The People’s FATCA

The People’s FATCA

What if we could look inside kleptocrats’ bank accounts?

Politicians are people. If leaders (or senior state officials) loot public money or steal state assets, they are nonetheless protected, like everyone else, by banking privacy. Thanks to a decade of campaigning we may soon know if they or their relatives control a company or a trust; but we may not know what financial assets that company or trust has amassed, nor where those assets have come from or gone to. These questions are ultimately the key to the public purse, or some form of it, recovering the money on behalf of the direct and indirect victims of an official’s grand corruption.

Governments have recently begun to take a dimmer view of the sanctity of the bank account. In 2010, amidst the fallout of the financial crisis, the U.S. government decided to coerce foreign banks to report to the IRS the balances of bank accounts owned by U.S. citizens: a global effort to stop U.S. citizens from concealing wealth and financial assets outside the U.S. tax net. Banks refusing to comply would face a withholding tax on U.S.-origin payments. Initially, and not without reason, the U.S. Foreign Account Tax Compliance Act (FATCA) was derided as an unworkable and draconian piece of financial imperialism. But it has since re-energised a more global, equitable push to force banks to disclose taxpayers’ income and assets to their home governments’ tax authorities, through a multilateral system of “Automatic Exchange of Tax-Related Information”. This year the first such exchanges of financial account information began under a 78-country system overseen by the OECD.

None of this, though, is much use against kleptocracy, for three reasons. First, being primarily tax-focussed, the information exchanged between governments is limited to a taxpayer’s account’s income and balances; it says nothing about the origin or source of the financial assets, making it a limited investigative tool against grand corruption. Second, because (for now) participation in the OECD’s system remains skewed towards wealthier economies, with many of the poorest economies left out in the cold. Poorer economies may not be more prone to corruption than wealthier ones, but they are probably harder hit by its impacts. Third, and most importantly, the system provides information to the ‘home’ governments of those squirrelling wealth away in foreign bank accounts. If those doing the squirrelling are the leaders or senior officials of that government, there’s every chance that the information will be ignored or suppressed.

What if instead “the people” could peer directly inside corrupt officials’ foreign bank accounts, and those of the companies and trusts that they control? What if their citizens could see their bank statements?

Before we consider the merits and risks of doing this, let’s think about how it could be done. One obvious place where the bank statements of many offshore accounts are effectively reconstructed is inside the U.S. banking system — thanks to correspondent banking. Since such a large proportion of international trade and financial transactions gets done in U.S. dollars, and because the dollar remains the world’s dominant reserve currency, a large proportion of bank accounts held in non-U.S. financial centres by non-residents of those centres – and many held by their residents as well — are dollar-denominated. If a kleptocrat has an offshore account, from Switzerland to Hong Kong, Paris to London, it’s quite likely to be a dollar account. To offer dollar banking, a non-U.S. bank needs an agreement with a U.S. bank which allows it to make dollar payments and take dollar deposits via a correspondent account held with the U.S. bank. In short, most money coming in and going out of a dollar account at a non-U.S. bank will have to be cleared through a U.S. bank. (There are some exceptions, including ‘nested’ correspondent banking). The records of that U.S. correspondent bank account will effectively reconstruct much of the transaction history of each dollar account in the non-U.S. bank.

Why is peering inside a U.S. bank account any easier than peering inside a Swiss or Seychelles bank account? One reason is that U.S. courts are almost uniquely disposed to order U.S. citizens and companies – including banks – to locate and disclose information relevant to a legal proceeding taking place elsewhere in the world. The basis for this is a little-known federal statute passed in 1948: Section 1782 of Title 28 of the U.S. Code.

28 Section 1782 essentially says that “any interested person” in any legal proceeding at a foreign court or tribunal can apply to a U.S. District Court to order a U.S. individual or company within its jurisdiction to produce any “document or other thing” for that foreign proceeding. Imagine a group of claimants is suing an allegedly corrupt retired Peruvian politician for corrupt behaviour or misappropriation of public funds. They determine that that politician has an account in Peruvian Bank X, and another in Swiss Bank Y. Bank X and Bank Y will have correspondent banking relationships with, say, the New York branches of Barclays and Citibank. Those correspondent relationships are generally on public record. Those claimants, even before they go to trial in Peru, can apply to the U.S. District Court for the Southern District of New York for Barclays and Citibank to turn over to them all the records of dollar payments into and out of the politician’s bank accounts in Peruvian Bank X and Swiss Bank Y.

28 Section 1782, combined with the global prevalence of dollar correspondent banking, radically expands the ability of claimants to unlock information about financial assets held all over the world. Crucially, the claimants don’t have to convince the U.S. court of the merits of their case in Peru, only of the relevance of the bank account evidence to that case. Section 1782 discovery is very broad in its definitions of who is an “interested person”, and what is a foreign “tribunal”. It does not depend upon the country where the legal proceeding is located being a signatory to an evidence-procuring agreement with the U.S., like the Hague Evidence Convention. The requester doesn’t have to have requested the information first via the non-U.S. proceedings – something which, in a court case with a hostile or complicit judiciary either in a kleptocrat’s country or in a tax haven, can hold up proceedings for years. And in some cases a U.S. court can grant 1782 discovery even before a foreign proceeding has commenced.

For decades after it was instituted, U.S. courts disagreed about the powers and scope of 28 Section 1782, and it largely languished on the statute book. We have a giant tech corporation to thank for unlocking its use. In 2004, microprocessor producer AMD filed a complaint with the EU’s antitrust agency against its arch-rival, Intel Inc. AMD needed internal Intel documents for its European case, and so it filed a lawsuit in the U.S. for a Section 1782 discovery order against Intel. The case went to the U.S. Supreme Court, which ultimately confirmed the broad scope of “interested person”, including those other than the actual litigants in some cases; agreed that “tribunal” can include almost any legal process, including recourse to a “first instance decision-maker” like the EU’s Directorate-General for Competition; and ruled that discovery could be sought even before the foreign proceedings had commenced. In short, the Supreme Court ruled that 28 Section 1782 granted U.S. discovery rights to any foreign person involved in (or about to be involved in) a foreign legal process, comparable to those enjoyed by U.S. litigants in U.S. courts. Though some sections of the U.S. business lobby have fought against this expansive reading of Section 1782, they haven’t yet succeeded in constraining U.S. courts in practice.

Since 2004 numerous corporate court battles around the world have deployed 28 Section 1782 discovery to obtain evidence and documents located in the United States, and also to compel depositions of U.S. individuals like lawyers or agents that might have knowledge of a particular transaction.

More recently, corporate and individual litigants outside the U.S. have begun to use Section 1782 discovery specifically to trace assets moving through foreign banks by compelling U.S. correspondent/intermediary banks to disclose their records. These include HNWI divorce cases, contractual disputes, and multi-billion dollar international fraud litigation.

(I’m grateful to individuals involved in some of these cases for explaining these strategies to me, and sharing their thoughts on their possible wider uses).

In some cases, the plaintiffs’ investigators didn’t even know the account numbers of the immediate accounts to which correspondent banking services were provided, since they were provided via other intermediary (usually European) banks. But the mere existence of the correspondent banking relationship is generally enough to apply to a U.S. court for the U.S. correspondent banks to turn over account statements for all the correspondent accounts held for particular foreign banks.

U.S. jurisdictional largesse, in short, has effectively punctured foreign banking secrecy in civil cases, allowing claimants to follow the money through a defendant’s own bank accounts around the world, and those controlled by his shell companies and trusts.

To use these kinds of discovery tools to target money stolen by kleptocrats, of course, isn’t as straightforward these cases make it sound; but nor is it insuperably difficult. To begin with, an investigator needs to know the details of bank accounts used by or controlled by the kleptocrat. In some cases this isn’t as hard as it sounds: investigators, both governmental and non-governmental, have more details of bank accounts linked to kleptocrats than one might think; culled from copies of procurement contracts, leaked document caches, and other documentary sources. (I have a list of several related to high-profile officials and politicians generated entirely incidentally by my work on weapons and tax in Africa and the Middle East.)

Once a bank account is known, it’s relatively straightforward to determine which correspondent U.S. banks the non-U.S. bank uses to clear dollar payments. You can look it up in the banks’ public documentation, and in banking industry reference books like the Bankers Almanac.

It’s not all plain sailing. Once the claimants have the statements from the correspondent account – disclosable to the plaintiffs and their lawyers only, not filed in the court docket – the transactions they contain might only illuminate the next stepping stone in a chain of money-laundering transactions that conceal the ultimate origin or final destination of stolen money.

1782 discovery cases can also be legally complex, especially if the U.S. bank or company being asked to locate and provide documents chooses to contest the order. Legal costs can be large: which may put such multi-jurisdictional legal strategies, without legal aid, beyond the means of a group of civil society claimants seeking to locate and recover looted state funds from a Yanukovych or an Obiang.

And of course locating assets and proving their corrupt provenance is only one step on the long road towards actually recovering those assets. (That said: U.S. courts have begun to consider U.S. dollar credits in non-U.S. banks’ dollar accounts as being effectively located in the U.S. They may order correspondent banks, therefore, not only to disclose money sitting in dollar accounts around the world, but in some cases to freeze it too).

Section 1782 discovery may not, then, be the stand-alone magic key needed to unlock the offshore accounts of the illicitly wealthy. But it’s an alluring legal tool, one of several smart re-purposings of civil search and disclosure laws to uncover information in the public interest that would otherwise be the purview of law enforcement (in criminal cases) or warring multinationals with deep pockets (in civil ones).[1]

More generally, such repurposing points to the – still underexplored — possibilities of ordinary citizens and civil society pursuing civil remedies against kleptocracy: actively pursuing stolen assets using the principles of tort, breach of contract, unjust enrichment, rather than waiting for states to go after the perpetrators of grand corruption themselves; and deploying, for the public good, the sometimes arcane legal tools for search, discovery and forfeiture that wealthy individuals and corporations have honed over decades, in rulings and precedents around the world, to recover money they believe to be rightfully theirs.

This isn’t new ground. Nonetheless – prominent cases in Spain and France notwithstanding — grand corruption still remains a less well-trodden are of activist litigation than, say, civil cases against torturers and war criminals.

Which begs the question of whether private actors and civil society should promote or pursue such cases. Such action is, after all, conventionally the job of the state and its enforcement agencies, which have recourse (in theory) to more direct and coercive instruments to locate and recover stolen assets.

One answer is that states simply aren’t doing very well at recovering the stolen assets of grand corruption. The World Bank reckons that between 2010 and 2012, US$1.4bn of corruptly stolen assets were frozen in OECD member states. Only three of those countries actually repatriated any of the assets during that time, returning just US$147m. This must only be scratching the surface. UNODC and the World Bank estimated back in 2007 that public officials in developing countries alone (let alone in wealthier countries) were stealing perhaps US$20-40bn of public assets annually. These estimates are probably shots in the dark, but to take just one example from a small country: in 2014 a corrupt politically-connected network in Moldova, including judges, MPs and Moldova’s former Prime Minister — allegedly looted over $0.75bn in three days from four Moldovan banks. In other words, corrupt officials and their associates in just one small country, and over only three days, looted five times the amount of looted assets that all OECD member states returned to all developing countries from 2010 to 2012. (The subsequent secret government bailout of these banks cost the Moldovan state budget a sum equivalent to 12% of the country’s GDP).

There are lots of reasons why this record of criminal prosecution, confiscation and restitution is so dismal. Some are probably legal: particularly the requirement in many jurisdictions that the assets to be recovered are provably linked to the specific criminal act being prosecuted. If there are multiple corrupt acts over a long period, only a few may be prosecuted in court, and only their direct proceeds recovered. Civil cases, by contrast, may create a general claim to damages from the overall assets of the corrupt individual.

As well as legal impediments, however, there’s a glaring political one: countries with standing to seek the recovery of stolen public funds are often controlled by the elites which have stolen them. How soon can we expect the government of Saudi Arabia to seek freezing orders on London townhouses bought by Saudi princes with corruptly-acquired state funds? Typically it takes a coup or a revolution to give new regimes an incentive to pursue the looted assets of their predecessors. The real victims of such corruption – the citizens of those countries whose public assets have been looted — shouldn’t have to wait so long.

And finally, such cases open up a range of mechanisms by which stolen assets might be returned more transparently to corruption’s real victims,b rather than through the opaque return of money from one government to another (possibly still kleptocratic) government.

We should be wary of vigilantism. The pursuit of the allegedly corrupt is rarely the politics-free zone that some more evangelical fringes of anti-corruption movements might suggest. But properly-functioning courts are there precisely to distinguish malign from justified cases.

***

A (not so) modest proposal: what if anti-corruption activists gathered, somewhere on a secure server, a list of bank accounts associated with suspected corrupt individuals or transactions. Activists and lawyers with access to the server could assess the most fruitful cases for asset tracing, discovery and, perhaps, civil recovery. They could find and work with plaintiffs from the country in question to initiate a small number of well-chosen cases to sue the suspected looters, and start to get courts to order disclosure of their bank accounts and other assets. Even if those cases failed to proceed from disclosure to forfeiture or restitution, they could put kleptocrats on notice that their offshore assets are no longer invisible – not just to tax authorities, but to their own citizens.

Such an initiative would require funding, as well as time and expertise. One major impediment to using procedures like 1782 Discovery – and more generally to anti-corruption activists using legal tools originally developed by wealthy individuals and large corporations to hunt and reclaim money across borders – is that such tools, and such litigation, is expensive.

Nonetheless the tools are there. It’s time we showed they can be used by citizens; not just by banks, oligarchs and Fortune 500 companies.

***

[1] Another unusual instance is the use of Anton Piller orders by anti-apartheid lawyers working against police torture in southern Africa. Such court orders – essentially civil search warrants – were initially developed by UK intellectual property cases during the 1970s. They permit a party in a civil case directly to search and seize evidence in another party’s premises if it is at risk of being destroyed: for instance, if an individual or company is being sued for stealing trade secrets or making unauthorised reproductions of master tapes, where the case might hinge on proving that the tapes or the files are in the respondent’s possession. In 1980s South Africa, anti-apartheid lawyers representing victims of police torture in civil cases began to seek Anton Piller orders for an entirely different purpose: to physically search police stations in order to locate physical items used for torture which would corroborate their clients’ testimony. Although apartheid-era South African courts often dismissed the suits, lawyers acting for victims of alleged police torture in post-independence Namibia successfully used Anton Piller orders in this way during the 2000s.

Photo: Brook Ward/CC/Flickr

 

 

 

 

 

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