The global community and the UK specifically need to adopt a new approach if they are serious about tackling the threat posed by the presence of kleptocrats, their associates and their financial flows.
Despite much rhetoric and progress on paper, the UK remains a safe haven for dirty money, a great deal of which comes from Russia and Eurasia. As we have shown, it is not just money that is laundered, but also reputations. The key allies of kleptocratic presidents merge into UK society and sometimes acquire British citizenship following receipt of a ‘golden visa’. They settle down, donate to charities, threaten journalists with legal actions and make political connections. As government has failed to address this problem, British professional services provision to kleptocracies is undermining the fairness and efficiency of the legal system. The British government has placed combating serious organized crime at the centre of its foreign policy, but often fails to recognize the intimate connections UK society and institutions have with kleptocratic states and their elites, the latter of which continue to find a home-from-home in London.
From a traditional security perspective, most Eurasian states offer little concern to the UK. Russia – with 4,000 nuclear warheads, capacity to intervene in its near abroad, intimidatory postures overseas and insistence on being recognized as a ‘great power’ – is the exception here. In terms of transnational kleptocracy, however, the risks stemming from servicing post-Soviet elites are considerable, and an effective response to these risks is as much a matter of domestic as foreign policy.
Kleptocracy also poses a potential security threat when it involves the merger of the contest between states over national interests and the conflict between elites over their vested interests.
The UK has recently been the site of conflict between Russian elites. A likely possible motive for both the killing of Alexander Litvinenko in 2006 and the attempted assassination of Sergei Skripal in 2018 was that both had continued to brief European intelligence services on links between the Russian state and organized crime. Similarly, the deaths of Boris Berezovsky and several of his associates occurred in the context of transnational struggles between Berezovsky and oligarchs linked to the Russian state. These, and other cases, indicate that post-Soviet kleptocracy has brought political violence to the UK. Coroners have recorded unlawful killings or open verdicts in many of these cases, but no perpetrators have yet been convicted in any of them.
The UK is also vulnerable to cooperation between its own elites and post-Soviet kleptocrats. As major studies have shown, Putin’s Russia was built as a kleptocracy which demands the loyalty of its globalized oligarchs and extends its power overseas through transnational networks and intermediaries. Its influence on Donald Trump’s business empire (which itself intersected with numerous kleptocratic figures and regimes around the world), and the array of connections to far-right and populist parties in Europe, points to the risks associated with the UK authorities’ piecemeal and hitherto ineffective approach to kleptocracy.
When the UK parliament’s Russia report was belatedly released in the summer of 2020, most attention fell on the question of influence over elections and the 2016 Brexit referendum. Less attention was devoted to the arguably more significant question it raised of kleptocracy. This included the point, summarizing the evidence of the NCA on UWOs, that ‘the oligarchy will have the financial means to ensure their lawyers – a key group of professional enablers – find ways to circumvent this legislation’.
Post-Soviet elites are ensconced in the UK, fight their legal battles in the UK and seek to gain cultural and political influence in the UK via philanthropy and political donations, especially to the governing party. Given the absence of transparency covering gifts to universities and charities, and the inadequacy of the UK’s lobbying register, the potential for the influence of kleptocrats to remain hidden is high. Where finance is secret and influence is hidden, vital ingredients of democracy – transparency, accountability, the fairness of the law – are at risk. Where the implementation of UWOs is undermined, and new public registers of beneficial ownership are apparently shelved or at least seriously delayed, it appears that damage is already being done.
One response to this failure is to instead declare success. The policy announcements of David Cameron’s anti-corruption summit of 2016 and the highly positive FATF review of 2018 are often heralded as a big step forward, despite the lack of evidence of progress in enforcement and the considerable evidence presented above that the risk-based system does not work in the regulated banking and property sectors. In response to the release of the Pandora Papers in October 2021, Chancellor Rishi Sunak somewhat misrepresented the FATF’s findings, saying that it had found the UK to be ‘one of the best in the world’ at tackling money laundering. Such a response disregards the evidence that the system is ineffective in practice, particularly with regard to lack of enforcement.
Post-Soviet elites are ensconced in the UK, fight their legal battles in the UK and seek to gain cultural and political influence in the UK.
A second response is to reframe the problem. Facing defeat in the courts by the lawyers of wealthy elites, the government may be tempted to present ‘illicit finance’ as a matter solely of organized crime. The March 2021 Integrated Review of British foreign policy appears to take this approach, with no mention of kleptocracy and only a brief reference to ‘high-end money laundering’ in the context of economic crime and organized crime. Indeed, serious and organized crime is a recurring theme, with a whole section devoted to it later in the report. But – as in several of our examples above – research on illicit finance suggests that criminal groups are second-order actors in a world shaped by political elites. Kleptocrats and their associates have the power and resources to invest and reinvest such that, in the words of the Russia report, their capital is ‘to all intents and purposes now apparently legitimate’.
By contrast, the US has launched a major anti-kleptocracy drive since the administration of President Joe Biden took office. In June 2021 – a few months after the US Congress finally passed legislation to create a beneficial-ownership registry – President Biden formally elevated corruption to a leading national security threat, requiring all governmental agencies to draft strategy policies specifically addressing corruption, and even announced his administration would seek to address anonymity in US property transactions. The administration also made fighting corruption one of the three main themes of its Summit for Democracy on 9–10 December 2021. Without stronger action by the UK – regarded by FinCEN as a ‘higher-risk’ jurisdiction, comparable with Cyprus, for illicit finance – then the ‘special relationship’ may come under strain.
Apparently concerned, the UK government introduced the Global Anti-Corruption sanctions regime in April 2021. The new regime allows the UK government to impose sanctions on individuals believed to be involved in serious corruption. The first 22 individuals sanctioned for corruption included 14 Russians linked to the kleptocratic fraud scheme that Sergei Magnitsky was investigating at the time of his death in a Russian prison in 2009. Although this is a welcome step, it remains too early to tell how effective the new regime will be in tackling systemic corruption and in limiting the UK’s vulnerability to illicit finance. Unlike the Biden administration, the Boris Johnson government makes no public mention of kleptocracy, remains uncertain as to whether future sanctions and UWOs can be used against kleptocrats, and is reported to be planning cuts of around 80 per cent to its funding of anti-corruption research.
An anti-kleptocracy strategy
A reset is required for the UK government, economy and society to come to terms with and respond to the problem of kleptocracy. It must, however, be noted that none of the following policy recommendations are specifically targeted at Russia and Eurasia. Our point is that this region is merely an acute illustration of a broader problem in the UK with respect to its vulnerability to corrupt capital and its openness to hidden political influence. An effective anti-kleptocracy strategy will need to include the following features:
- Mandatory reporting to a state agency of PEP transactions over a certain monetary value. As the NCA has nothing like the capacity to investigate most SARs, this must be addressed directly or instead via a different kind of reporting system. All transactions involving PEPs over a defined amount should be reported to the NCA or another state agency, thereby removing both the need for professionals to assess ‘suspicion of money laundering’ and the immediate need for the NCA to investigate. Similar reporting (not just confined to PEPs) has had a beneficial effect in the US in regard to property transactions.
- A requirement for UK-registered companies to have at least one UK citizen/resident as an officer – with this person, as well as the company’s ultimate owner, bearing liability for impropriety. There is little, if any, incentive for service providers based overseas to ensure that the companies they represent are filing accurate accounts. Following the practice of many other countries, abuse of UK companies could be reduced if one of the company’s officers was required to be a British citizen or permanent resident.
- Investigation of, and penalties for, those who submit fraudulent information to Companies House. Proposed reforms to Companies House cannot come soon enough. Regard must be paid to monitoring compliance among those submitting information to Companies House, especially with the (hopefully) upcoming introduction of the Registration of Overseas Entities legislation, which requires companies that own property in the UK to submit their ownership information to Companies House. Fines should be imposed for non-compliance and the individuals involved prevented from acting as company officers in the future.
- A clear mandate and better funding for the NCA to investigate and prosecute enablers of money laundering. The creation of OPBAS has led to increased scrutiny of AML controls in each sector, though supervision remains a problem. While fines against non-compliant companies are to be welcomed, fines also need to be levied against non-compliant individuals to effect real change. Prosecutions and imprisonments are necessary to end the climate of impunity.
- Re-examination of AML legislation in relation to PEPs and third countries. Following Brexit, the UK has pledged to remain in compliance with the EU money-laundering directives. But it could go further. For example, it could add – and properly enforce – a requirement for all PEPs who are beneficial owners of companies (‘Persons of Significant Control’) to be placed on record no matter what percentage stake in a company they hold. Furthermore, the UK could make its own additions to the European Commission’s ‘high-risk third countries’ list by applying the FCA’s criterion of ‘a political economy dominated by a small number of people/entities with close links to the state’. By this measure, almost all post-Soviet states would count as high-risk.
- A revival in the use of Unexplained Wealth Orders. A better-funded NCA should be able to renew its UWO work. In 2017, in advance of their first use, the Royal United Services Institute outlined four requirements for UWOs: expertise, inter-agency cooperation, resources and political will. These requirements have hitherto been unmet. In particular, investigations should include greater examination of evidence from a PEP’s country of origin, given the increased likelihood that this evidence is unreliable. Expert witness testimony on the sources of wealth should be used more often in legal cases.
- Use of the new Global Anti-Corruption sanctions regime against kleptocrats and their associates residing in the UK. These sanctions may also be used and should be targeted at enablers. Even a small number of designations against kleptocrats and enablers may create a deterrent effect.
- The introduction of a specific legal requirement for universities to report the identity of donors, amounts donated and any major stipulations attached to such donations to the Department for Education, in line with what is required and enforced in the US. The Higher Education (Freedom of Speech) Bill, currently before parliament in draft form, should be amended for this purpose.
- The amendment of charity law to require all registered charities, including think-tanks, to publish a list of all significant donors, plus the amount and any major stipulations in their annual report to the Charity Commission for England and Wales and the equivalent bodies in Scotland and Northern Ireland.
The UK has a long road ahead to address the risks from its servicing of post-Soviet elites and the suspicious capital that flows into the country in its billions. The UK government needs to enforce its laws; create better oversight of regulated sectors; crack down on those who are shown to have enabled money laundering; stop giving visas, residency and citizenship to those suspected of grand corruption; and ensure that journalists and researchers have the freedom to report on the actions of these individuals.
Faced with the challenges of Brexit and an economy under strain after the COVID-19 pandemic, there is a real risk that the UK will move in the other direction – towards deregulation, hoping for quick economic gains. This would present an opportunity for the kleptocrats, one that they have exploited in the past. And it would be a great misstep, given the risks – both actual and potential – that kleptocracy poses to the nation’s security, democracy and the rule of law. Now is the time for the UK government to acknowledge these risks and to address them with a coherent strategy.
Annex
