In response to the recent revelations of the Pandora Papers, the UK’s Chancellor of the Exchequer Rishi Sunak claimed the UK is one of the best in the world at tackling money laundering – a debatable claim given, while the UK laws are robust, enforcement of them is often lacking.
But Sunak’s point misses the main issue anyway, because the majority of the Pandora stories are not about money laundering – the transference of illicit funds – but the proceeds of grand corruption or ‘kleptocracy’.
Such proceeds may include some illegal funds but most is money which is technically earned ‘legally’. For example a company owned by a family member of the country’s president may receive proceeds from a mining project – corruptly obtained but not necessarily illegal according to the law of that country.
According to Transparency International, in 2019 the value of this kind of money flowing into the UK could be in excess of £325 billion, a figure which is no surprise as the UK is the world’s largest net exporter of financial services. The ‘greyness’ of this capital allows it to pass into the UK’s financial institutions, real estate markets, universities, and even into the coffers of political parties.
Kleptocracy not a primary focus
The UK’s anti-money laundering regime was built according to recommendations from the Financial Action Task Force (FATF). It is ill-equipped to deal with the proceeds of kleptocracy because FATF was originally created in 1989 to address money laundering in relation to drug trafficking – then a major millstone around the neck of the world economy – before terrorist financing became a major focus after 9/11.
Although other legislative efforts have since been created to counteract the effects of kleptocracy in the UK, such as the Bribery Act 2010, Criminal Finances Act 2017, and the Sanctions and Anti-Money Laundering Act 2018, results have been mixed and the regulations lag behind when it comes to addressing ‘dark money’.
The UK regulations do now acknowledge the heightened risk posed by government officials and their close relatives, but this came only in 2007 when people working in certain regulated sectors such as banking or real estate were forced to start conducting ‘enhanced due diligence’ – extra checks on the source of funds used by these individuals. But as evidenced by countless investigations, corrupt officials often avoid this simply by using more distant relatives or other proxies to act for them.
There is also a mandate for enhanced due diligence if an individual is from a country on the European Union (EU) ‘high-risk third country’ list – but what is striking about this list and FATF’s similar ‘grey list’ of jurisdictions under increased monitoring is how few kleptocracies are on it.
Although a certain amount of geopolitics is involved here as Russia, China, and Saudi Arabia are all FATF members, countries generally tend to end up on the lists because they fail to implement a set of international standards rather than because of the actual risk they pose.
Barbados is on both lists but none of the former Soviet republics are on either despite several – Azerbaijan, Turkmenistan, and Uzbekistan most notably – languishing in the bottom third of Transparency International’s Corruption Perceptions Index and there are plenty of allegations of their political leaders squirrelling money away with impunity.
Although the money laundering regulations identify corruption as a geographic risk factor, no specific countries are proscribed, leaving the decision in the hands of professionals who may have little knowledge of the countries themselves or a vested interest in seeing the deal through.
Suspicious real estate deals such as those outlined in the Pandora Papers are often enabled by UK-based professionals – solicitors, bankers, or real estate agents – who either turn a blind eye to the money’s origins, or explain it away with ‘evidence’ garnered in the klepto-state.
If a transaction appears dubious, these professionals are obligated by law to report suspicions to the UK National Crime Agency (NCA) but, with 573,000 reports in 2019/20, the NCA simply does not have the time or resources to properly assess them all. And even if a transaction related to kleptocracy is flagged as suspicious, it can be difficult to pinpoint the funds as illicit under UK law.
The current regime needs a rethink and, most importantly, FATF should consider risks associated with kleptocracy. But the UK should also create its own list of kleptocratic countries and mandate that enhanced due diligence is performed by regulated professionals on all transactions relating to these countries over a certain amount.