Kleptocracy: A Clever Name and a Clever Way to get around Sovereign Immunity

by Calla Ketchens

“[C]orruption holds back every aspect of economic and civil life. It’s an anchor that weighs you down and prevents you from achieving what you could.” – President Barack Obama

Imagine that you are the child of a leader of a country. You are probably used to getting everything you want and are used to having the country’s coiffeurs at your disposal. So you travel to different countries and amass a collection of houses, artwork, novelty and collector’s items, luxury cars, and a jet. You amass this collection with the help of your country’s tax money; meanwhile, the roads in your country are so riddled with potholes that you cannot even possibly drive that new luxury car on them. You keep traveling and amassing because you know that you will never be stopped. Except that when you attempt to have your private jet flown to you from the U.S., so that you can go somewhere else, you find out it has been stopped at LAX and seized by the U.S. government. This article examines this very thing, called Kleptocracy. What is Kleptocracy? How is the U.S. government fighting it?

Background

Kleptocracy is a little known expression for what most people understand to be government corruption. It loosely translates “from Greek as ‘rule by thieves’—[and it] is a form of political or government corruption involving officials who steal from their government treasuries to enrich their own personal wealth.” [1]. In other words it is “when foreign officials steal from their own governments at the expense of their citizens” [2]. Focusing on Kleptocracy is important because it has a large impact on businesses. When officials abuse the system for their personal gain, they ultimately cut off competition and innovation. [3]. Moreover, and closer to home, it threatens the U.S. economy, impacts trade and investment, fuels the growth of criminal enterprises, and undermines democratic processes. [4].

While the U.S. government has been focused on international government corruption for a while     (see below the brief discussion of the Foreign Corrupt Practices Act enacted in 1977), the focus on Kleptocracy is fairly recent. The Kleptocracy Asset Recovery Initiative (KARI) was created about six years ago. [5]. KARI is comprised of the Department of Justice (DOJ), the FBI (which has dedicated squads in New York City, Los Angeles, and Washington, D.C.), the Foreign Bribery Task Force, the SEC, and international partners (for example the Malaysian Anti-Corruption Commission). [6]. KARI “seeks to forfeit the proceeds of corruption by foreign officials and, where appropriate, use the recovered assets to benefit the people harmed by the acts of corruption.”[7]. The DOJ and FBI get these cases upon request by their international partners. [8]. Some examples of what KARI has been up to include, “over $30 million in assets recovered from a corrupt official of Equatorial Guinea; $20.2 million returned to Peru; $117 million returned to Italy; $2.7 million returned to Nicaragua; and, in coordination with our partners in Switzerland, approximately $115 million used to benefit children in Kazakhstan.” [9].

U.S. v. “The Wolf of Wall Street”

This is primed to be the largest Kleptocracy case to date; the DOJ is seeking to recover $1 Billion from the Malaysian government.[10]. This summer, the DOJ filed this complaint for civil forfeiture in rem. The complaint alleges misappropriate and money laundering all the way back to 2009 from 1Malaysia Development Berhad (1MDB). [11]. 1MDB was “originally established to drive strategic initiatives for long-term economic development of Malaysia.” [12]. While I will not bore you with all the details (you can read the 136 page complaint) [13], some of what the money was used for include: ten pieces of real property, mostly in New York City and Los Angeles; a jet; copyright and intellectual property rights from EMI; hotels; artwork by Vincent Van Gogh and Claude Monet; and the name sake of the action, profits and royalties derived from “The Wolf of Wall Street” film. [14]. About $64 million was sent to Red Granite Pictures, a production company involved in producing the film. [15].

Analysis: Is there a jurisdictional hook?

At first glance, it looks like the DOJ is going after foreign governments and their officials directly. If that were the case, they would run into sovereign immunity and their suits would surely get dismissed for lack of jurisdiction. However, the DOJ has gotten around this by bringing actions against property and corporations. As mentioned earlier, the U.S. has been trying to weed out corruption for a while with the Foreign Corrupt Practices Act. FCPA “makes it illegal for U.S. companies, U.S. persons, and foreign corporations with certain U.S. ties to bribe foreign officials to obtain or retain business overseas.” [16]. FCPA targets the supply side of corruption. [17]. KARI, on the other hand, addresses the demand side (corrupt officials and illicit financial assets). [18]. The key is to go after these “illicit financial assets,” especially if they are purchased on U.S. soil. Furthermore, the very fact that these Kleptocrats used the U.S. banking system to launder allows the U.S. to go after these assets. [19]. On a public policy note, there is a compelling interest of national security in bringing actions of this nature. [20]. It is national security under the umbrella of “global security” because “healthy democracies around the world” with governments who obey and are held accountable to the rule of law help ensure the U.S.’s national security. [21]. There are also practical reasons, such as judicial economy and budget constraints, in bring actions against the property. Summarily, “It's one thing to seize the stolen assets, another to retain them. The accused in all these cases employs a raft of lawyers, and it's often difficult to find witnesses and gather evidence overseas. For that reason, the Justice Department’s focus is on civil forfeitures, or trying to get the assets back, rather than prosecutions.” [22].

Conclusion

This case against the Malaysian government is seen as a big test case because there is so much money involved. [23]. Other cases involved millions of dollars and foreign officials who were no longer in power. This case involves at least a billion dollars, although it has been purported that there are billions involved [24], and possibly a foreign official who is still serving. [25]. Specifically, the case implicates the Malaysian Prime Minister, Najib Razak. [26]. This could “create a diplomatic nightmare,” but the U.S. has stood firm in stance on seeing this case through till the end. [27]. The U.S. has been quite successful in similar cases in the recent past. [28]. While the U.S. is going after assets, it has not ruled out prosecuting, as there is a criminal investigation. [29]. The U.S. has found a way around sovereign immunity attaching its actions to property. Jurisdiction has been established by the mere fact that these foreign officials bought property in the U.S., brought property to the U.S., or used U.S. banks. KARI is a little known initiative that has huge implications globally.

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[1] “FBI Establishes International Corruption Squads” (March 30, 2015) https://www.fbi.gov/news/stories/fbi-establishes-international-corruption-squads (last visited Nov. 4, 2016) (hereinafter “Squads”).

[2] “International Corruption: U.S. Seeks to Recover $1 Billion in Largest Kleptocracy Case to Date” (July 20, 2016) https://www.fbi.gov/news/stories/us-seeks-to-recover-1-billion-in-largest-kleptocracy-case-to-date (last visited Nov. 4, 2016) (hereinafter “International Corruption”).

[3] Charles H. Rivkin, “U.S. Businesses at Forefront of Anti-Corruption Fight,” (Dec. 10, 2015) https://blogs.state.gov/stories/2015/12/10/us-businesses-forefront-anti-corruption-fight (last visited Nov. 4, 2016).

[4] International Corruption, supra.

[5] Jackie Northam, “When Kleptocrats Bring Money into the U.S., There’s Now a Plan to Seize it,” (Oct. 13, 2016, 4:44 am) http://www.npr.org/sections/parallels/2016/10/13/497706638/when-kleptocrats-bring-money-into-the-u-s-theres-now-a-plan-to-seize-it (last visited Nov. 4, 2016).

[6] Squads, supra.

[7] Id.

[8] Id.

[9] Leslie R. Caldwell & William R. Brownfield, “The International Fight to Conquer Kleptocracy and Corruption,” (Dec. 9, 2014) https://blogs.state.gov/stories/2014/12/09/international-fight-conquer-kleptocracy-and-corruption (last visited Nov. 4, 2016).

[10] International Corruption, supra.

[11] “Attorney General Loretta E. Lynch Holds a News Conference to Announce a Law Enforcement Action Related to the Kleptocracy Asset Recovery Initiative,” Political/Congressional Transcript Wire, (July 21, 2016) available at https://www.justice.gov/opa/video/attorney-general-lynch-announces-kleptocracy-enforcement-action-recover-more-1-billion (hereinafter “Lynch Statement”).

[12] Id.

[13] Verified Complaint for Forfeiture In Rem, United States v. “The Wolf of Wall Street” Motion Picture, Including any Rights to Profits, Royalties and Distribution Proceeds, (C.D. Cal. 2016) (No. CV 16-16-5362), available at https://www.justice.gov/opa/file/877166/download.

[14] Id. at 2-5.

[15] Lynch Statement, supra.

[16] Squads, supra; see also, 15 U.S.C. 78dd-1.

[17] Id.

[18] Id.

[19] International Corruption, supra.

[20] Lynch Statement, supra.

[21] Id.

[22] Northam, supra.

[23] Id.

[24] Lynch Statement, supra.

[25] Northam, supra.

[26] Id.

[27] Id.

[28] Caldwell, supra.

[29] Northam, supra.