15 October 2018

Transparency is the best weapon against Russian meddling

By Katarzyna Szczypska

As November’s US midterm elections approach, the threat of Russian interference again looms over Washington. Officials recently summoned Silicon Valley gurus to Capitol Hill to grill them over Russian propaganda on social media. And, earlier this year, election administrators from all 50 states received a rare red carpet welcome in the capital, where security officials warned them of the Kremlin’s planned efforts to interfere with the 2018 race.

But the Russia media fever isn’t getting at a solution that has the potential to disarm the Kremlin.

If handled correctly the US government could deal a huge blow to the Putin regime with a provision mandating disclosure of owners behind real estate and limited liability companies (LLCs). This sort of mandate could finally rid the US of the really meddlesome influence in their politics: Russian dark money.

To appreciate why this ownership transparency is needed, you need to understand the nature of the Kremlin’s regime — one that has been called a “mafia state”, “the corporation,” and “Putin’s kleptocracy”.

These names are fitting, as Russia’s government does amalgamate secret police and organised crime. As Anders Aslund, Senior Fellow at the DC-based think-tank the Atlantic Council, noted, the Russian state has morphed into a corporate enterprise whose owners are no longer Russian citizens.

Indeed, Putin and his cronies consistently swipe money from their own system. For instance, they take over private-sector companies at improbably low prices. But, in an ironic twist, the same regime that destroyed the rule of law in Russia now has to transfer the money it steals offshore to protect it. This is why Putin’s Kleptocracy relies on, and owes its existence to, offshore assets.

Most of Russia’s dark money lands in the US. It’s mainly pumped here through legal use of LLCs and high-value real estate deals that allow anonymous ownership. In other words, thanks to relaxed US ownership law, absolutely anyone can buy a mansion on the West Coast or set up an LLC in Delaware without ever revealing their identity. In some US states, it takes more information to get a library card than to establish an anonymous shell company.

Once that Russian money has been moved to the US, it can be deployed to fund cyber attacks on election infrastructure, buying off American decision-makers, or setting up so-called “troll factories”, Kremlin-sponsored networks of users tasked with spreading disinformation across the internet.

There have been promising results from schemes designed to increase transparency. A 2016 pilot from the Department of Treasury began requiring disclosure of the customer names behind shell companies buying properties in certain U.S. jurisdictions. Since then, the volume of high-value real estate deals has been driven down by a massive 95 per cent in Miami and 70 per cent nationwide, as Clay R Fuller of the American Enterprise Institute and the Hudson Institute’s Nate Sibley have pointed out.

Demanding such disclosures also doubles as an answer to the serious problems that surfaced with the sanctions America has imposed on Putin’s regime. And Russia deserves punishment, certainly.  It swallowed Crimea, attacked Donbas under a false flag operation, and stirred the pot in Syria by propping up the Assad regime.

But some of the US-imposed restrictive measures haven’t done the trick. Most of them, while designed to target Russian citizens and businesses close to Putin through travel bans and asset freezes, were far from thorough. In reality, the US doesn’t have the tools to track all Russian assets on its soil. In fact, a frighteningly minimal amount has been frozen thus far. Moreover, in many cases, there appears to be little rhyme or reason for their actions. They often act at random — cutting off people found on the Forbes list of rich Russians from their funds, regardless of whether they actually form part of Putin’s kleptocracy.

For more than a decade now, Congress has debated overhauling these weak shell-company laws, and several draft bills currently aim to track down dark fortunes by establishing ownership transparency. In July, Treasury Secretary Steven Mnuchin pushed for regulators to find “an efficient and prudent way” for the federal authorities to “have access to beneficial ownership”, indicating a six-month deadline for getting the bill passed.

Indeed, it will be up to the federal government to shut down these operations in the name of national security. At the moment, states are in charge of corporate-ownership issues, and those with overly permissive rules transformed into meccas for anonymously owned LLCs. For instance, Delaware, a state with a population of around 962,000, has registered over 1.3 million entities — and more than half are LLCs. Some states might be resistant to change, as their budgets rely heavily on company registration fees. In the end it may be down to the Treasury itself to enforce its right to collect all information.

Another possible approach is to add a provision to draft bills dealing solely with Russia. The Defending American Security from Kremlin Aggression Act of 2018 (DASKAA) seems the most likely to get passed, and it calls for more transparency, including drafting a report on president Putin’s personal wealth. Arming the bill with a provision requiring corporate beneficial ownership could put an end to one of the main channels for Russian interference.

Property ownership must also be investigated. The 2001 Patriot Act, implemented after the 9/11 attacks, forced most of the world’s shell banks to come out of the shadows. Initially, the act included transparency of property ownership, but, shortly after it was enacted, the US Treasury granted an exemption that remains in force today. Rescinding that property exemption could be done at the stroke of a pen with an executive order from President Trump.

For the sake of the American public, the Trump administration and the federal government must take a hardline stance against dark money in general — and Russia specifically. With goodwill towards Russia’s government running low and the November election approaching, now is the time for American voters to press their government to reveal the identities behind these dark assets and put a halt to Putin’s meddling. What the US has done so far isn’t working. It’s time to try something else.

Katarzyna Szczypska is a Young Voices contributor originally from Poland. She has worked for the Cato Institute and Civic Development Forum and is currently pursuing a Russian Studies degree at University College London.