How strongmen abuse tools for fighting financial crime

Their ordeal is an example of how governments are weaponising rules intended to stop dirty-money flows, both at home and abroad. LexisNexis Risk Solutions, a data firm, lists 130,000 entities alleged by governments or media to have laundered money. Some 30,000 have had their assets frozen, up from 24,000 last year—the biggest rise in at least nine years. Although some of this increase reflects genuine crime-fighting, international directives create opportunities for large-scale abuse. And evidence suggests that strongmen are becoming increasingly creative in how they wield tools of financial suppression.

At fault is a body called the Financial Action Task Force (FATF). Established in 1989 by the G7 as a one-year, fact-finding unit that would catalogue policies to stop money-laundering associated with the illegal drugs trade, FATF has grown into a 40-member outfit central to the global fight against all grubby finance. The task-force now has two main jobs. One is to recommend basic measures—such as blocking suspicious funds and surveilling dodgy groups—to stop cash going to mafias, terrorists and weapons-traders; countries are then expected to translate the recommendations into domestic policies. The second is to assess countries’ compliance.

In principle FATF recommendations are non-binding. In practice almost no country can afford to ignore them. Any that receive poor marks risk ending up on a “grey" list, which causes capital inflows to dwindle as foreign banks retreat. Those on the “black" list—Iran, Myanmar and North Korea—are largely cut off from the global, dollar-based financial system. Despite this, the task-force’s standards are vaguely worded and allow strong measures to be taken, based not on criminal convictions, or even allegations supported by evidence, but on mere suspicions.

The worst offenders are autocratic regimes keen to maintain a pretence of democratic rule, says Stephen Reimer of the Royal United Services Institute (RUSI), a think-tank. But even democracies are sometimes tempted. In 2022 Canada broadened its anti-money-laundering laws to stop funding for a protest by lorry drivers that had paralysed Ottawa. A recent study by RUSI suggests that abuses are most common during elections, referendums, the passing of controversial laws and periods of military tension.

The potentates’ playbook

Tactics vary in sophistication. Some strongmen start by collecting information. The FATF requires governments to establish “Financial Intelligence Units" with the power to obtain data from banks. Although its standards say units should be independent, security services often lean on them. Aggressive measures, such as office raids, may also be used to harass targets, steal their wares and construct cases.

Abusers might then starve victims of funds so they cannot continue to work. The FATF calls on governments to forbid transactions involving entities suspected of shifting dirty money, so as to prevent funds from disappearing during an investigation. For strongmen, the tool has the merit of debilitating targets at zero notice, without being as visible as imprisonment. A victim in Egypt says that even his friends forget he has not had access to his bank account for three and a half years. It helps strongmen that banks, wary of being punished, are often ultra-cautious in how they handle frozen assets, preferring to wait until they get an explicit green light from the authorities before unlocking funds.

For more ambitious leaders, the FATF can be used to make politically motivated arrests. The insertion of offences related to financial crime in national penal codes, together with provisions allowing for lengthy pre-trial detentions and broad definitions of “terrorism", allows repressive regimes to lock up people for months or years on baseless charges. Only 2% of those investigated under India’s Unlawful Activities Prevention Act from 2016 to 2019 have been convicted of a crime, for instance.

Even exiles can be targeted. FATF standards require states to provide legal assistance, cross-border asset freezes and extraditions. Belarus and Kazakhstan have used this to make Western democracies provide financial intelligence on exiled dissidents. In recent years critics of the Turkish government living in the West have been cut out from banking after the country’s president placed them on a list of presumed sponsors of terrorism. Politically motivated accusations in one country are picked up by global data aggregators that banks elsewhere rely on.

How can those in the crosshairs escape? One option is to challenge unfair treatment in court. This has yielded success in Kenya and Uganda, with assets unfrozen and, in the latter case, legal fees covered. But the strategy is tough in countries without independent courts. Attracting the attention of rich democracies or multilateral bodies, such as the UN or World Bank, ahead of debt-relief talks or loan negotiations is a surer option. Such pressure recently helped win the release of political prisoners in the Middle East and derail a probe of 57 media, philanthropic and anti-corruption outfits in Serbia.

A more lasting solution would require reform of the FATF, including the introduction of more precise standards, a channel to report abuse and a way to block countries from misusing the system. Last year FATF Recommendation 8, which focuses on the use of non-profits for financing terrorism, was revised to limit abuse and tackle the widespread “debanking" of charities. At the same time, other changes sought to make the confiscation of criminal funds faster and close existing loopholes. The organisation’s priority remains making its war against money-laundering a fiercer fight, rather than a cleaner one.

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