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Using Corrupt Practices As Foreign Policy Tools CORRUPTION AS STATECRAFT Using Corrupt Practices as Foreign Policy Tools Transparency International (TI) is the world’s leading non-governmental anti-corruption organisation, addressing corruption and corruption risk in its many forms through a network of more than 100 national chapters worldwide. Transparency International Defence and Security (TI-DS) works to reduce corruption in defence and security worldwide. Author: Dr Karolina MacLachlan Research provided by: Nikolai Topalov Transparency International Anti-Corruption Center, Armenia Transparency International Bosnia & Herzegovina Editors: Katherine Dixon, Leah Wawro, Deirdre Mahony With thanks for feedback and assistance to: Transparency International EU N-OST Public Eye This report was funded by Open Society European Policy Institute as well as UK aid from the UK government. © 2019 Transparency International. All rights reserved. Reproduction in whole or in parts is permitted, providing that full credit is given to Transparency International and provided that any such reproduction, in whole or in parts, is not sold or incorporated in works that are sold. Written permission must be sought from Transparency International if any such reproduction would adapt or modify the original content. Published July 2019. Every effort has been made to verify the accuracy of the information contained in this report. All information was believed to be correct as of February 2019. Nevertheless, Transparency International cannot accept responsibility for the consequences of its use for other purposes or in other contexts. Transparency International UK’s registered charity number is 1112842. CORRUPTION AS STATECRAFT: Using Corrupt Practices as Foreign Policy Tools D Corruption as Statecraft: Using Corrupt Practices as Foreign Policy Tools Transparency International Defence & Security E CONTENTS Corruption and Foreign Policy: The Big Picture 1 Exporting Corruption 3 The case of Ukraine 3 The case of Armenia 6 The case of Republika Srpska (RS) 7 Looking further afield 7 What Makes States Vulnerable? 9 Corruption and strategic dependence 9 Secrecy and anonymity 9 Vulnerability at the Heart of Europe 11 Countering Corruption as a Foreign Policy Tool: State of Play 13 Tackling strategic dependence 13 Closing the legal loopholes and limiting the activity of professional enablers 14 What Next? How to Protect Against Corruption as a 16 Tool of Statescraft Understand the systemic nature of the threat and design reforms to match 16 Consider the balance of support and conditionality 16 Appreciate and address the areas of strategic dependence enabling corruption 17 Keep up the momentum: tackling legal and professional enablers 17 Strengthen resilience, build integrity 17 Help others build resilient institutions 18 Endnotes 19 1 Corruption as Statecraft: Using Corrupt Practices as Foreign Policy Tools CORRUPTION AND FOREIGN POLICY: THE BIG PICTURE Corruption is frequently described as a ‘cancer’: a for example, apparently utilised corrupt schemes in the malign force which undermines societal development energy sector, strengthening and eventually leveraging and security, but one that is amorphous and devoid of corrupt networks in Ukraine to help achieve foreign policy deliberate intent. In many contexts, this is an accurate goals. depiction; in others, it does not tell the whole story. This is especially the case where corruption is used, consciously and intentionally, as an instrument of statecraft, to help …Russia over the last decade or so has achieve foreign policy goals. used another foreign policy weapon. It uses corruption as a tool of coercion to Corruption can enable elites in one country to hold whole political classes in other countries to ransom, exert keep Ukraine vulnerable and dependent. illegitimate influence over another state, sow insecurity So pursue those reforms to root out and instability, and undermine government institutions. corruption. It’s not just about good This kind of corruption is not aimed at economic benefit: rather, it often relies on a willingness to forgo economic governance. It’s about self-preservation. gains in favour of influence, favourable political outcomes, It’s about your very national security.2 and an ability to spread political norms and practices. Joe Biden, Former US Vice President ‘Corruption with intent’ is difficult to diagnose, analyse and Kiyv, January 2017 prove, especially as it can be intertwined with complex, opaque corruption and criminal networks, both in the state employing corruption and in the target state. In states The use of corruption as a foreign policy tool robs where governing elites have extensive links to organised countries of opportunities to pursue development, crime, criminal networks can be harnessed by the state democratic reforms, and security. It repurposes state to exercise influence, thereby turning corruption into a institutions into networks that extract resources and divert weapon. This is the case especially where the distinction public wealth into private pockets. It can be used to between public and private is blurred. strengthen authoritarian governments and weaken those which promote democratic norms, from electoral reforms The ‘Azerbaijani Laundromat’, a money-laundering to robust human rights provisions. scheme that transferred a total of $2.9 billion USD from Azerbaijani companies and government departments When corrupt practices are intertwined with trade in a through four UK-based shell companies, financed both crucial resource such as energy, disentangling the relevant private enrichment and foreign policy schemes aimed networks and enabling factors is extremely challenging. at improving the country’s international reputation.1 Even a robust anti-corruption effort will only have limited Azerbaijani officials appear to have used funds passed effects if the underlying strategic dependence of the through the ‘Laundromat’ to bribe members of the weaker state is not addressed. Parliamentary Assembly of the Council of Europe in order to water down official criticism of Azerbaijan’s human These schemes also pose significant problems in mature rights record. At the same time, top officials used it as a democracies. The links between corruption and insecurity slush fund to pay for luxury goods and services. Individual have been recognised in the US, with calls for Congress corruption and state-sponsored schemes both benefitted to take action to block financial flows which can not from the fund, and corrupt practices accompanied the only undermine allies, but also influence the US political use of legal services such as lobbying and PR activities to system.3 The Australian national security apparatus is also achieve the aims of both individuals and the state. sufficiently concerned – especially after the cross-party donations by China-born businessman Huang Xiangmo, An additional challenge is that in their most dangerous and linked to attempts to influence the main parties’ stance durable form, ‘corruption with intent’ schemes are built on on the South China Sea - to have introduced significant political and economic dependence, usually in key sectors. legislative changes to defend against foreign interference.4 Russia’s attempts to shape the domestic and foreign policy decisions of Ukraine over the last two decades, Yet much more effort is needed to safeguard democratic Transparency International Defence & Security 2 institutions. In the EU, some financial institutions, PR and networks in states on both sides of the issue, and to real estate companies use legal loopholes and act as minimise the strategic dependence that can underpin professional enablers that facilitate corrupt transactions these schemes. and can, in turn, further the interests of malign actors.5 The ‘Azerbaijani Laundromat’ case suggests that major • ‘Corruption with intent’ needs to be approached as financial institutions had failed to follow up on suspicions a systemic issue: a problem based not merely on of money laundering or to comply with beneficial the actions of individuals, but facilitated by intricate, ownership regulations, allowing large amounts of money often transnational, networks and professional to flow through financial systems with no record of who institutions, which requires a systemic approach in controlled it or who benefitted. order to challenge it. Authoritarian, kleptocratic elites from across the globe • The use of corruption as a foreign policy tool is use these financial channels – the scale of which was frequently underpinned by strategic dependence: revealed in the Panama Papers – not only to hide and a pressure point, such as energy exports, crucial legitimise wealth, but also to export their way of doing infrastructure investments or debt, which makes it business. Unless countered, practices ranging from difficult for individuals to counteract a corrupt system the illegal (bribery and tax evasion) to the unethical and which means that anti-corruption reforms are, in (such as tax avoidance through offshore banking) will and of themselves, frequently insufficient. weaken institutions and laws across multiple states in which corrupt networks operate.6 Ultimately, the use • Countries seeking to counteract these schemes of corruption to undermine national and international will also need to look closer to home, identifying institutions, such as the Council of Europe, threatens the their own corrupt networks and vulnerabilities democratic norms upon which many societies, especially and insulating their own political
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