Britain’s dirty money problem

Britain has long been associated with the English gentleman, fair play, the Royal Family, universities like Oxford and Cambridge, and Harry Potter. Indeed, the country was recently ranked second in the world in soft power, behind only the US.

But for someone like me who has visited London many times in recent decades, it is striking that there seem to be fewer and fewer British people who actually live in London. Prestige real estate has been snapped up by foreign oligarchs from Russia, Ukraine, China, the Middle East and African countries like Nigeria and Angola. And oligarchs have become notorious for the purchases of football teams, luxury goods at Harrods (which is now owned by Qatar), and a range of other expensive items.

It has long been an open secret that many of these transactions involve money laundering. This means concealing the origin of money obtained from illicit activities such as drug trafficking, corruption, embezzlement or gambling, and converting it into legitimate money.

Somehow, the country’s diplomats managed to convince the Financial Action Task Force in 2018 that the UK has a well-developed and robust regime to effectively combat money laundering and terrorist financing. But organisations like the Centre for Financial Crime and Security Studies, and journalists like Oliver Bullough are not convinced. They have been working hard to document and analyse financial crime in the UK.

Now, in light of Russia’s invasion of Ukraine, and the role of the UK in courting shady financial transactions with Russian oligarchs, the UK government is being pushed to take the matter seriously.

Origin of dirty money problem

In his penetrating book Butler to the World, Bullough documents how Britain became the servant of tycoons, tax dodgers, kleptocrats and criminals over the past 70 years. He likens Britain to the butler Jeeves from the books of P G Wodehouse, who could get his incompetent boss out of any scrape. This is a far cry from Britain’s role of ruling the world, as the leading colonial power prior to World War 2. Thus, London became the money laundering capital of the world, a giant washing machine.

There was no great plan or strategy for Britain to become a butler to the world, writes Bullough. It just grew like Topsy. During the 1950s, a Soviet bank moved its dollars out of the US to the UK out of fear of confiscation. It loaned these dollars to a UK bank which then used them in local transactions, thereby creating the infamous eurodollar “offshore” market.

This was a rules-free space, neither regulated by the Bank of England nor the Americans, which enabled the Soviets and others to evade US rules. People could thus move dirty money around anonymously without being noticed and with no restrictions. According to Bullough, the eurodollar market now amounts to $3 trillion, the biggest offshore market in the world.

The next step in Bullough’s story is the role of the British Virgin Islands in creating “shell companies” to enable Americans to avoid taxation in the 1970s/80s. It also attracted the attention of the mafioso which had been kicked out of Panama after the overthrow of its leader, Manuel Noriega. And when Britain announced that Hong Kong would be returned to Chinese control, Chinese businessmen flocked to the British Virgin Islands to hide their wealth. The British Virgin Islands has become the most important shell-company tax haven in the world, with shell companies very often used for Russian and other foreign investment in British real estate.

For historical reasons, Scotland has a unique law for “limited partnerships” which means that they can function as corporate entities. Some creative lawyers/accountants noticed the potential of using them for money laundering. Thus, these partnerships featured in the most notorious money laundering scandals out of Russia and elsewhere in Eastern Europe. When a Scottish politician sought to regulate the limited partnerships, the government proceeded to deregulate them further. The concern was to maintain the competitiveness of the city of London, and ensure that business does not slide away to Luxembourg or elsewhere.

The case of Dimitry Firtash, a corrupt Ukrainian businessman, is symbolic of oligarchs buying their way into the British establishment in search of respectability. While he was being welcomed into the guild of benefactors of Cambridge University, being introduced to the Duke of Edinburgh, and even buying a disused metro station from the Department of Defense, the FBI was investigating him. He was then indicted by the Americans on corruption charges, and he is now stranded in Vienna battling extradition charges. Britain has still not laid any charges against him.

British culture of “hear no evil, see no evil”

In Bullough’s telling of the story, a major factor fostering Britain’s role in dirty money has been the government’s attitude of “hear no evil, see no evil”. Any foreign money was considered good for Britain, irrespective of its origin, and the concern was always to protect the role of London as the world’s financial capital. And this was facilitated by the feeble resources assigned to enforcing financial regulation. The combined budget of national agencies that fight economic crime is less than 1% of the money laundered through Britain each year.

The National Crime Agency is understaffed, underfunded and badly organised. Its staff are poorly paid and demoralised, as they are outdone by highly paid lawyers and accountants hired by oligarchs. True, the US also has a problem of financial crime, but it also has the FBI and the United States District Court for the Southern District of New York to fight financial crime. Britain has no comparable agencies.

Corrupt foreign oligarchs can use the British legal system to protect themselves. For example, Britain has some of the most stringent libel and data protection laws in the world which make it hard to report on oligarchs. Highly-paid British lawyers can censor journalists seeking to expose their dirty secrets.

Dark money is sometimes considered to be a victimless crime. But that is far from the truth. The ripping off of public finance in poor countries undermines the provision of public services like health and education. And elites from these countries can fly to London to get their medical treatments and education for their children. In other words, Britain enables them to opt out of their own countries, when it suits them.

The London financial laundromat, by which Putin and his cronies invest their ill-gotten money in the UK, has helped keep Putin in power. According to Bullough, some 400-500 people around Putin now own everything in Russia – not just property, but also the security services, organised crime, and all the government machinery.

So, none of these power brokers in Russia are speaking out against the invasion of Ukraine, because they are part of the gravy train. He believes that it is Britain’s fault that Russia invaded Ukraine, because it has supported the Putin regime by being the favoured destination for Russian dirty money. Bullough has documented £1.5 billion worth of UK property bought by Russians with links to the Kremlin or accused of corruption, with £430 million invested in Westminster.

Challenge of reforming dirty money culture

The fact that there was no grand strategy or single mastermind driving Britain to become a butler to the world makes it all the more difficult to solve the problem. What is required is a complete change in the culture and politics of Britain’s financial sector. This will be enormously difficult in light of the importance of London in the modern, deindustrialised British economy, and the number of people making a living through butlering.

In response to Russia’s invasion of Ukraine, Britain has been shocked into action. It has implemented widespread sanctions against Russian oligarchs. For example, Roman Abramovich was forced to sell Chelsea Football Club and related companies. Britain has also implemented an “Economic Crime” Act to improve transparency. But according to Bullough, this law was rushed through without sufficient deliberation, does not go far enough, will not be operational for one year, and is not backed up by serious resources for the National Crime Agency to enforce it. In sum, he believes that Boris Johnson has never been serious about tackling the issue of Russian money in Britain.

It is astonishing that it took the invasion of a sovereign European nation for the UK to contemplate tackling financial crime. The West can never expect to contain the nefarious behaviour and actions of rogue states like Russia while there is collaboration to take and whitewash their dirty money. While there may now be some hope of Britain tackling the issue of Russian dirty money, Russia is not in any way the only source of dirty money in Britain. There is much more Chinese money in London than Russian. How will Britain react if China invades Taiwan?

Britain faces an oligarch/financial crime crisis, not a Russia crisis, and should deal with it proactively and methodically.

Acknowledgements

This article was first published by Unravel on 28 June 2022.