By George Porter, Knowledge Manager
The Invasion of Ukraine has brought a renewed focus on anti-money laundering (AML) processes across the UK, Europe and the US. With the US deploying the largest and best-funded sanctions programs in a generation and multinationals removing themself from the Russian economy entirely, awareness of who a company is dealing with and the source of their funds has never been more vital. The UK in particular has seen a new drive to tackle the entanglement between illicit money – Russian money in particular – and the procedures by which these funds are transported, concealed and integrated into the wider UK financial system. While new measures to tackle these issues, including the UK’s first ever economic crime plan, should be celebrated, we should take the opportunity to assess the regulatory landscape and see how well these changes protect the UK economy.
Current UK challenges
It’s been clear for some time that there’s a need to rethink how AML, anti-fraud and anti-corruption processes work, both around the world but particularly in the UK. The National Fraud Intelligence Bureau reported a 36% rise in fraud offences in the UK for the year ending June 2021, compared with the year ending June 2020. Current assessments project this figure accelerating even faster this year. Recent exposés have shown just how easy it is to use Scottish or Irish limited partnership structures to conceal or launder illicit funds. The UK property industry in particular is struggling to extricate itself from its relationship with Russian money, with some estimates showing the amount of Russian-owned property in London being three times greater than previously believed.
While bold steps have been taken with regards to acting against Russia, including sanctioning more than 1,000 individuals, entities and subsidiaries and barring more than 3 million Russian companies from raising money on UK capital markets, there remain barriers to be overcome. Prominent among these has been the use of the UK court system to disrupt or even punish reporting on oligarchs through Strategic Lawsuits against Public Participation (SLAPPs). While the government has set out their plans to stop these actions, the legislation is yet to be fully applied and only time will tell how effective these measures are in the courts.
UK Ministers have been very vocal in the recent drive to fix these changes, particularly when it comes to Russian money. Some have even gone as far as to severely criticise the government’s previous approach. Conservative Minister Tom Tugendhat recently stated, “Complacency has left the door open to corrupt wealth taking root and morally bankrupt billionaires using the UK as a safe deposit box”.
While the US has recently loosened some elements of its sanctions program – mainly controls on the export of grain and fertiliser in exchange for allowing Ukraine to ship grain out of it’s besieged ports – overall the US Sanctions program has been one of the strictest and widest-ranging ever imposed, and we’ve seen similar unprecedented action across the EU. However, does this new drive in the UK, and the recent delivery of the UK’s first Economic Crime Plan, herald a new era of effective AML activity? Or are these new measures simply following in the footsteps of the flawed plans of the past?
Is it Groundhog Day?
It’s important to state that we’re at a turning point, at least in the perception of the threat of money laundering and associated fraudulent activities. In the last year we’ve seen a Minister resign over the lack of due diligence applied to COVID-19 loans, a brand new Register of Overseas Entities created requiring overseas entities owning land or property in the UK to declare their beneficial owners, and a brand new NCA Kleptocracy Unit created specifically to tackle corrupt elites, sanctions evaders, and enablers of money laundering. This has been matched by action across the West, with the US, Spain and Italy among others all taking action to seize super-yachts linked to sanctioned Russian oligarchs.
While the circumstances may be unprecedented, this hasn’t been the first time wide-ranging changes and improvements to anti-fraud and anti-corruption practices have been announced, and there’s clearly a big difference between introducing a change and effectively implementing one. For example when the UK first enabled online access to the Companies House Registry much was made of its ease of use and transparency, with many claiming this greatly simplified the process of detecting fraudulent companies and disrupting criminal operations. However, 7 years on from its initial launch we see vast amount of fraudulent companies registered on Companies House each day, as highlighted by industry expert Graham Barrow, and a campaigner who attempted to show how easy it was to enter false information has even been prosecuted. In light of this many activists and users of the service have noted the ease of use of the service seems to be turning into the ease of abuse.
This pattern of change seems to have persisted through to the most recent measures. As anti-corruption campaigner Oliver Bullough has pointed out, there are significant issues with the Economic Crime Plan. The main issue being that it is rather easy to evade the oversea’s entity register’s requirement to disclose the identity of the ultimate beneficial owner of a firm by dividing its shareholding structure so that no single individual reaches the 25% ownership level required to count as the person of “significant control”. Alternatively this can be evaded by registering the company via a professional corporate trust provider, who acts as a nominee, and thus can be named in the place of the actual ultimate beneficial owner on the ownership documents.
Evolution not revolution
Even if the recent steps are not perfect, they are still a significant improvement in the UK’s ability to tackle money laundering, fraud and illicit finance, and a much needed change in overall attitude to the risks and challenges posed in the modern economic landscape. While there will always be loopholes and exceptions in legislation designed to focus on specific cases, other measures such as changes that make it easier for AML supervisors to share information and the establishment of proactive economic crime teams in police services should be seen as significant victories for the AML sector. Perhaps the most comprehensive analysis of the UK government's plans to tackle fraud and money laundering come from the Royal United Services Institute (RUSI). They state that the legislation so far has delivered “some basic system maintenance in the form of legislative and policy reform” but further goals, including the predicted second phase of the economic crime plan need to be concerned with “converting those reforms into tangible, real-world outcomes”.
While there are encouraging signs on the horizon, including the upcoming Second Economic Crime Bill, for now we continue to operate in a high-risk environment. For as long as that’s the case the best course of action remains for businesses to be aware of the regulatory and risk environment they’re operating in, while being proactive and assuming that basic compliance with requirements is only step one of what’s needed to protect your business, and always apply a high standard of due diligence when starting or renewing a business relationship.