Cleaning Money
Regulatory capture by Russians in the West elevates capitalism over democracy, and that has implications beyond foreign influence. Each football club and villa purchased by oligarchs moves us down the path to cronyism and our own oligarchy.
Capital Thinking • Issue #1089 • View online
Mount Everest has been scaled by 6,000 climbers, and 300 have died. Of those, 85% died on the descent.
Just as invasion is (usually) harder than occupation, criminality itself is often easier than figuring out how to spend your ill-gotten gains.
Digital bank records and international regulatory systems make it hard to turn blood money into Lambos and Alhambra necklaces.
Wash
Scott Galloway | No Mercy, No Malice:
Enter money laundering: The UN estimates that $2 trillion in proceeds from crime are laundered into the legitimate economy every year.
This goes way beyond Jason Bateman stuffing cash into the walls of his house in the Ozarks.
It’s billions in off-shore accounts, corrupt construction projects, and thousands of cash-intensive businesses ranging from strip clubs to five-star restaurants that do better than their footfall would suggest.
It’s a big business attracting more law enforcement scrutiny, new laws, and international task forces. The feds got Al Capone for tax evasion — following the money is one of law enforcement’s best weapons.
Kleptocracies
Yet until just a few weeks ago, a first cousin to money laundering received far less attention: money washing. The conversion of corrupt, if not illegal, oligarch money into Kensington flats and Premier League football clubs.
London, aka Londongrad, has become the global capital of money washing, but it’s more widespread than that. Much more.
The sources of this money are kleptocratic regimes: Governments that operate like organized crime syndicates, extracting wealth from the resources and hard work of the people they rule.
Think of Russia, Saudi Arabia, the other petrol states, and countries ranging from Argentina to Zimbabwe where corruption lets billions leak from the legitimate economy into the pockets of the elite, the patrons of the money washers.
This wealth isn’t necessarily “illegal” — the elegance of cronyism — but there are heavy strings attached.
Klepto-fortunes are made in countries where the rule of law is fluid and shaped by competing elites … who are also walking a tightrope.
Russian oil oligarch Mikhail Khodorkovsky was one of the wealthiest people in the world until he fell out of favor with Putin and spent a decade in prison, ending up with just $500 million.
He was lucky.
Nikolai Glushkov, the former finance director of Aeroflot, was found strangled with a dog leash in his London flat, just before he was scheduled to appear in court to testify about Kremlin corruption. (Note: Don’t know what happened to the dog.)
A common feature of kleptocracies is that they are unappealing places to spend money. A hundred million dollars in London, Paris, and St. Barts buys a better life than any amount of money will afford you in Riyadh.
And you don’t obtain modern economy status with a mansion or a megayacht, but with courtside seats next to Kanye or a position on the board of MoMA.There are forms of washing everywhere.
Anna Wintour sells prestige in the form of admittance to the Met Ball, via purchase of print ads in Vogue.
Admission to elite society is for sale, but big spenders from autocracies require fabric softener before admission.
Downey
Just like drug kingpins, oligarchs have money but can’t spend it. Enter the money washer.
This is any jurisdiction with strong property rights, ample luxury goods, and a willingness to overlook origins. Also a society that accepts oligarch money for real estate, yachts, and midfielder salaries.
Money laundering is done in secret, because it requires hiding the source of money. Money washing hides in plain sight, because that’s the point (appearances).
Money washers merely ask the broader community to ignore the money’s origins.
Money laundering experts outline three components: Placement (getting dirty money into the legitimate financial system), Layering (concealing its source through dishonest transactions), and Integration (making it available for spending).
Money washing also has three components: Removal (getting kleptocash out of the kleptocracy), Enjoyment (converting dead money into a luxury lifestyle), and Elitism (entry into the elite cultural and political circles of the adopted country).
The key principle of washing is removal: getting money out of Russia (or Iran or Kuwait or Venezuela) and into the West — the American/European financial system.
The first port of call for many oligarchs is a web of shell companies located in places including the Virgin Islands and the Caymans. This converts their cache into dollars and euros and removes it from the grasp of the kleptocracy back home, which could have a change of heart.
But ultimately oligarchs want things, not numbers.
Buying Western assets, vs. just shifting money into Western accounts, looks more like legitimate business activity, and the purchase can earn a return and garner Western prestige.
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