How the West Undermines Its Own Sanctions

The Western sanctions in response to Russia’s invasion of Ukraine have been far broader than many experts anticipated. But there’s a catch.

A limousine broken in half midair, against a purple background, with money coming out of it
Getty; The Atlantic

As Russian troops bulldoze and bludgeon Ukraine, the West has begun implementing one of the few tools in its arsenal: sanctions. The United States blacklisted multiple Russian oligarchs and banks, and the United Kingdom followed suit by blocking Russian banks and barring Russian companies from raising money on British markets. The European Union issued what its foreign-policy chief, Josep Borrell, dubbed the “harshest package of sanctions” in the bloc’s history, targeting energy, trade, and a group of Russian oligarchs long thought untouchable.

The Western response has been far broader than most experts anticipated, and threatens to throw the Russian economy into chaos. Yet there’s a catch. Absent significant domestic reforms in the West—reforms that should have been enacted long ago—sanctions targeted at the oligarchic and official figures close to Russian President Vladmir Putin risk inflicting little more than a flesh wound on Russia’s imperial kleptocracy.

Rampant financial anonymity in places like the U.S. makes it relatively easy for powerful rich people to evade sanctions. A Russian oligarch may have multimillion-dollar mansions in Washington, D.C.; or multiple steel plants across the Rust Belt; or a controlling stake in a hedge fund in Greenwich, Connecticut; or an entire fleet of private jets in California; or an array of lawyers setting up purchases at art houses around the country. And all of that wealth can be hidden—perfectly legally—behind anonymous shell companies and trusts that are enormously difficult to penetrate.

If Western policy makers hope to hold Putin’s cronies truly accountable, sanctions will have to be paired with pro-transparency reforms that can disassemble this web of secrecy. Western governments should start by ending anonymity in shell companies and trusts; demanding basic anti-money-laundering checks for lawyers, art gallerists, and auction-house managers; and closing loopholes that allow anonymity in the real-estate, private-equity, and hedge-fund industries. That is, if the sanctions are to retain their bite, the entire counter-kleptocracy playbook needs to be implemented—immediately.

Global transparency reform is essential because the people and entities who are bankrolling Moscow’s bloodshed don’t exist in some kind of geopolitical vacuum, limiting their grand larceny to Russia alone. They rely not simply on access to the Kremlin and its largesse, but also on Western financial-secrecy tools to hide and launder their illicit wealth, destabilize markets, and upend Western polities.

The most conspicuous jurisdiction feasting on ill-gotten Russian gains is the U.K. As illustrated by a recent report from Chatham House (of which I was a co-author), the U.K. has helped launder billions in questionable, illicit, and dirty post-Soviet money, especially out of Russia. In the process, suspect Russian wealth has flowed into British real estate, London’s luxury-goods market, and even the Conservative Party’s coffers. Despite Prime Minister Boris Johnson’s recent promises to make it harder for Russian oligarchs to hide their wealth in the U.K., “Londongrad” is still perhaps the best place in the world for Russian kleptocrats to park their illicit funds.

In the EU, France and Italy spent years showing little willingness to target oligarchic figures sunning on the Mediterranean coast, while ex-politicians in Germany and Austria continued offering aid to any Kremlin-linked figures and entities in need of high-powered lobbying services. Switzerland constructed an entire nation on the back of financial secrecy, while even notionally clean countries such as Denmark and Sweden watched domestic banking industries turn into dirty-money carousels servicing corrupt Russian clients.

The U.S. has, in many ways, led this democratic march over the offshoring cliff. With few Americans paying attention, the U.S. transformed over the past few decades into the world’s leading financial-secrecy haven, providing all of the anonymity services kleptocrats in Moscow and around the world needed to continue their transnational money-laundering operations.

States such as Delaware opened anonymous shell companies for whoever came calling, while South Dakota and others invented new financial-secrecy tools that prevented even the federal government from figuring out who’s behind trusts in those states. Along the way, American law firms—operating for decades without basic anti-money-laundering checks—joined real-estate agents, hedge-fund managers, and art-market executives in providing all the skills and loopholes necessary for oligarchs and related entities to skirt even the most basic regulations.

Why have Western governments been so slow to take action against this sort of corruption? These offshoring networks are, by design, difficult to understand and disentangle. Purposely obscured, purposely buried, their kleptocratic appeal lies in their anonymity and in their invisibility. Yet complexity alone cannot explain the persistence of these practices. For decades, Western industries have profited from the (anonymous) inflows of this oligarchic wealth. Shell-company providers in Nevada and Wyoming, real-estate agents in Malibu and Miami, white-shoe law firms in New York and private-equity managers in Connecticut, art gallerists in San Francisco, and PR spin doctors in Washington—all took a slice of the money pouring through the offshoring sieves, without any questions asked.

These industries sold, and entrenched, as much anonymity as they could, and took their helping of profit for the trouble. In so doing, they not only transformed places like the U.S. into the titans of the offshoring world but also helped create the kind of national-security threats now on display in Moscow. So long as the policies that enable dirty money to flow around the globe remain in place, untouched even by those Western politicians now railing against Russia, any sanctions-related response will be less than the sum of its parts.

Over the past few days, at least, we’ve seen some stirrings of change. In Washington, at last week’s State of the Union, President Joe Biden announced the formation of an interagency “KleptoCapture” task force to target oligarchs. And Johnson’s government in London announced the same day that a long-delayed economic-crime bill—which would create a registry of offshore-owned property—would finally move forward in Parliament. Yet that bill is yet to be passed, let alone implemented, and the announcement came only as protesters gathered in Whitehall to remind legislators that Russian Money < Ukrainian Lives. Progress is far from assured.

So, yes: Western policy makers must enact as many sanctions as they can, as swiftly as they can. But they also must fast-track counter-kleptocracy reforms to make sure Russian figures and entities can’t skirt sanctions through Western backdoors. If action against Russia isn’t paired with reforms at home, the battery of sanctions set to come will fall flat, undone by the same Western nations professing to be aghast at this resurgence of empire, and at this return to warfare in Europe.