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Risk Fraud & Compliance

Strategic Corruption: Being ready to act

Marren Haneberg  Risk Intelligence Analyst / FiveBy Solutions

· 5 minute read

Marren Haneberg  Risk Intelligence Analyst / FiveBy Solutions

· 5 minute read

In a two-part series, we will examine the challenges around detecting, investigating, and preventing strategic corruption and kleptocracy in governments

In June 2021, the Biden administration issued a memorandum establishing the fight against corruption and kleptocracy as a core national security interest. In December, the White House issued the United States Strategy on Countering Corruption that aims to enhance the nation’s “capacity to identify, track, and disrupt illicit finance and other illicit activity, kleptocracy, and strategic corruption.”

The White House specifically flags strategic corruption as a national security threat, noting that foreign adversaries weaponize corrupt practices as part of their foreign policy to advance their geopolitical goals. As part of its anticorruption efforts, on April 28, the White House proposed “making it unlawful for any person to knowingly or intentionally possess proceeds directly obtained from corrupt dealings with the Russian government.” The Financial Crimes Enforcement Network (FinCEN) is working to implement additional regulations, issuing guidance to help US firms and financial institutions identify and block corrupt actors’ access to the US dollar and continuing to make tackling strategic corruption a priority this year.

“Corruption threatens the United States’ national security, economic equity, global anti-poverty and development efforts, and democracy itself,” said President Biden, further stressing the urgency of this threat. “But by effectively preventing and countering corruption and demonstrating the advantages of transparent and accountable governance, we can secure a critical advantage for the United States and other democracies.”

What is strategic corruption?

Corruption largely means the abuse of public office for personal gain, and strategic corruption is a particular subset of that general definition in which adversarial governments use either the government or proxy actors to further their foreign policy objectives. Strategic corruption can include various tactics that can be used to influence foreign countries’ governments, democratic institutions, and foreign policies.

Strategic corruption often does not seek to gain personal or business advantages — although personal or business gain are often the result — but rather, it helps the corrupt government shape its foreign policy outcomes, making it a national security concern for the United States. Indeed, in a recent address to the American Bankers Association, FinCEN acting director Himamauli Das noted the proliferation of strategic corruption aimed at weakening US institutions.

Buying political influenceOligarchs, especially those from Russia and Ukraine, are making real estate and other large asset purchases to evade sanctions, launder money through US and other western financial systems, and influence politicians. Corrupt regimes also exploit state-owned companies to influence foreign politics. For example, the Kremlin uses its energy and defense sectors and private business surrogates to launder money, funnel it to its preferred candidates, finance political campaigns, and influence foreign leaders. To counter their efforts, the United States is placing oligarchs’ assets under additional scrutiny through the Russian Elites, Proxies, and Oligarchs (REPO) Multilateral Task Force and the KleptoCapture Task Force.

US regulators could also increase reporting obligations for real estate cash transactions, enhance corporate transparency requirements, and bolster regulatory requirements for professional services members, such as attorneys and other gatekeepers.

      • To advance Russia’s energy policy in Europe, the Kremlin gave former German Chancellor Gerhard Schröder “a highly-paid board position” on Gazprom’s Nord Stream project, which has sparked disputes in the European Union and in Germany about European energy security. Thus far, Schröder has refused to step down from his board positions. Russia also gave former Austrian Foreign Minister Karin Kneissl a position with its state-owned oil company, Rosneft; and former French Prime Minister Francois Fillon a position with energy company Zarubezhneft, co-opting elites in those countries to further Russia’s geopolitical goals.
      • In November 2017, US authorities arrested Patrick Ho, an executive from Chinese energy conglomerate CEFC China Energy, on bribery and money laundering charges after he paid off African leaders to open oil and gas markets on the continent to China. Ho also “arranged for illicit arms sales to Libya and Qatar,” and “offered to help Iran move sanctioned money out of China.” A CNN report in 2018 showed that CEFC China Energy aligned itself closely with the Chinese government, making distinguishing between the two difficult. Beijing took over CEFC after Ho’s arrest.

Military corruptionTransparency International assessed that in 2021, more than 60% of the countries in the world were at a high to critical risk of defense sector corruption, which can undermine military peacekeeping and homeland defense operations, as well as divert military materiel to corrupt or adversarial countries and terrorist and criminal groups. The White House counter-corruption strategy includes measures to address corruption in military structures, including using newly created anticorruption task forces at the Commerce Department and US Agency for International Development to press risky countries for accountability.

      • Russian troops faced little resistance from Ukrainian forces when they invaded Crimea in 2014, facing a Ukrainian military weakened by decades of underfunding and outdated equipment, while more modern and effective equipment was sold by corrupt Ukrainian military officers to nations such as China and Pakistan for cash. Ukraine’s military was better able to withstand Russia’s invasion in February, likely in part because of the country’s anticorruption efforts and less cultural tolerance for corruption after the 2014 Crimea annexation.
      • Efforts to clamp down on strategic corruption will significantly impact military contractors, which will almost certainly need sound anticorruption programs to stay ahead of possible regulatory changes. The White House’s strategy mentions strengthening analysis of corruption risks in security cooperation and military operations and planning by developing training, assessing the political will of military partners, and conducting more frequent security cooperation evaluations to ensure transparency and accountability.

In the second part of this series, we will look at the increasing threat of the interplay between cybercrime and strategic corruption and some ways that US firms can stay proactive in their risk and compliance obligations.