How the global financial system enables oligarchy

At On Point, we love numbers. So, here are some numbers around money, and how the global financial system enables oligarchy.

50%. That’s the percentage of Russian oligarchs’ wealth that is held outside of Russia.

£100 billion ($131 billion). That’s how much money is invested by Russian oligarchs into the United Kingdom per year.

About £1.5 billion ($1.9 billion). That’s the amount of British real estate that has been bought with suspect funds from Russia.

$2.3 billion. That’s how much Russian money has been invested into real estate in the last five years in the U.S.

Many of the world's richest countries slapped sanctions on individual Russian oligarchs. The goal? To rattle Vladimir Putin by squeezing his closest supporters.

From the U.S. --

"We’re joining with European Allies to find and seize their yachts, their luxury apartments, their private jets. We’re coming for your ill-begotten gains," President Joe Biden said.

To the U.K. --

"We will sanction Russian individuals and companies of strategic importance to the Russian state," Prime Minister Boris Johnson said.

Meanwhile Japan, France and Germany have also taken steps to freeze assets tied to Russian oligarchs.

So how were these Russian oligarchs able to launder so much wealth in the first place?

One big avenue is through the global financial market. A very legal and highly regulated system. Well, so we thought.

According to a 2018 report by the Common Foreign Affairs Committee, the U.K. has simply quote “turned a blind eye” to Russian “dirty money” laundered through London.

Billions and billions of likely “dirty money” has flooded out of Russia for decades, with little done to stop it.

Today, On Point: Protecting Ukraine and democracy, by reforming the global financial system.

Louise Shelley, professor of public policy and director of the Terrorism, Transnational Crime and Corruption Center at George Mason University. Author of many books, including Dark Commerce and Dirty Entanglements. (@ShelleyTraCCC)

Oliver Bullough, he writes and reports about financial crime, kleptocracy and offshore money laundering for various outlets including the Guardian and the BBC. Author of Moneyland and the forthcoming Butler to the World. (@OliverBullough)

Daniel Glaser, former assistant secretary for terrorist financing at the U.S. Treasury Department from 2011 to 2017. Global head of Jurisdictional Services and head of the Washington, D.C. office at K2 Integrity.

MEGHNA CHAKRABARTI: I want to bring Louise Shelley into the program. She's a professor of public policy and director of the Terrorism, Transnational Crime and Corruption Center at George Mason University. ... Could you give me a little bit more of a sort of a how-to in terms of ill gotten gains? Let's put it that way. From Russia ... enters the global financial system, and ends up in the assets we've been talking about. Like, how does that actually work?

LOUISE SHELLEY: It works through a large number of facilitators around the world. Lawyers who set up shell companies, individuals who are real estate agents who will sell property to oligarchs. We have a huge art market internationally. And as a Senate investigation a few years ago revealed ... Boris Rotenberg, one of the closest friends of Putin, was moving large amounts of money through the real estate market, through the auction house. Because there are not enough protections and transparency in our financial system. So as Oliver carefully pointed out, we have the absence of beneficial ownership that allows us to hide who is behind this money. And with great difficulty we can occasionally unravel who are the actual owners.

CHAKRABARTI: And so at the risk of asking a naïve question, at what point does the dirty money become clean?

SHELLEY: When it enters into the financial system. Into the banks, into the auction houses, into the real estate, it's been cleaned.

CHAKRABARTI: So, essentially the very first transaction within the financial system. Because it can go through, as you pointed out, multiple shell companies, et cetera.

SHELLEY: Exactly.

CHAKRABARTI: And the reason why I ask that is this essentially, it was almost rhetorical more than anything. To make the point that if true, reform is necessary here to stop this kind of kleptocracy that both you and Oliver are pointing at. Does it require that reform of the entire global financial system?

SHELLEY: It requires reform of the U.S. system, and of the international financial system. There needs to be much more transparency. And there has to be not only the decline of offshore havens overseas, but the decline of havens in the U.S. that allow you to register companies and anonymize them.

CHAKRABARTI: Right. So, Oliver ... put the British flag down on the place where it's easiest or most attractive for Russian oligarchs to use the financial system this way. Would you like to challenge him on that claim?

SHELLEY: I think we can really already challenge them. The oligarchs are not as visible here. They don't own large physical houses in New York as much as they do in London. They buy apartments in New York, which they rarely use. Or apartments in Florida. But they are deeply integrated into our financial system and and are using it, and have been investing in high tech, and are in our venture capital system and our hedge funds. So it's not just 'Londongrad' as it's been called, but something much more deep and profound in our society.

CHAKRABARTI: OK, so Oliver, let me turn back to you here. I'd like to spend a few minutes with understanding from both of you. When we say it's much more, when it's deep and profound, the impact of this money. What would you say? How would you describe what the impact of it is? Let's start with in the U.K.

OLIVER BULLOUGH: Well, I mean, the impact is, you see, in terms of obviously far higher house prices. I mean, let's face it, I wouldn't be able to afford to buy a house in the ritzy parts of West London anyway. But you know, other people would be able to see the house prices are driven up. We also see a very significant chunk of our professional class, which works for oligarchs, for kleptocrats. And that therefore ... sucks talent away from more productive sectors and brings it to the butler class of people. You know, we see this everywhere, obviously, where there's very well-developed financial centers. But I think it's more important to talk about the effect in places like Russia or Ukraine.

You know, it's a simple calculation, if you are a thief. If you're going to go and steal something before you do that, you think, can I keep it? You know, otherwise you're not going to bother. You're not going to all the trouble of stealing something if you're not going to be able to keep it. What we provide, I mean, particularly in London, but you know, not just London, I mean, there are plenty of places in the U.S. that would rival London. I mean, Miami, obviously. But you know, places like South Dakota provides astonishingly opaque trust structures that I've written about in the past. And so on. You know, what these centers provide is a way of hiding illicit wealth. So ... people [that] have stolen, can keep it.

And that incentivizes more theft than would happen otherwise. So, you know, places like Ukraine have been looted by their rulers over the years. Somewhere like Russia, where half of all the nation's wealth is held outside of Russia. You know, astonishingly unequal. Just 500 people essentially own everything in the country. I mean, more unequal than it was before the Bolshevik Revolution. It's astonishing to think about. Yeah, that has been facilitated, that theft, epic theft, probably the greatest single campaign of theft that has ever been, that has been facilitated by us in the West. And therefore, you know, we may not have committed the theft. But we need to recognize that we are at least partially responsible for its continuation and the depth that theft has gone to.

CHAKRABARTI: Yes. And Professor Shelley, I know that this is also something that you want to talk about, about the impact that this is having on Russia and Russians themselves.

SHELLEY: I think it's a little more complex to understand what you call the theft in Russia. It's not just stealing state resources. Oligarchs have been choking and taking over businesses that are started by less politically connected entrepreneurs, and it's a phenomenon called corporate raiding. So in 2020, the Ombudsman for Russia, that's an official government figure, was saying that there were 200,000 Russian businessmen in prison. Because they were placed in prison, while oligarchs and members of the power structure were taking over their businesses.

And that's in part why so many Russians have moved money outside the country. Because nothing is safe in Russia. Because there's no rule of law and it's just the more powerful eat the lesser. But it's also why there's so little entrepreneurship. And why Russia has not been able to move away from its dependence on oil and gas, which is why the sanctioning is so crippling to the Russian economy.

CHAKRABARTI: So, you know, of course, let's just state the obvious that this is not a new issue at all. It's renewed in its urgency because of the attack, Russia's attack on Ukraine. And the manner in which the international community is trying to push back. But Oliver, I'd love to talk about one particular bank here just for a moment. Actually with both of you here, because as people might know, Deutsche Bank recently announced that it was going to wind down its operations in Russia.

But this is a bank that's been frequently implicated in the very kind of shady operations that we've been talking about. I was looking at an article that you wrote in The Guardian, Oliver, back in 2018, and you pointed out that Deutsche Bank did their own survey in 2015 about discrepancies of money coming into the U.K. And found that some £130 billion at that time arrived in the U.K. without being publicly accounted for. But then you asked, did the Deutsche Bank analyst seek to find how that money got there? They could have just walked down the hall and asked their colleagues, but didn't. Tell me more about that.

BULLOUGH: Yeah, that was a particularly entertaining irony. It's a very detailed piece of research by Deutsche Bank's analysts team. About how money moves through these secretive channels. How it's done doesn't end up in the official accounts of the countries published. And yes, it turned out that their colleagues just down the hall had been involved in this extremely elaborate mirror trading scheme. Whereby sort of parallel trades were done in Moscow and London simultaneously to essentially move money from one place to the other. It's a little bit like a very high tech, extremely high powered version of the Middle East Hawala system that we heard a lot about in the years after 9/11.

Which is the way that money can be moved seamlessly from one center in the Middle East to another just by sort of, you know, between a trusted network of financiers. It's essentially worked the same way with Deutsche Bank, just with trading shares. And that's just one of the really big European money laundering scandals that there's been. I mean, Deutsche Bank was bought from abruptly $20 billion.

Danske Bank really went one further. They moved $240 billion out of the former Soviet Union, hidden behind a U.K. registered shell companies mostly, and into the West. Other banks ... did not as quite as dramatic, but equally still very large money laundering scandals. A huge amount of money, as the professor mentioned. The courts in Russia are politicized. They are not used for legal processes, but as for punishment. And so the oligarchs recognize that if they fall out with Putin, as some oligarchs have done, that their assets will be as much a risk as anyone else is. So it's a good reason to to get certainly a decent share of their wealth out of the country.

CHAKRABARTI: I mean, the numbers are staggering, right? ... Professor Shelley, Deutsche Bank has been scrutinized in the recent past for similar activities here in the United States, right?

SHELLEY: Exactly. As I was writing Dark Commerce, I kept coming across Deutsche Bank. It was officials of Deutsche Bank, not only were facilitating illicit trade and money movements of others. But one of them was sent to prison for involved in the largest crime that was ever recorded in the European Union, which was the hijacking of the carbon credit market. And in the United States, Deutsche Bank recently paid a fine of $150 million for facilitating the money movements connected to Jeffrey Epstein, the human trafficker. And how they turned a blind eye to these payments that were going on through the bank for Epstein to pay off his victims, to silence them and to pay for more victims.

CHAKRABARTI: And is Deutsche Bank an exception here, or if we looked hard enough, would we find similar activities in other major institutions, Professor Shelley?

SHELLEY: Unfortunately, Deutsche Bank may be the most notorious, but it's not the only one. There was a leak called Swiss Leaks. Just last month, by a consortium of journalists around the world that looked at Credit Suisse and its facilitation of different kinds of corruption. Oligarchs moving their money. Theft of resources from around the world. So there are serious problems and the banks are not doing the due diligence that they should be doing. And often are prime facilitators of autocratic governments.

CHAKRABARTI: Oliver, how much money are the banks making off these transactions and therefore their shareholders?

BULLOUGH: Well, I think the really big corruption scandals, the big money laundering scandals, such as Deutsche Bank or Danske Bank ... have been places that have had, particularly after the big financial crisis of 2007 to 2008. Had, you know, some cash flow troubles, difficulties. And this became a useful profit stream when they were in a bit of a hole. They didn't really want to ask too many questions about it. You know, I mean, the Russian oligarchs aren't that rich, right?

I mean, probably Elon Musk is probably richer than all of them put together. But for a bank that's in a bit of a hole, it's a useful revenue stream and it can really supplement what they're making from other places. So, yeah, I mean, we don't want to overstate how rich the Russians are, but you know, it's a handy chunk of change.

The Guardian: "The oligarch’s guide to getting round the UK’s economic crime bill" — "he economic crime bill being debated today in the House of Lords does not, as the home secretary, Priti Patel, insisted, show Britain’s determination to root out Vladimir Putin’s 'mob of oligarchs and kleptocrats.'"

New York Times: "Oligarchs Got Richer Despite Sanctions. Will This Time Be Different?" — "For nearly a decade, sanctions have been little more than names on a list for wealthy Russians. Governments are working to give them bite."

Forbes: "What Is An Oligarch? Here’s What You Need To Know About Russia’s Billionaires" — "Russian businessmen embraced post-Soviet privatization – and Vladimir Putin – to become extraordinarily wealthy. Here’s why we call them oligarchs."

POLITICO: "Confiscating a Russian oligarch’s luxury condo requires much more than political bluster" — "Seizures can be further complicated by the fact that ownership of most if not all of the Russian oligarchs’ properties is shielded by shell companies."