Kleptocracy and foreign corruption manifesting in illicit financial flows
| Pages | 681-701 |
| Published date | 02 July 2018 |
| DOI | https://doi.org/10.1108/JFC-02-2017-0008 |
| Date | 02 July 2018 |
| Author | Ted C. Moorman |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Kleptocracy and foreign
corruption manifesting in illicit
financial flows
Ted C. Moorman
Financial Intelligence Data Analytics Specialist, Vienna, Virginia, USA
Abstract
Purpose –The purpose of this paper is to identify the place of kleptocracy and foreign corruption within the
broader framework of financial crime. This facilitates understanding the importance of kleptocracy and foreign
corruption as social problems. Two other aims are to better understand the most problematic components of a
kleptocratic network and the most effective combatants of that network. A subsequent goal is to offer solutions
from a broad range of interventions, including policy, technology, education, research and collaborative efforts.
Design/methodology/approach –Theoretical economicconcepts are used to analyze the importance of
kleptocracy and foreign corruption.A small in-depth survey of 15 experts is conducted to identifythe most
problematic componentsof kleptocratic networks and the most effective combatantsof those networks. The
proposed solutions are based on a combinationof argumentation, econometric developments, application of
trends in relatedfields and material from in-depth surveys.
Findings –This paper identifies kleptocracy and foreign corruption as one of the most, if not the most,
devastating financial crime according to its impact on the total marginal utility of wealth. Experts identify foreign
kleptocrats or corrupt foreign government officials as the most problematic entities in kleptocratic networks and
the most effective combatant is identified as the US Department of Justice. By adding up fines and asset forfeiture
related to corruption, penalties are found to be a small fraction of the problem in terms of monetary magnitude.
Research limitations/implications –The paper does notattempt to make causal claims because of the
nature of the paper’spurpose and methodology.
Practical implications –The paper offers suggestionsand methods for academic researchers who may
wish to pursue a research agenda that is empiricaland forensic with the aim of combatting kleptocracy and
foreign corruption. The paper describes how information on kleptocracy and foreign corruption can be
implementedinto business and economics curriculum.
Social implications –Kleptocracy and foreigncorruption are important problems, and creative solutions
are desperatelyneeded.
Originality/value –The paper shows how understanding and combatting kleptocracy and foreign
corruption can be considered an interdisciplinary activity, touching on fields including technology,
economics,business, ethics, education, law, policy,statistics and research methods.
Keywords Financial crime, Data analytic applications, Foreign corruption, Illicit finance,
Kleptocracy, Total marginal utility of wealth
Paper type Viewpoint
The author is grateful to the following interview participants for the invaluable information they
provided for this paper: Raymond Baker, Global Financial Integrity; Sarah Chayes, Carnegie
Endowment for International Peace; Clark Gascoigne, FACT Coalition; Alex Habershon, World Bank;
Michael Hershman, The Fairfax Group; Trevor McFadden, Baker McKenzie; Diana Schemo, 100
Reporters; Nicholas Shaxson, author and investigative journalist, John Torres, Guidepost Solutions;
Marina Walker, International Consortium of Investigative Journalists; and five other individuals who
are unnamed at their request.
Disclaimer: Views and opinions expressed by individuals mentioned in this paper may not
represent the organizations with which they are affiliated.
Kleptocracy
and foreign
corruption
681
Journalof Financial Crime
Vol.25 No. 3, 2018
pp. 681-701
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-02-2017-0008
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
1. Executive summary
This paper focuses on kleptocracy and foreign corruption that manifests in illicit financial
flows. This type of financial crime is of most concern as it is widespread, frequent and its
victims have the most difficult time recovering. Because kleptocratic states often abuse
human rights and support organized crime, terrorism and global military aggression, the
impact of kleptocracyand foreign corruption goes beyond mere economicconsiderations.
Kleptocracy and foreign corruption can be understood in a reduced form framework
categorizing entities by their location in the directional flow of illicit funds. Entities can be
one or a combination of the following: potential sources of funds, bribery facilitators,
kleptocrats, secrecy facilitators or fund storage and investment. Interviews are conducted
with 15 leaders in thought and action representing a variety of fields, who are addressing
the problems of kleptocracy and foreign corruption. The most problematic entities, as
identified through these interviews, include kleptocrats and foreign officials, banks
(primarily Swiss) and secrecyjurisdictions that allow anonymous incorporation and prevent
beneficial ownershiptransparency.
Monetary penalties assessed by US global anti-corruption law enforcement are
calculated, and a worldwide total of penalties is estimated. The estimated total in penalties
over multiple years is a fraction of the annualsize of the problem. These calculations are not
intended to criticize organizations and individuals combatting kleptocracy and foreign
corruption; rather, this exercise should provoke prescriptions for bridging the gap. The 15
interview respondentsare then asked to identify the organizations that they believe are most
effective in combatting the problem. The top organizations identified are the Department of
Justice/FBI; the press,NGOs and leaks; and no organization.
Future directions for work are proposed for several areas. Considering the wealth of
information gathered through the interviews, a series of documentary and informative
conversations with experts is recommended. Examples are given for how education in
accounting, economics and finance can consider problems and solutions related to foreign
corruption that fit naturally into the flow of a course. Micro-level forensic research on
kleptocracy and foreign corruption is encouraged for these disciplines. Direction in forensic
research is further illustratedwith specific examples of data analytical approaches that can
be used in global law enforcement applications. US policy prescriptions are given for how
amending, improving and passing specific legislation can improve transparency and make
anti-corruption law enforcement more effective. Finally, a collaborative approach between
businesses, regulatorsand legislators is described by one of the interview respondents.
2. An introduction to kleptocracy, foreign corruption and illicit finance
2.1 Definitions and interrelation
Kleptocracy means “rule by thieves”. A kleptocrat, therefore, simultaneously rules and
expropriates. As the word kleptocracy may not be well known or frequently used, one may
suggest equivalent definitions or phrases for those unfamiliar with the term. “Money
laundering by heads of foreign governments”would be one such attempt. A few problems
with this phrase immediatelycome to mind. Rather than only being foreign, kleptocracycan
be a domestic concern for many people. Also, kleptocracy is not just what happens after
money is obtained, as indicated by the label of laundering. Discussing kleptocracy often
requires a more generaldiscussion of foreign corruption.
Foreign corruption can be defined by the Foreign Corrupt Practices Act (FCPA) of
1977[1]. In addition to bribery, foreign corruption can also include kleptocracy,
although the FCPA does not have statutes to prosecute foreign officials (Koehler, 2011).
If kleptocracy represents the demand side of foreign corruption, then bribery and its
JFC
25,3
682
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