Reality check: Can the West bring kleptocrats to justice?

Earlier this month, the US government made a splash with the announcement that, following its warrant, authorities in Fiji had seized a US$300 million yacht allegedly owned by sanctioned Russian billionaire Suleiman Kerimov through a company registered in the Cayman Islands.

Just days later, however, a Fiji court paused the yacht's seizure acting on the request from the Cayman Islands company that argues Kerimov does not actually own the yacht in question.

Transparency International’s new report finds that cases like this are likely not an exception. From layers of secrecy to legal challenges to the complexities of international cooperation, governments targeting the illicit wealth of Russian elites face myriad obstacles – despite their strong pledges to act decisively following the invasion of Ukraine.

Russia’s brutal invasion of Ukraine in February 2022 ignited a global reckoning over the dangers of kleptocracy and the international community’s decades-long complicity. Advanced Western economies initially responded by unleashing new waves of targeted sanctions against Kremlin-linked individuals. But denying safe haven to Russian kleptocrats calls for multilateral efforts, including tracking down the illicit wealth they have diligently hidden across the globe.

In a welcome step, several governments – such as those making up the G7 – are now joining efforts to share intelligence and cooperate across borders through the Russian Elites, Proxies, and Oligarchs (REPO) Task Force established in March.

Transparency International has now assessed how well countries leading these multilateral efforts to freeze and seize kleptocrats’ assets are equipped to deliver on these objectives. Our comparative analysis covers eight countries: Australia, Canada, France, Germany, Italy, the Netherlands, the UK and the US.

A majority of these have also set up national task forces to implement sanctions, but most are focused on coordination rather than actually tracking down assets.

We found that all of the countries studied have significant loopholes that allow kleptocrats to keep their assets out of authorities’ reach, including by failing to give authorities the resources they need to act on available evidence.

Countries have known about many of these barriers for decades. In 2004, the G8 outlined hurdles in the tracing of criminal assets and issued a list of best practices for states to consider. Recommendations included examining national laws to enable asset tracing and confiscation, establishing dedicated authorities and adequately resourcing them. Almost 20 years later, many of the previously identified shortcomings remain unaddressed across the G7 and other countries.

But even if assets are successfully identified, they can only be frozen for so long. Ultimately, sanctions are mere tools to freeze assets and aren’t enough to achieve justice when designated individuals could be also linked to corruption and other crimes. While still following due process and adhering to human rights obligations, countries should go a step further to seize and confiscate assets so they can eventually return wealth to the people from which it was stolen.

Anonymous companies make it easier for kleptocrats to purchase real estate or other luxury goods and to launder their ill-gotten gains.

Germany, France, the Netherlands and the UK all maintain registers of companies’ beneficial owners, but none of the four sufficiently verify the data in them. Australia, Canada, Italy and the US still rely on the information collected by financial institutions to identify the beneficial owners of companies, which has proven to allow for gaps in data or incorrect information. Yet encouragingly, all but Australia have progressed or fast-tracked commitments to establish registers in the past year.

We also found find that, despite commitments and pledges to improve transparency in beneficial ownership of trusts, real owners can still use this loophole to hide their identities.

Only Germany, France and the UK have registers for trusts, but all restrict access by “legitimate interest” or registration requirements, preventing the public and partners from helping to hold owners accountable. Australia, Canada, Italy, the Netherlands and the US have no registers for trusts at all – even though the EU has required them since June 2017, meaning Italy and the Netherlands are out of compliance.

None of the countries systematically collect beneficial ownership information for real estate properties. This leaves a significant loophole, as most countries’ real estate sectors allow for anonymous ownership of properties through foreign companies.

_{*Except for British Columbia}

Furthermore, countries also fail to systematically collect beneficial ownership information for yachts or private planes. Such registers would be a significant step towards setting up a global asset register, which would help to effectively trace stolen assets.

We found that the national frameworks do not sufficiently extend anti-money laundering regulation to non-financial gatekeepers such as investment advisors, luxury goods dealers and real estate agents. Even in the countries where key professions are under anti-money laundering obligations, compliance remains patchy – especially in the real estate sector.

Key gatekeeper professions have anti-money laundering requirements in Germany, France, Italy, the Netherlands and the UK, but not in Australia, Canada and the US. Most significantly, trust and corporate service providers and lawyers in those three countries are under no obligation to conduct customer due diligence, identify the beneficial owner of legal entity clients or establish their source of wealth.

In the US, investment advisers are not even obliged to conduct customer due diligence on their clients, while in Australia they are regularly exempted from these duties. No country covered in the study provides authorities with direct and immediate access to information on end investors of investment funds such as hedge funds and private equity.

Germany, France, Italy, the Netherlands and the UK have reporting obligations for dealers in luxury goods. However, Australia, Canada and the US only include jewellers in anti-money laundering obligations.

To break the cycle of impunity and money laundering, the ultimate objective of multilateral efforts should be to confiscate and return stolen assets to the victims. This is only possible, however, if countries can efficiently gather intelligence and investigate complex, cross-border cases. We found that governments do not yet provide sufficient powers, resources or tools to the authorities tasked with freezing, seizing and confiscating illicit assets.

Financial intelligence units (FIUs) are one of the most important government agencies tasked with combatting financial crime. They receive and analyse suspicious transaction reports (STRs) and produce financial intelligence for further investigation by law enforcement and other authorities. They also support and coordinate the exchange of information with foreign FIU counterparts.

A majority of countries do not provide their FIUs with sufficient funds, particularly the UK and the US. Even Germany’s FIU, which is relatively better resourced after a series of reforms, continues to face serious challenges when it comes to effectively implementing a risk-based approach to fighting financial crime.

<sup>Source for GDP figures: World Bank
* The FIUs of Australia, Canada and the US have additional responsibilities and are consequently expected to have larger budgets.
** Data for UK FIU budget is from 2017/2018.</sup>

The FIUs of the UK and the US also stand out as having too few staff considering the caseload arising from the number of suspicious transaction reports they receive.

^{* The FIUs of Australia and Canada have supervisory responsibilities and FinCEN in the US has regulatory and enforcement responsibilities.
** In the Netherlands, the data corresponds to the number of unusual transactions reports (UTRs), which have a lower reporting threshold than the suspicious transaction reporting model that is in place in other countries.}

Overall, when compared to the size of their economies and caseload stemming from incoming suspicious transaction reports, no country sufficiently resources its FIU. Australia, followed by Canada, have larger budgets for their FIUs relative to other countries, but their FIUs also have additional regulatory and supervisory responsibilities. France, the Netherlands, and particularly the UK and the US dedicate substantially fewer resources to their FIUs.

Russia’s invasion of Ukraine has shed new light on the systemic weaknesses that allowed kleptocrats to find safe haven for their illicit wealth abroad. Until countries address the identified gaps, the same deficiencies that created a problem of this scale in the first place can undercut multilateral efforts.

To effectively deter kleptocrats – from Russia or elsewhere – governments leading the efforts to freeze and seize illicit wealth should:

1. Pro-actively identify and freeze the assets of kleptocrats. Governments should explicitly mandate that their task forces trace the assets of designated and corrupt individuals. They should also go beyond freezing to seizing and aim to confiscate the assets when they are linked to grand corruption and other crimes, as long as they follow due process. To that end, governments should prioritise reforms that grant necessary powers to law enforcement to proactively trace and investigate assets linked to sanctioned individuals.
2. Fast-track key transparency measures. All remaining countries should establish and maintain central registers with verified information about the real owners of companies – including foreign-registered companies buying real estate – and trusts. All should ensure information is available publicly in open data formats so that foreign authorities, media and civil society can access the information and help to hold owners accountable. Authorities should record and publicly disclose information about the real owners of assets, including end investors of hedge funds and private equities, yachts and private jets.
3. Regulate and hold to account all professional enablers of financial crime. Banks, corporate service providers, lawyers, investment fund managers, accountants, real estate agents and luxury goods dealers should be obligated to identify the beneficial owners of customers, conduct enhanced due diligence on politically exposed persons and report suspicious transactions to authorities. Those found to be enabling Russian kleptocrats and other corrupt individuals should be held to account.
4. Effectively resource financial intelligence units and law enforcement, as well as strengthen mechanisms for confiscating assets. Countries should ensure that law enforcement and financial intelligence units are empowered and well-resourced. To move beyond sanctions, they should also ensure that they have civil and criminal mechanisms to seize and confiscate assets and eventually return these assets to the victims of corruption.
5. Strengthen multilateral efforts. The REPO Task Force should expand its current coordination efforts beyond just Russian elites, making both the multilateral and domestic task forces permanent. These task forces should publicly report on their work, including on the assets frozen, investigations initiated and confiscation efforts.