Financial Transparency Coalition

Cross-posted with permission from Freedom House.

flickr / Mitchel25J

Corrupt dictators who take bribes and loot their treasuries are rightly condemned by governments and other observers in developed countries. But the extent to which this plundering is aided by lax and weakly enforced money laundering laws in the West has too often escaped notice. It is remarkably easy for these criminals to hide their identities behind anonymous shell companies and bank secrecy in order to bring their dirty money into the United States and Europe.

Right now the U.S. Department of Justice is trying to seize proceeds from what may be one of the most egregious cases of state looting. A recent complaint details claims that Teodorin Obiang, son of the autocratic president of Equatorial Guinea, used anonymous shell companies in the United States and his home country to disguise his identity and deposit illicit money into U.S. bank accounts. It was then apparently spent on expensive property, a fleet of fast cars, and a crystal-studded glove worn by Michael Jackson.

The complaint alleges that Obiang spent more than $300 million between 2004 and 2011 to acquire assets and property around the world. In one stretch of less than three months, he allegedly bought a $30 million mansion in Malibu and a $38 million private jet. Global Witness separately uncovered a plan last year for Obiang to build the world’s second most expensive yacht. At $380 million, this would have cost approximately three times his country’s combined health and education budgets.

Obiang’s eccentric and expensive tastes aside, the real problem with his lavish spending is that it significantly exceeded his official monthly salary of $6,799 and the amount of income he claims to have earned from his business interests in Equatorial Guinea.

The Department of Justice alleges that Obiang made extensive use of shell companies that exist only on paper and served to “disguise his criminal conduct, conceal the source of his income, and to claim falsely to overseas financial institutions and foreign governments that his income was derived from legitimate commercial activities in [Equatorial Guinea].”

Despite billions of dollars in oil revenue, 77 percent of Equatorial Guineans live below the poverty line, 35 percent die before the age of 40, and 58 percent lack access to safe water. Infant mortality has actually increased since oil was discovered in the mid-1990s. Obiang is guilty of bad taste and a seeming lack of concern for his fellow countrymen at best, and outright theft of public wealth at worst.

The unfortunate reality is that Equatorial Guinea is not the only country where the elite may be robbing the poor. The cost of corruption in Africa alone has been estimated at $148 billion a year, representing 25 percent of the continent’s gross domestic product. It has been estimated by economists that $903 billion in illicit financial flows left the developing world as a whole in 2009.

Corruption has a corrosive impact on governance and development. When millions of dollars are looted from resource-rich countries, it benefits a corrupt elite and enables them to stay in power, to the detriment of the rest of the population, most of whom typically live in poverty. Money that is siphoned off to hidden foreign accounts might otherwise have been used to build infrastructure like roads, schools, and hospitals, or to pay for life-saving medicines, clean water, and teachers’ salaries. State looting also weakens confidence in public institutions, subverts the rule of law, and damages the private investment climate. In the worst cases, it leads to conflict and failed states.

There is a patchwork of laws around the world intended to stop dirty money from entering the banking system, but illicit funds are able to flow unimpeded through gaping legal loopholes. The easiest way to take advantage of these gaps and move money quietly is to set up an anonymous shell company.

In the United States, it is perfectly legal to incorporate a company without disclosing who actually owns and controls it. More information is needed to obtain a driver’s license than to open an anonymous shell company in most states. This allows corrupt foreign officials, weapons smugglers, tax evaders, and drug traffickers to disguise their identities when accessing a bank. In fact, a study of 150 cases of large-scale corruption showed that American shell companies were used more often than those registered in any other country.

Human rights groups have identified ending hidden company ownership as one of the 10 biggest challenges for the next U.S. administration. By tackling this problem, the next president could have a huge impact on grand corruption and poverty in developing countries. This in turn could contribute to economic growth and trade, and help prevent conflicts and crises that require international intervention.

There is a bipartisan bill in Congress, the Incorporation Transparency and Law Enforcement Assistance Act, that would end the use of anonymous American shell corporations by requiring companies to disclose who ultimately owns and controls them when they incorporate. The bill is supported by the U.S. law enforcement community.

Congress and the president should act now to stop corrupt dictators and other criminals from using the privilege of limited liability to hide their identities and launder dirty money in the U.S. financial system.