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Under US pressure, UK Tories pledge to change tack on dirty money

LONDON — The U.K. has long found it profitable to turn a blind eye to dirty money. But a U-turn is underway as the U.S. demands action amid renewed tensions with Russia.

The U.K.’s status as a premier destination for shady oligarchs may be about to change, or so campaigners hope after the Conservative government promised to bring forward a long-delayed series of reforms to close existing loopholes.

The most important piece of the puzzle, according to MPs and a minister directly involved, will be to give Britain’s corporate registrar, known as Companies House, powers to check the identity of people applying to become owners of U.K. firms.

The registrar’s inability to conduct even basic fact-checking has made Britain a favored destination for global money launderers, who pay a mere £12 to register companies often under blatantly false identities. The body currently admits it “does not verify the accuracy of the information filed.”

John Penrose, the prime minister’s anti-corruption “champion,” acknowledged it has taken too long for the U.K. government to get moving. But he told POLITICO the bill will “plug the beneficial ownership transparency loopholes” that have enabled money laundering flows through London.

The bill has “been one of those unglamorous bits of economic and crime-fighting plumbing,” he said. “There’s always been something that has been more urgent, including Brexit and the pandemic. But everyone gets the fact that this is important and right in principle.”

London’s status as a hub for dirty money attracted attention once again during the deadly upheaval in Kazakhstan, a country living under a repressive regime with vast natural resources, when it was revealed that its elites have spent lavish amounts on British assets.

Margaret Hodge, an opposition Labour MP who leads a parliamentary group on anti-corruption, said her concerns about U.K. companies being used as dodgy shell vehicles were validated in 2020, when an explosion of a large quantity of fertilizer devastated Beirut and killed 218 people. It was later exposed that the cargo’s owners had links to a firm registered in the U.K., and that the fertilizer may have been illegally earmarked by the Syrian regime to manufacture explosives.

Calling the years of delays to reforms “an utter scandal,” Hodge said the Economic Crime Bill should create a “desperately needed” open register of foreign owners of U.K. real estate. The goal is to prevent people under international sanctions or accused of looting their home countries from buying residential and commercial real estate, she added.

Lawmakers expect to discuss the proposals in the House of Commons in the second half of the year, and the anticipated scrutiny in both chambers could prolong the process for months. This has led to questions over whether the bill will have become law by the time new sanctions against Russia might be issued, as pledged by Foreign Secretary Liz Truss.

American dream

The United States, as the dominant ally of the U.K. after Brexit, has meanwhile been upping pressure on the Conservatives to do more, according to Paul Massaro, senior policy adviser at the U.S. Commission on Security and Cooperation in Europe.

The apparent British willingness to start closing loopholes that let dirty money into the country “is an example of American pressure working,” said Massaro, who also advises U.S. lawmakers on economic crime and national security.

As a case in point, he said, the U.S. elevated corruption to a national security threat last June, enabling the federal government to begin clamping down on the problem at home — while demanding allies do the same. “The U.K. does have a huge blood money problem, and U.S. officials have complained that London may be unable to impose sanctions because they are so reliant on Kremlin-linked money and enablers with Russian clients,” Massaro added.

According to diplomats, U.S. State Department officials have expressed “dismay and frustration” at the British government’s failure to take tough action against the flow of Russian funds, particularly in “Londongrad.”

And Tom Tugendhat, the Tory MP who chairs the House of Commons’ foreign affairs committee, recently warned that the U.K.’s efforts to support Ukraine risk being “undermined” if the government doesn’t act to stop “dirty Russian money flowing through our system.”

The Center for American Progress, a U.S. think tank close to the Biden administration, gave a similarly unvarnished reading of the U.K.’s commitment to change. “Uprooting Kremlin-linked oligarchs will be a challenge given the close ties between Russian money and the United Kingdom’s ruling Conservative party, the press, and its real estate and financial industry,” it said in a report last month.

But Penrose insisted the British proposals will go a long way to reassuring the White House. “It is certainly helpful to have both governments in the two jurisdictions with the two biggest financial centers singing from the same hymn sheet,” he said.

Spotlight on donors

Some of the Conservatives’ key donors may also be hardest hit by the changes, warned London think tank Chatham House recently, stating that the party “may be open to influence from wealthy donors who originate from post-Soviet kleptocracies and who may retain fealty to these regimes.”

The anti-corruption group Transparency International has identified 150 land titles in the U.K. worth a total £1.5 billion owned by Russians who either have close ties to the Kremlin or who have been the subject of corruption allegations. But the public has found out only about two-thirds of the value of those properties, mainly through leaks to the press or court actions, due to the secrecy around offshore companies, said Duncan Hames, the group’s director of policy. 

The group says the true extent is likely to be much higher because there are about 90,000 properties in England and Wales owned by anonymous companies based in secretive jurisdictions.

This lack of transparency could hinder any potential British sanctions against Russia if it invades Ukraine, he added.

The closeness of oligarchs and the Conservative Party is one reason why the U.K. has avoided cracking down on shady money for so long, said Casey Michel, a U.S.-based journalist and expert on illicit finance, who has authored a new book on the subject, “American Kleptocracy.”

The “potentially horrific crisis” on the Ukrainian border “has turned a lot of heads to the role that the United Kingdom has played” in bolstering the fortunes of Russian billionaires close to President Vladimir Putin, Michel said.

A way to go

Without action in London, Americans may eventually resort to tougher means, Michel said, pointing to the “potential for increased tensions within the American-British relationship.” The U.S. could consider issuing sanctions against British individuals and organizations involved in money laundering, as it has already done with allied countries such as Latvia and Cyprus, he added.

As for the government’s January announcement on sanctions, it’s “better than nothing” for the Tories to declare a stronger stance on foreign oligarchs, said Edward Lucas, a former Economist editor, who has long covered intelligence, security and money laundering.

“[But] unless we fix the system of company ownership and disclosure the sanctions won’t work, they will be performative and symbolic,” he warned, noting that kleptocrats could still use proxies to register assets rather than their own names. “The big change in all this is that the U.S. started to take counter-corruption seriously, and this casts a harsh light on countries such as the U.K.”

The recent media focus on oligarchic wealth in the U.K., as well as the high-profile resignation of a government minister over failures to tackle government loan fraud, have added to pressure on the government, said Conservative MP Kevin Hollinrake, who leads parliamentary groups on banking and whistle-blowing.

As Hollinrake sees it, the most important element in the bill should be establishing corporate criminal liability for “failure to prevent” money laundering and fraud. This would allow prosecutors to charge law firms, banks, money managers, accountants, and various consultancies that have become accessories to oligarchs and human rights abusers. Labour’s Hodge also backs this provision.

However, Penrose, the anti-corruption czar, said this change may be omitted in the initial version of the law due to an ongoing review by the Law Commission, whose spokeswoman said it intended to finish its assessment “before June.”

Meanwhile, some anti-corruption stalwarts say they will need much more than just promises to be convinced that the tide is turning.

Bill Browder, a financier and campaigner who lobbied for the“Magnitsky” sanctions adopted across the Western world — named after his late colleague and Kremlin corruption-battler Sergei Magnitsky — said “the delay in the economic crime bill is shameful, a symptom of Britain talking tough but never acting tough on this issue.”

“There is no logical reason why it should be delayed further,” Browder said. “Any delay plays into the hands of oligarchs who don’t have this country’s best interest at heart.”

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