing in international financial crime. In soliciting the opinion of these officials, the IMF and FATF could better identify countries that are more susceptible to money laundering and target those that engage in mock compliance. Countries that have been repeatedly implicated in global money laundering should no longer be able to hide embezzled public assets.

This alone wouldn’t be sufficient. It should be complemented by positive incentives to improve compliance.

Ukraine could be a test case. Retrieving its plundered treasure would require retracing what is often a circular flow of funds. Money moves out of Ukraine to, say, a Russian corporation, which then lends it back to Ukraine. Scrutinizing the nation's private sector debt could yield enormous amounts of information about the missing assets.

Second, IMF and World Bank shareholders should require that technical assistance programs support the identification, reporting and prosecution of money laundering. They also should ensure that these rules are enforced as a condition of lending packages. As things stand, the international anti-money-laundering regime is plagued by the misalignment of incentive structures. Countries that are the most vulnerable to money laundering have the most to gain and the least to lose from engaging in the practice.

Existing agreements ask those countries to invest government time and resources in investigating money-laundering cases that have a relatively limited impact on the stability of domestic financial systems or economic growth.

Ukrainians shouldn't have to wait years or decades for the Yanukovych assets to be tracked down. Their prompt return would provide a signal for other populations suffering under dictatorship and kleptocracy that change is possible and beneficial.

There is a simple way to align the incentives of the creditors in a multilateral assistance package with those of the populations they are assisting. The recovery of looted assets should be used as the security for the repayment of the IMF credits. This would encourage creditors to look harder for the looted funds; and the debtors would be unburdened. It also might be possible to securitize private sector loans on the basis of a recovery process to recapture the stolen wealth of fallen dictators.

The linkage of assistance and asset recovery would provide economic and financial relief to fragile reformers, and it would offer political relief and a real demonstration of global solidarity. Developing countries have had few incentives to support the global transparency regime. An effective international effort will only work if ordinary people -- workers and voters in poorer countries — see that they benefit quickly and directly from the restoration of financial honesty.

Harold James, a professor of history and international affairs at Princeton University, is the author, most recently, of “The Creation and Destruction of Value: The Globalization Cycle” and “Making the European Monetary Union.” Domenico Lombardi is director of the global economy program at CIGI.

The opinions expressed in this article/multimedia are those of the author(s) and do not necessarily reflect the views of CIGI or its Board of Directors.

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