Remarks on U.S. Treasury’s Approach Toward Combating Kleptocracy

Asst. Sec. O’Brien Prepared Remarks on Treasury’s Approach Toward Combating Kleptocracy

December 1, 2008
HP-1300

Prepared Remarks of
Assistant Secretary for Terrorist Financing
Patrick O’Brien
On Treasury’s Approach Toward Combating Kleptocracy

Washington, DC–Good afternoon, everyone.  I thank you all for your active participation in today’s first-ever, U.S. government-wide anti-kleptocracy outreach event to the NGO community.

We come here today as policymakers, stakeholders and concerned citizens in pursuit of a common interest:  stemming the ills of kleptocracy that continue to plague so many parts of the world.  Just over two years ago, President Bush announced the National Strategy To Internationalize Efforts Against Kleptocracy.  That strategy explicitly recognized the need for a comprehensive global approach to combat high-level, large-scale public corruption, including an emphasis on the role of private sector actors in denying financial safe haven to kleptocrats.  Stated differently, the U.S. strategy recognizes that government must engage the private sector and NGO community in developing and implementing a comprehensive anticorruption policy.

One of the primary goals of today’s event is to provide a venue for open and cross-cutting discussion of kleptocracy-related issues that we encounter on a daily basis.  We have heard formal presentations from both U.S. government officials and NGO representatives whose work focuses on combating corruption, as well as discussion from representatives of a range of public-sector, non-governmental, and academic institutions.  This afternoon, we will engage in break-out sessions to facilitate discussion on a number of key issues in combating kleptocracy, including: 

• addressing those sectors most vulnerable to the threat of kleptocracy;
• pursuing kleptocrats and their enabling networks and recovering stolen assets through law enforcement and other means;
• providing technical assistance to address systemic vulnerabilities and build capacity to counter kleptocracy; and
• promoting multilateral and global support for counter-kleptocracy efforts.

I am confident that these discussions will facilitate or strengthen partnerships among several of the organizations represented here in combating the ongoing threat of kleptocracy that we all face.

In keeping with the conference’s aim of promoting collaborative efforts in combating kleptocracy, my remarks today will focus on explaining how we at Treasury are working together with our interagency partners, our international counterparts, and with the private sector and the NGO community to combat the threat of kleptocracy.  But first, it is important to recognize the substantial challenges we face and understand why our collective anti-kleptocracy efforts are needed. 

What is kleptocracy, and why is it important?

Although kleptocracy is defined as large-scale corruption by senior government officials, it generally requires extensive support networks of advisors, attorneys, accountants, family members and close associates, as well the deliberate exploitation or complicity of corporations, businesses, and other legal entities.  Depending on the context, kleptocracy represents either the politicization of criminality or, even worse, the criminalization of an entire political class.

Cultures of corruption deserve our condemnation on their own merits because they undercut development and good governance, breed criminality, and sow mistrust in democracy and the rule of law within their given societies.  But within the sphere of international relations, kleptocracy takes on the added dimension, and increased importance, of a threat to international peace and security.

How does kleptocracy threaten U.S. national security?  Left to its own devices, a kleptocratic political class takes little or no interest in the well-being of its population.  When its greed combines with legal privilege and a robust security apparatus, what generally results is a marginalized majority beset by poverty and desperation.  This absence of economic and political opportunity invites broader problems, potentially including civil conflict, terrorism, and long-term regional instability.

In recent decades, we have also witnessed how profit-driven political classes have internationalized the problem of kleptocracy by taking advantage of globalized markets, advanced technologies, and networks of middlemen.  Brazen regimes have trafficked in persons, narcotics, weapons of mass destruction, and other illicit materials, all in the name of padding bank accounts and preserving a stranglehold on society.  Consequently, the U.S. anti-kleptocracy strategy represents Presidential-level recognition that corruption has created security threats of the highest magnitude.

The need for a comprehensive interagency approach

As our national anti-kleptocracy strategy highlights, the U.S. government has adopted a comprehensive public-sector approach to combat the transnational threats that stem from corruption.  Before turning to the work of the Department of the Treasury, it is important to acknowledge the major anti-kleptocracy efforts that other U.S. government agencies are undertaking, including:

• The Department of State, which leads U.S. government collaboration with our international partners to promote the adoption and implementation of common standards against corruption;
• The Department of Justice, which prosecutes all federal corruption and money laundering offenses and enforces U.S. forfeiture laws to recover the proceeds of kleptocracy and other offenses;
• The Federal Bureau of Investigation, which addresses corruption around the world through investigations related to money laundering and to violations of the Foreign Corrupt Practices Act and other financial crimes;
• U.S. Immigration and Customs Enforcement, which combines international money laundering expertise, immigration and customs authorities, and extensive international investigative capabilities to combat corruption;
• The U.S. Agency for International Development, which maintains anticorruption programs around the world to assist partner countries in strengthening systems to resist corruption; and
• The Millennium Challenge Corporation, which provides large grants, or Compacts, to poorer countries that perform better than their peers on 17 indicators that rate commitment to Ruling Justly, Investing in People, and Economic Freedom.

These vital efforts contribute to an interagency approach that is greater than the sum of its parts.  They are also essential to Treasury’s specific role in combating kleptocracy.

A financial component to every national security threat

Treasury’s approach to combating kleptocracy begins with an understanding that there is a financial component to every national security threat and that protecting the international financial system from all forms of illicit finance is a fundamental national security interest.  Recognizing this, President Bush and Congress have given Treasury both the legal authorities and the resources necessary to make substantive contributions across the full spectrum of national security issues.  I am proud to say that Treasury remains at the forefront among finance ministries worldwide in developing and applying financial authorities to both:  (i) protect the international financial system from all forms of illicit financing, and (ii) identify and disrupt illicit financing networks that attempt to operate within the financial system.

Treasury’s Office of Terrorism and Financial Intelligence, or TFI, is dedicated to advancing these twin interests.  TFI’s mission relies upon the constant support of the interagency community and directs the strategic approach that Treasury applies to combating national security threats, including kleptocracy. 

TFI’s comprehensive strategic approach to combating illicit finance

Treasury’s fundamental approach to combating kleptocracy and other national security threats encompasses both systemic and targeted efforts.  Our systemic efforts aim to promote transparency across the financial system, focusing particularly on those vulnerabilities that kleptocractic networks and other illicit financiers exploit to evade detection.  Our targeted efforts rely upon such financial transparency in developing and applying targeted financial measures to identify and disrupt specific illicit financing networks.  Taken together, these systemic and targeted elements of Treasury’s strategic approach make it more difficult, more costly, and riskier for illicit financing networks to operate within the financial system and serve as an effective deterrent for those who would otherwise exploit the financial system for criminal purposes. 

Effectively implementing systemic and targeted measures to combat illicit financing across the international financial system requires the ongoing support of not only the interagency community, but also the private sector and the international community.  For these reasons, much of TFI’s work involves engaging financial services industries, other non-governmental stakeholders, and international counterparts.  Outreach and engagement are vital components of the comprehensive strategic approach that Treasury applies in combating all forms of illicit finance.

I would now like to explain how Treasury is applying all elements of this comprehensive strategic approach to the specific challenges of combating kleptocracy. 

Applying TFI’s comprehensive approach to combat kleptocracy

The effectiveness of TFI’s approach to fighting any form of illicit financing requires that we understand the scope and character of the problem.  In combating kleptocracy, TFI is working with the regulatory, law enforcement, and intelligence communities to provide, to the extent possible, a baseline assessment of the flow of kleptocracy assets, including:  (i) vulnerabilities in the financial system that may be exploited by kleptocratic networks to move and store assets, and (ii) critical financing networks for klepocractic regimes.  These analytical efforts inform, in turn, the systemic and targeted elements of TFI’s strategy to combating kleptocracy.

Systemic efforts

TFI focuses its domestic systemic efforts to combat kleptocracy on three objectives, each benefitting from and helping to advance efforts to combat money laundering and other forms of illicit finance more broadly.  These objectives include: 

(i)                 Requiring financial institutions to identify and apply enhanced due diligence against private banking accounts held by or for the benefit of senior foreign political officials, commonly known as Politically Exposed Persons or PEPs;

(ii)               Providing guidance with respect to suspicious activity reporting requirements for U.S. financial institutions regarding potential kleptocractic activity; and

(iii)             Promoting the transparency of U.S. legal entities that may otherwise mask kleptocractic activities of PEPs in the financial system.

The Financial Crimes Enforcement Network, a bureau within TFI that is commonly referred to as FinCEN, administers the Bank Secrecy Act (BSA), which establishes a framework for the U.S. anti-money laundering and counter-terrorist financing (AML/CFT) regulatory regime.  Pursuant to the BSA, FinCEN issues regulations that promote transparency across the U.S. financial system and facilitate the production of information useful to law enforcement and counter-terrorism authorities in combating money laundering and terrorist financing.  Section 312 of the USA PATRIOT Act amended the BSA to specifically require, in part, U.S. financial institutions to conduct enhanced scrutiny of certain accounts maintained by or on behalf of PEPs and their immediate family members and close associates.   On January 4, 2006, FinCEN issued a final rule implementing this provision.  Notably, this final rule requires U.S. financial institutions to take reasonable steps to identify all nominal and beneficial owners of private banking accounts for purposes of applying enhanced scrutiny against those accounts in which a PEP is a nominal or beneficial owner.  The purpose of such enhanced scrutiny is to detect and report transactions that may involve the proceeds of foreign corruption.

Domestically, FinCEN also helps systemically address the threat of kleptocracy by promoting more effective reporting of potential illicit activity by financial institutions.  FinCEN has worked with law enforcement and regulatory partners to provide instructions for financial institutions on the best ways to highlight kleptocracy in Suspicious Activity Reports, thereby helping law enforcement more easily identify potential kleptocratic activity.  These efforts include an advisory issued by FinCEN in April 2008 that provides additional guidance on suspicious activity reporting for foreign corruption and helps financial institutions understand how to proactively prevent PEPs from exploiting those vulnerabilities in the international financial system that allow them to disguise or otherwise facilitate illicit activities.

In collaboration with the interagency community, state governments and the private sector, Treasury is also pursuing a number of measures to prevent the kleptocratic and criminal abuse of legal entities in order to hide the proceeds of illicit crime or to mask illicit actors engaging in financial activity.  Specifically, TFI is working with various partners to promote greater transparency of U.S. legal entities.  These efforts include developing effective ways of identifying, verifying, collecting and disclosing beneficial ownership information of legal entities for purposes of combating money laundering and terrorist financing.  These steps can significantly deter the use of U.S. legal entities to hide the proceeds of illicit activity, including kleptocracy, in the financial system.

Internationally, TFI and its interagency partners help lead efforts to promote transparency of the international financial system through ongoing work with global partners in the Financial Action Task Force, or FATF, and related multilateral organizations.  These efforts include the development and implementation of international standards that require enhanced monitoring of accounts and transactions involving PEPs, as well as standards that require basic transparency for legal entities that can mask illicit actors and activities in the financial system.  Treasury also supports the efforts of the Departments of State and Justice in developing and facilitating the effective implementation of international legal standards against kleptocracy, including the United Nations Convention Against Corruption and the Organization for Economic Cooperation and Development Anti-Bribery Convention.

Targeted efforts

Building upon this systemic approach, TFI is working with all elements of the national security community to develop and implement ways of calling attention to regimes of public corruption concern, including through certain jurisdictional sanctions programs.  The President has included a corruption component in a number of sanctions programs administered by Treasury’s Office of Foreign Assets Control, commonly referred to as OFAC, the office that administers and enforces the United States’ economic sanctions programs.  This authorizes OFAC to target directly those who improperly benefit from or assist in the public corruption of foreign government officials.  Specifically, the President has included public corruption as a basis for designation in recent Executive orders targeting certain persons in Zimbabwe, Syria, Burma, and Belarus.  In the most recent of these Executive Orders, for example, involving officials in Zimbabwe, the President delegated to the Treasury the authority to designate for blocking senior officials from the Government of Zimbabwe and others who are engaged, or have engaged, in activities facilitating public corruption.  We hope to continue using this authority to combat kleptocratic regimes when appropriate and also aim to expand the scope and effectiveness of these measures by multi-lateralizing our sanctions whenever possible.

TFI is also working with its interagency partners to develop other ways to call attention to individuals and regimes of public corruption concern, including potentially through:

• Section 314(a) of the USA PATRIOT Act (Patriot Act), which enables Federal law enforcement agencies, through FinCEN, to reach out to more than 45,000 points of contact at more than 25,000 financial institutions to locate accounts and transactions of persons that may be involved in terrorism or money laundering, including laundering of kleptocractic assets; and
• FinCEN advisories, which FinCEN issues to U.S. financial institutions to alert them of specific illicit financing risks – including public corruption concerns – and to assist them in effectively applying risk-based controls to address these risks.  These advisories also raise awareness of illicit financing risks and influence the corresponding application of risk-based controls in the international financial community.

Finally, I would like a take a moment to mention Treasury and broader U.S. government efforts, domestically and internationally, to develop initiatives that identify, track, and return kleptocratic assets to those who need them most.  In 2003, Treasury helped lead a focused interagency effort to find, freeze, and repatriate Iraqi assets from around the world, and to find cash and assets within Iraq that were stolen and hidden by elements of the former Hussein regime.   This worldwide hunt resulted in the freezing of nearly $6 billion in Iraqi assets outside of Iraq, the return of over $2.7 billion of those monies, and the recovery of over $1 billion in cash inside Iraq. 

Treasury, together with our interagency partners, has also supported multinational efforts – initiatives like that of the World Bank’s Stolen Asset Recovery Program (StAR) – that use a collaborative approach to finding and repatriating assets stolen by foreign officials and placed in the international financial system.  In order to make these international targeted efforts a success, Treasury’s Office of Technical Assistance works with TFI and the interagency community to provide technical assistance and training to foreign governments, aiming to enhance their ability to prevent, detect, investigate, and prosecute corruption.

Outreach efforts

Treasury has built upon the aforementioned systemic and targeted approaches by engaging in outreach to the private sector and non-governmental stakeholders.  TFI’s domestic work in this area includes FinCEN initiatives with the Bank Secrecy Act Advisory Group (BSAAG).  Internationally, TFI has incorporated efforts to combat kleptocracy into private sector dialogues with the international banking and financial service industries in the Middle East and North Africa and in Latin America. 

As one example of our outreach efforts in practice, FinCEN recently conducted an industry survey to help increase our understanding of how banks and other financial institutions identify and verify beneficial ownership.  Due diligence in this context helps safeguard against fraud and credit risk and also helps address the misuse of business accounts that are opened to hold and move illicit proceeds.  An account held in the name of a corporation or other legal entity can be used to disguise the beneficial owner, the person or persons who actually own or control the funds in the account.  In the case of private banking accounts, U.S. financial institutions are required pursuant to Section 312 of the Patriot Act to undertake reasonable efforts to identify nominal and beneficial owners for among other purposes combating public corruption.  We understand that financial institutions also undertake efforts to determine the nature of the business holding a commercial account and to identify the individuals who own or control the funds in the account in other contexts as well.   

International private sector outreach is also important.  Over the past few years, Treasury has facilitated a series of private sector dialogues linking the U.S. banking sector together with those from the Middle East/North Africa region and the Latin American region, with the support of relevant financial and regulatory authorities.  These dialogues raise awareness of terrorist financing and money laundering risks, facilitate a better understanding of effective practices and programs to combat such risks, and strengthen implementation of effective AML/CFT controls.  The implementation of effective AML/CFT controls regarding PEPs is a key issue in these dialogues.  Discussions include the importance and challenges of implementing Section 312 of the Patriot Act as well as the relevant international standard (FATF Recommendation 6) that guides financial institutions in identifying and addressing risks of public corruption associated with PEPs. 

Finally, Treasury is pursuing increased engagement with the NGO sector, including through events such as today’s symposium.  We hope that this symposium will help expand the NGO community’s understanding of the relationship between combating corruption and our efforts to combat illicit finance more broadly.  We also hope that it will help us develop greater support for the use of systemic and targeted measures against corruption.  Ultimately, our multi-sector outreach will help us better understand and integrate the efforts that governments, the private sector, and the NGO community can undertake to help address problems that allow kleptocrats to exploit both the international financial system and the resources of their own people.

Challenges moving forward

Our efforts to combat kleptocracy have come a long way in the past decade.  The U.S. government has identified kleptocracy as a national security threat and has developed a necessary comprehensive strategy to combat this threat.  The evolution of TFI at Treasury has enabled us to contribute more effectively to this strategy, including through systemic and targeted financial measures, as well as through outreach to international counterparts, the private sector and the NGO community.  These efforts have established a sound foundation for developing and applying financial authorities to combat kleptocracy.

Our focus now must be on facilitating implementation.  Consistent with the standards championed by the UN and the FATF, all countries, including the U.S., need to strengthen their efforts towards three primary objectives:

(1)        We must increase global public awareness of the threat posed by kleptocracy so that our efforts to combat this threat become a high priority for all;

(2)        We must continue promoting implementation of the FATF’s international standards to establish financial transparency and strong anti-money laundering regimes that protect our global financial system from abuse, including through implementation of standards requiring enhanced due diligence of PEP accounts to combat public corruption; and

(3)        We must continue to develop and apply targeted initiatives that effectively identify kleptocratic regimes and networks.

The NGO community is a crucial partner in these efforts.  Working together, we can raise awareness and secure greater support for the actions needed by all countries to combat kleptocracy.  Forums like this will help build the consensus and capacity to do just that.