Features, Online — March 25, 2011 at 3:37 am

Freezing and Seizing Qadhafi’s Assets

By Reena Mittelman —

As Libyan leader Muammar Qadhafi struggles to retain his four-decade control over the North-African nation, public discourse on the Libyan conflict has focused largely on the effectiveness of financial sanctions, military operations, and other punitive measures in curtailing his military campaign. While such punitive measures may be necessary first steps to resolve current hostilities, combating long term transnational terrorism in the region will require the effective repatriation of frozen funds to the Libyan people. Given the volatility of Libya’s political future, it is imperative that the United States act quickly to develop the optimal asset recovery strategy.

Libyan assets frozen by the United States represent the largest amount ever blocked under an American sanctions action. On February 25, 2011, President Obama issued Executive Order 13566 freezing all assets held in the United States by the Libyan government, Muammar Qadhafi, and four of his children. Soon after, Treasury Department Acting Under Secretary for Terrorism and Financial Intelligence David Cohen announced that the United States had frozen at least $30 billion in Libyan government assets, including those held by the Central Bank of Libya and the Libya Investment Authority, Libya’s oil-heavy sovereign wealth fund. By all indications, the Treasury Department is likely to continue its expansion of the Order’s coverage. With such large figures at stake, the restitution of these funds can reverse the tide of corruption in Libya and inject a much-needed infusion of capital into the state’s weakened infrastructure, cultivating a climate of political accountability and rule of law.

In light of the current conflict, the chronic deficiency of stable infrastructure, responsive law enforcement, and political will in Libya’s pervasively corrupt Jamahiriya system has especially grave implications for U.S. security and counterterrorism efforts. Invoking the International Emergency Economic Powers Act (15 U.S.C. § 1701), the National Emergencies Act (15 U.S.C. § 1601), and section 301 of title 3 of the U.S. Code, the President in Executive Order 13566 declared that threats to the security and stability of Libya constituted an “unusual and extraordinary” threat to U.S. national security and foreign policy. In fact, there are already early indications that the chaos and unrest in Libya are creating a fertile breeding ground for terrorist activity. Recent weeks have seen the release from Libyan jails of more than 100 members of the Libyan Islamic Fighting Group (LIFG), a terror organization with ties to al-Qaeda. While LIFG has ostensibly remained dormant following peace talks with the Libyan government in 2009, Scott Stewart, an analyst at STRATFOR Global Intelligence, warns that LIFG may decide to resume its operations if Qadhafi’s regime falls.

Equally troubling are reports of looting of Qadhafi’s apparently sizeable arms depots. In late February, for instance, Islamist gunmen, part of the “Islamic Emirate of Barqa” criminal group, stormed a military arms depot and a nearby port in Libya and seized 70 military vehicles and 250 weapons. The group’s leadership is reportedly comprised of former al-Qaeda fighters previously released from jail. Although looted weapons are now being used primarily to fight Qadhafi’s forces, an uncontrolled military arsenal is worrying. Libyan fighters have been pictured with grenades, assault rifles, mortars, military-grade explosives, mines, and the highly sought-after man-portable air defense systems (MANPADS), heat-seeking antiaircraft missiles that could be used against civilian airliners. Weapons will likely circulate widely and be placed on the transnational black arms market, where they could easily fall into the hands of terrorist organizations in countries such as Egypt, Tunisia, and Algeria for years to come.

Clearly, in the fight against escalating terrorist activity in Libya, anti-corruption measures in general, and asset recovery measures in particular, are critical. Ironically, the corruption of the present regime may provide the necessary foundation for effective restitution of frozen assets to the Libyan people.

Looking ahead, it is highly probable that Libya will be unable to initiate formal asset recovery procedures. Under the United States’ relatively progressive in rem non-conviction-based asset forfeiture system, which does not require a civil or criminal conviction to confiscate assets, guilt is assigned to the property in question and prosecutors need prove only by a preponderance of the evidence that assets were involved in an illegal activity. Yet according to Jack Smith, Mark Pieth, and Guillermo Jorge at the Basel Institute on Governance’s International Centre for Asset Recovery, an “asset recovery action is one of the most complex projects in the field of law.” The costly process requires forensic accountants, experts, and translators, financial investigators to trace assets, and attorneys skilled in multi-disciplinary and multi-jurisdictional litigation. Countries of origin frequently lack proof of the misappropriations, the means to undertake the necessary research, or the political will to trace embezzled assets and file civil or criminal recovery suits, especially when the reliability of the investigating and prosecuting authorities is suspect or when lack of fiscal transparency obfuscates paper trails. Even with the requisite political will, Qadhafi’s scheme of conducting government transactions in cash and blurring the distinction between government wealth and private family assets can be expected to pose significant legal hurdles to an in rem action. Both Libya and the United States are States Parties to the United Nations Convention Against Corruption (UNCAC), which can form the basis for bilateral mutual legal assistance between States Parties under UNCAC article 51. Nonetheless, mutual legal assistance applications require an unlikely partnership between the judicial institutions of requesting and requested states.

In formulating its counterterrorism strategy in Libya, then, the United States should look to Switzerland’s recent pioneering asset-recovery legislation. The Federal Act on the Restitution of Assets of Politically Exposed Persons Obtained by Unlawful Means (RIAA), entered into force on February 1, 2011, makes it possible for the Swiss Federal Department of Finance to take legal action before the Swiss Federal Administrative Court to freeze, forfeit, and restitute the assets of politically exposed persons (PEPs) and their close associates in cases where a request for mutual international legal assistance in a criminal matter cannot succeed in Switzerland due to the failure of state structures in the requesting country in which the PEP exercised or continues to exercise a public function. Notably, article 6 of the RIAA shifts the burden of proof to the accountholder, providing that the unlawful origin of assets is presumed when the accountholder 1) enjoys an extraordinary increase in personal wealth in connection to holding political office and 2) resides in a country or region with a high level of acknowledged corruption. Pursuant to the RIAA, for example, Switzerland has been able to block millions of dollars held in bank accounts belonging to former Haitian dictator Jean-Claude Duvalier, though Haitian authorities have yet to formally charge Duvalier with embezzlement and corruption since his ouster in 1986.

Libya appears to be an ideal candidate for the Swiss asset recovery model and its article 6 unlawful origin presumption. While in power, Qadhafi has enjoyed such a drastic increase in personal wealth that he reportedly has tens of billions of dollars hidden away in Tripoli despite global asset freezes. Moreover, Libya’s endemic corruption is widely acknowledged. According to a November 2010 U.S. State Department Background Note on Libya, much of the country’s income has been lost due to mismanagement and corruption by the Libyan government. Since coming to power, Qadhafi has secured loyalty through insular tribal patronage networks, by which officials distribute money, favors, and high-ranking military and security positions to elite supporters. Bribery of tax authorities and judges is rampant, and the judicial system, heavily influenced by political interests, is often reluctant to hold public officials accountable for wrongdoing. In Transparency International’s 2010 Corruption Perceptions Index, which considers criteria such as bribery of public officials, kickbacks in public procurement, and embezzlement of public funds and ranks 178 countries on a scale of 1 (least corrupt) to 178 (most corrupt), Libya ranks 146th.

Article 56 of the UNCAC places an affirmative duty on States Parties to endeavor to take measures, without the prior request of a receiving party, to assist in initiating and implementing investigations, prosecutions, and judicial proceedings. The RIAA offers an excellent model of compliance with this provision. Growing security concerns in Libya should provide the United States with the impetus to improve its asset recovery system as well.

Image courtesy of Associated Press

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