The UK is often presented as one of the best regulated countries in the world in regard to money laundering. Yet it is also considered by some as the global capital of money laundering. We reconcile these two claims by examining how UK regulations, while strong on tackling organized crime, are ill equipped to prevent capital flight from kleptocracies.
To assess the regulatory challenge with regard to transnational kleptocracy between the UK and post-Soviet states, we must recognize its larger geography. Corruptly acquired capital does not merely flow to ‘havens’ in Europe and the US, but also increasingly to Middle Eastern and Asian financial centres such as Dubai, Hong Kong and Singapore. This is truly a global problem. For example, much of the illicit wealth of Nigerian dictator Sani Abacha ended up in UK banks, while Riggs Bank in Washington DC held millions of dollars belonging to former Chilean president Augusto Pinochet and President Teodoro Obiang of Equatorial Guinea.
Holding political office presents possibilities for power to be abused for illicit gain, especially in countries where the rule of law is limited or absent. Despite this, regulatory and legislative attempts to address the high money-laundering risk posed by some non-UK state officials are a relatively new phenomenon. There was no acknowledgment of this issue in the laws that made money laundering a criminal offence in the UK in the early 1990s, nor in the Proceeds of Crime Act of 2002 (POCA 2002) or a revised set of money-laundering regulations adopted in 2003. It was only addressed in the next version of the regulations issued in 2007, which introduced the concept of the PEP to UK law.
One important, but controversial, element of POCA 2002 was that it criminalized the failure to report a suspicion or knowledge of money laundering in a regulated industry. The reporting of such suspicions is done through the submission of a suspicious activity report (SAR) to the NCA’s Financial Intelligence Unit.
From a legislative point of view, this framework appears strong enough to deal with the dangers posed by PEPs from autocratic regimes. The regulations require that PEPs are:
- subject to enhanced due diligence; and
- that the authorities are notified of suspicions regarding the source of funds.
As is often repeated by UK government ministers, in 2018 the UK received the most favourable rating of the 60 countries evaluated by the FATF in the preceding five years in regard to its policies to combat money laundering. However, the British – and the global – AML framework is inadequately configured to deal with preventing capital flight from kleptocracies while there are flaws in the legislation itself, its implementation and its enforcement in regard to PEP-related money transfers.
Current UK money-laundering regulations stipulate that enhanced due diligence must be carried out on clients from high-risk jurisdictions, and on transactions between parties based in such countries. The list of ‘high-risk third countries’ is decided by the European Commission – despite Brexit, the UK abides by this list, which is updated periodically. The current list contains countries of origin of major terrorist organizations (for example, Iraq, Pakistan, Syria and Yemen) and those countries viewed as deficient in their AML controls (Jamaica, Trinidad and Tobago, and Vanuatu). However, as leading money-laundering experts have argued, ‘Jurisdictions end up on these lists for failing to implement a set of international standards, not necessarily because they pose actual money laundering or tax evasion/avoidance threats. As a result, there is a tenuous relationship between actual risk and the propensity to end up on such lists.’
The list – which is also highly politicized – does not account for the fact that in kleptocracies the actual laws and regulations surrounding money laundering may be strong, but weak enforcement and a failing rule of law allows these countries’ leaders to transfer money out of the country at will. The money-laundering regulations also refer to other indicators of geographic risk, including, for example, FATF’s mutual evaluations. However, it is striking that none of Eurasia’s most prominent kleptocracies – and indeed none of the former Soviet republics – feature on either the high-risk third country list or FATF’s ‘grey list’. This is despite many of them being world leaders in ‘grand corruption’, concentrating power in cliques around the political leadership. The list has the unfortunate effect of stigmatizing low-frequency financial flows from countries such as Jamaica, while legitimizing much larger flows from corruption hotspots such as Kazakhstan.
One could argue that the absence of Eurasian kleptocracies from the high-risk list is not significant, as enhanced due diligence is not only required on PEPs but also on clients that pose a high risk. Guidance issued by the FCA includes specific factors that should be used to ascertain whether any individual poses a higher risk in regard to money laundering.
These factors – such as ‘personal wealth or lifestyle inconsistent with known legitimate sources of income or wealth’, ‘wealth derived from preferential access to the privatization of former state assets’, and ‘wealth derived from commerce in industry sectors associated with high-barriers to entry or a lack of competition, particularly where these barriers stem from law, regulation or other government policy’ – determine that both politicians and most senior businesspeople from Eurasian states should be considered high-risk. Indeed, the risk factors are so well defined that UK government bodies would have the capability of assessing these factors against each country.
What is highlighted in such guidance is in essence the ‘risk-based approach’, introduced in the 2007 UK Money Laundering Regulations. This means that professionals in regulated industries such as banking, property and accountancy should assess various risk factors and adjust the level of scrutiny depending on the apparent risk of money laundering, with enhanced due diligence mandatory in certain circumstances, including on all PEPs.
Banks appear to have become risk-averse – operating blanket restrictions on certain kinds of transactions – while being risk-insensitive and failing to identify actual cases of potential money laundering.
However, there are indications that the risk-based approach is largely ignored in the financial sector. A recent study saw approaches made to all banks in the worldwide SWIFT network regarding the possibility of opening an account by a range of different entities posing varying degrees of risk – for example, a company registered in the UK and a company registered in Pakistan. One would expect that higher-risk clients would receive fewer positive responses. However, this was not the case: ‘[C]ontrary to the risk-based approach, the central regulatory principle of international banking… we find that banks are remarkably insensitive to risk.’ UK banks fared no better when compared to the larger data set.
It is obvious that those looking to enable dubious transactions will ignore a risk-based approach, but this research suggests that the problem is more structural. Banks appear to have become risk-averse – operating blanket restrictions on certain kinds of transactions – while being risk-insensitive and failing to identify actual cases of potential money laundering. It is more difficult to assess how widespread this practice is in other regulated industries, as there are inherent problems in trying to conduct similar experiments in other businesses that require a more direct relationship with a client.
However, the latest report by the Office for Professional Bodies Anti-Money Laundering Supervision (OPBAS) – a UK government body set up to oversee the professional bodies that supervise legal and accountancy firms and companies in regard to their anti-money laundering procedures – found that the vast majority (81 per cent) of the 22 professional bodies had not implemented an effective risk-based approach, and only one-third of them were effective in developing and recording adequate risk profiles for their sector.
Some publicized examples of non-compliance indicate that the failure to identify risk is a crucial part of enabling. In 2015, Leyla and Arzu Aliyeva, the daughters of the president of Azerbaijan, attempted to buy two luxury apartments in Knightsbridge for £59.5 million. The solicitor representing them in the transaction failed to identify them as PEPs, and was referred to a disciplinary tribunal for failing to detect ‘a significant risk of money-laundering’, fined £45,000 and ordered to pay a further £40,000 in costs. Not identifying clients as PEPs would have allowed the solicitor to avoid enhanced due diligence, thus simplifying the transaction and removing the need to address any troubling questions that extra scrutiny may have raised.
Current legislation states that enhanced due diligence no longer has to be performed on a PEP once they have been out of political office for longer than one year. For relatives of PEPs, there is no ‘cool off’ period, meaning that as soon as their relative leaves office, enhanced due diligence need not be applied. These individuals may continue to be viewed as posing a high risk of money laundering for other reasons – and the regulations say that a PEP could be subject to enhanced scrutiny ‘for such longer period as the relevant person considers appropriate to address risks of money laundering’ – but this is seen as a matter of judgment, again part of the ‘risk-based approach’.
PEPs no longer in office, and their relatives, may be less likely to be able to gain illicit benefits, but any wealth accrued previously will continue to be at their disposal and many will retain the ability to request political favours. It seems rather short-sighted that, irrespective of the legitimacy of their wealth, relatives of corrupt former leaders from Eurasia – Kyrgyzstan’s Askar Akaev and Kurmanbek Bakiyev, Turkmenistan’s Saparmurat Niyazov and Uzbekistan’s Islam Karimov – are no longer classed as PEPs under the provisions of the legislation.,
Much has been written about the inadequacy of the current suspicious activity report (SAR) system. In 2019/20, regulated industries filed 573,085 SARs – 20 per cent more than in 2018/19 – the vast majority of which (75.4 per cent) were issued by banks. Again, this suggests a risk-averse response that is also risk-insensitive. The system thus relies on the NCA to be able to deal with the information it receives, so that it can act appropriately when investigation reveals evidence of criminal funds. However, according to Finance Uncovered, an investigative journalism training and reporting project, the NCA’s Financial Intelligence Unit only has 118 employees to scrutinize SARs. Moreover, we understand that dozens of posts remain unfilled as the NCA continues to lose staff to a private sector which pays a premium for employees who have worked for regulatory and enforcement bodies.
Although more research needs to be done, there is a general belief that, outside of the banking industry – which submits too many SARs, apparently for defensive purposes (i.e. to avoid criminal liability) – there is widespread failure to file SARs. Only 861 were issued by estate agents in 2021, compared with approximately 1,500 issued by legal professionals in relation to property deals. Again, the level of non-compliance is difficult to assess or attempt to quantify.
One insight into complicit behaviour in property deals was provided by the 2015 investigative documentary, From Russia with Cash. This programme used hidden cameras to show a series of estate agents who appeared happy to continue with a particular transaction, despite being told by the prospective buyer – an undercover anti-corruption campaigner posing as a ‘Russian government official’ – that the funds were stolen from the Russian state budget. What was noticeable was how many of the agents fell back on the letter of the legislation, which at the time contained no requirement to perform due diligence on the buyer of property, even when the proposed transaction was in clear violation of POCA 2002 regarding the failure to report a suspicion or knowledge of money laundering.
The absence of effective enforcement in favour of de facto self-regulation by enablers lies at the centre of this paper’s argument and the problem of kleptocracy in general. Without actively complicit service providers facing prison and negligent ones facing punitive fines, it is hard to see how transnational kleptocracy can be arrested in the UK, however well-drafted the law. The net effect of these weaknesses in legislation, implementation and enforcement is that the UK remains in practice a global money-laundering capital. In December 2020, the UK government’s own national risk assessment concluded that ‘it is likely there has been an increase in the amount of money being laundered since 2017’. As the next chapter demonstrates, even when there is evidence of suspicious wealth, it can often be explained away.