Punishing the Kleptocrats: A New Framework

Karl Muth lays out a plan for tackling kleptocracy.

The riches of Africa have been plundered, and are being plundered. One can argue about whether the kleptocrats on the continent are simply doing what anyone would do in their positions or whether they started from the beginning as thieves. The question of motive is less and less relevant each year, as proving up the mens rea for embezzlement on this scale (billions of dollars in Mr. Mugabe’s case?) is hardly the issue.

But recent restrictions (post-Ukraine) on Mr. Putin’s associates are unlikely to punish anyone. The people named are not the oligarchs who own much of Chelsea and South Kensington in London or much of the Upper East Side in New York City. They are not the ones whose entourages and circles of mistresses require mid-sized private jets. They are not the ones whose yachts can be seen from the beaches of St. Barth’s and Antigua.

These restrictions will do little to set back the plutocratic kleptocracy that is Russia. But new restrictions might well deal a blow to the African kleptocrats. And these restrictions, which I envision here, would take the scope of North Korean restrictions and overlay them on top of the strategic targeting of the Russian restrictions. I would focus on three key areas: credit ratings, cash mobility, and accounts availability.

First, I would attribute the credit ratings of the home country of these kleptocrats (many of the leaders of heavily-indebted poor countries, so-called HIPC’s, don’t have bad credit ratings and many carry elite credit cards or other trinkets of the global ruling class) to the individuals. Sure, the fact that Uganda is heavily in debt doesn’t mean President Museveni is missing payments on his AMEX Centurion card. But credit ratings are powerful things.

By denying good credit to these people – and hence not allowing them to profit from mismanaging their countries’ finances while maintaining their own personal accounts – we disallow everything from credit cards to mortgages to Netjets memberships. This is important, as it vastly raises the cost for these kleptocrats to maintain their lifestyles by raising their cost of capital. It also curtails the gains in their investment accounts by disallowing them anything but ordinary (fully collateralised) margin loans.

Second, I would restrict the cash mobility of these people and their henchmen. Make it illegal for any developed-world banking institution (any institution with a branch or presence in an FDIC-regulated jurisdiction) to accept deposits or transactions involving notes, bearer bonds, or negotiable instruments created by these countries. Creating extremely large-denomination bearer bonds, as Zimbabwe did, is a classic tool used by kelptocrats to tax (inflation is a tax) the population for their own gain.

By destroying the cash mobility of local currencies, the value of hard currency in these countries is increased. The hard currency premium would be initially slight, but would put increased pressure on African kleptocrats. Some, in the resource-rich countries, have had opportunities to hoard at least millions – if not tens of millions – in hard currency. But these pools of capital are finite, and have low returns over time – especially for men who are planning for dynastic wealth that needs to last generations.

Third, I would make accounts vulnerable to seizure with criminal penalties and bounties for straw men. This creates uncertainty around the developed world banking system for developing-world kleptocrats and prevents wives, mistresses, and nephews from opening accounts that are functionally under the control of the kleptocrat. I would give a bounty of 20% to any investment banker, fund manager, or bank employee who identifies kleptocrat accounts; giving two million dollars to a banker handling ten million dollars in stolen funds is more than enough to destroy any loyalty.

Bounties work well and quickly dissolve the loyalty between the kleptocrat and service providers, accomplices, and others. Most African kleptocrats, no matter how powerful, still do not have first-tier civilian passports (even the citizenship-for-sale schemes in Austria and proposed in Malta and Gibraltar are not popular among African kleptocrats, oddly) and most banks do not allow accounts to be opened with diplomatic credentials alone. While they may handsomely reward members of their circles (or their countries’ diasporas) with cash or cars or jobs or women, these reward schemes can easily be “outbid” and betrayal can be purchased.

Through this three-pronged approach, kleptocracy and macroembezzlement would not be stopped, but the lifestyles of the perpetrators would be somewhat more complex. The most effective way to injure or inconvenience a thief is to harm his trust in others (and the trust others place in him). Whether the relationship is with a fence or a pawn shop or a Swiss bank, trust is fragile and can be sabotaged easily; it’s a shame the developed world has done so little to act in its role as the saboteur. Without trust (which is what credit ratings are, for instance – a quantification of trust), the thief cannot enjoy the spoils of his thievery. And without enjoyment of the spoils, there is less reason to steal in the first instance.