What happens to dictators' loot?

As the populations of the Middle East and north Africa rise up against kleptocratic dictators, Western governments are racing to freeze the despots' assets before they are spirited away for ever. But what does this actually involve? Simon Wilson looks at who has frozen what, and what is likely to happen to it.

By Simon Wilson

published 4 March 2011

in Features

Western governments are racing to freeze the assets of Middle Eastern despots. But what does this actually involve? Simon Wilson reports.

Who has frozen what?

In the case of Hosni Mubarak, the interim military government in Cairo banned him and his family from leaving Egypt and froze all their money and assets this week. According to some estimates, the wealth amassed by Muburak during his time in power amounts to $70bn. It includes a vast property portfolio, including several houses in London. Egypt did not formally ask other governments to freeze its deposed leader's assets until 21 February, ten days after he was ousted. However, Switzerland plainly keen to clean up its reputation as the haven of choice for the discerning kleptocrat had already launched its own asset freeze a remarkable two hours after Mubarak said he was going. By contrast Britain, which immediately agreed to freeze the assets of Tunisia's Ben Ali, has dragged its heels over Mubarak, preferring to agree sanctions within the EU.

Switzerland sent notices to banks with a list of Mubarak family names and asked that their assets be seized and held pending the possibility of a criminal investigation. Tracking down all his family's assets will be somewhere on the continuum between time-consuming and impossible, given that many holdings are likely to be disguised within shell companies, trusts and other secretive vehicles. "It isn't sitting all in one account where they can go and freeze it," says Jack D Smith, a former US banking regulator who is now a law professor at George Washington University. "If you don't get it quickly, stuff that's not frozen disappears. You have to ask the banks to help you, but it can be done. I'll bet you a lot of banks are still looking." In any event, the legal process of returning the assets to Egypt could take years.

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The US government has said it has frozen $30bn (£18bn) of Gaddafi family, Libyan Investment Authority (LIA), and central bank assets. The European Union has frozen assets of Colonel Gaddafi and five family members also banning the supply of arms, ammunition and any equipment that could be used for "internal repression". The total of Libyan assets blocked by Britain is unconfirmed, but some reports this week put the figure at around £1bn. Britain has also stopped the export of about £900m worth of new Libyan dinar notes printed here. Meanwhile, Pearson group, which announced last summer that Libya had bought a significant chunk of its stock, has said that it considers the 3.3% stake in the company held by Libya's sovereign wealth fund as "effectively frozen" by the British government's action.

The UK Treasury like those of other governments around the world has been notably vague this week as to whether it considers the assets of the LIA to belong to Gaddafi (and hence frozen) or to the Libyan people (thus still accessible). "Until very recently, it was very clear who was in charge of the [LIA's] money," says Pepe Egger of Executive Analysis. "Libya was Gaddafi and Gaddafi was Libya." But now, who owns what is unclear.

The Libyan fund holds some $70bn in assets and has grown since its foundation in 2006 to become the world's 13th largest sovereign-wealth fund. It has big holdings in global companies, including the Italian bank Unicredit and industrial group Finmeccanica, as well as Canadian oil exploration group Verenex and (according to some reports) Russian aluminium giant Rusal. If these assets are frozen, it could make life very difficult for the management of those companies, particularly those in Italy, the former colonial power in Libya. For example, the governor of the Libyan Central Bank is on the board of Unicredit, and the LIA and Libyan central bank own more than 7% of the firm between them.

Until recently, countries such as Britain had tried to bring Gaddafi into the international fold. Now, though, everyone from Marjorie Scardino to the London School of Economics to singer Nelly Furtado (who was paid $1m for a 45-minute private concert for the Gaddafi clan in 2007) is racing publicly to rid themselves of Gaddafi's ill-gotten gains. But in terms of politics, the main reason for freezing his assets is to hasten Gaddafi's departure. The West, and Europe in particular most exposed to a massive influx of refugees has no interest at all in impoverishing the Libyan people. That's why the question of who owns the sovereign-wealth fund is so tricky. There is an argument that despots should be allowed to keep their loot in order to encourage them to go quietly. With only the promise of the hangman's noose or life in jail, there is very little to stop them fighting to the bitter end. In the case of Gaddafi, who appears to be delusional as well as ruthless, it probably makes little difference his next move may be a mystery even to him.

George Osborne ordered the freezing of Gaddafi family assets last weekend (in concert with other EU states). The Treasury issued the compliance officers of all UK banks and financial institutions with a notice requiring them to conduct due diligence and identify any such assets they might hold and then block access to them immediately and indefinitely. Such assets can remain blocked for years, or even decades, as in the case of Swiss assets held by the Haitian dictators Papa Doc and Baby Doc Duvalier. Any bank that won't comply would face hefty fines and the prospect of criminal charges.

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.