Don’t Expect Sanctions to Fix the UK’s Systemic Illicit Finance Problems

The past week has dramatically revealed the significant role the UK plays in global money laundering and the vulnerabilities this dirty money creates for the UK. That it has taken a crisis such as the invasion of Ukraine to bring these issues – the product of decades of complicit neglect – to the government’s attention is a disgrace.

After a risible start, the UK has indeed enacted significant sanctions against Russia. Thursday’s raft of actions will, undoubtedly, inflict meaningful damage on the Russian economy. You cannot freeze the assets of a country’s second largest bank without causing immense direct and collateral financial damage.

But issuing tough sanctions is no substitute for reducing the enduring role the UK plays in the continuation of global laundromats and the role they play in creating geopolitical instability, yet this point seems to elude the current prime minister and his senior leadership team.

Over the past week, Boris Johnson has made a series of extraordinary – and often fallacious – claims, which fall into two main categories. First, he seems to believe that the UK is doing all it can to combat illicit finance. At Prime Minister’s Questions last week, he brazenly claimed ‘I do not think any Government could conceivably be doing more to root out corrupt Russian money, and that is what we are going to do. We can be proud of what we have already done and the measures we have set out’, and then doubled-down by claiming ‘No country is doing more than the UK to tackle this issue’. Both statements suggest a detachment from reality.

Second, both the foreign secretary and prime minister have tacitly acknowledged that the UK has a problem with dirty Russian money (and from plenty of other countries too). The foreign secretary has repeatedly suggested that in the event of an escalation of Russian aggression against Ukraine, that oligarchs and Vladimir Putin’s allies would have nowhere to hide their assets. And the prime minister has committed to ‘open up the Russian doll of property ownership, of company ownership, in London and see who’s behind everything’. These statements beg the question ‘why were they ever allowed to hide their assets in the UK in the first place?’.

With every statement they make, Johnson and his leadership make it clear that they know the UK has a problem with dirty money, yet, to-date, he has actively sought to defer the opportunity to address this festering sore, a sore that his own 2021 Integrated Review recognised as a security threat to the UK. Much-needed legislation has been consigned to the graveyard of ‘when parliamentary time allows’; reforms that those working in Companies House publicly recognise (Q113) are needed are repeatedly postponed; and the intelligence, investigative and enforcement capabilities that are needed to push back the tide of dirty money are woefully under-funded and out-gunned by kleptocrats and criminals.

The government is often quick to wheel out justifications to support the prime minister’s claim that the UK is doing all it can. Yet, if this is right, then the outlook is bleak. If it is wrong, then neglecting to take the action needed to reverse this national threat is irresponsible.

In Parliament on Thursday evening, as he announced sweeping new sanctions in response to Russia’s full-scale invasion of Ukraine, the prime minister made several commitments that are important to scrutinise.

First, he committed to bring forward, before Easter, elements of the shelved Economic Crime Bill to strengthen the ability of the government to use Unexplained Wealth Orders (UWOs), an investigative tool that can require politicians and officials with assets in the UK to prove their legitimacy. When first introduced in 2017, UWOs were over-sold as a major step forward in the fight against illicit finance, yet they were never going to be the panacea to the problem and have not been able to overcome the fundamental capacity gaps in the system.

Second, he committed to ‘set out further detail … on the range of policies to be included in the full Bill in the next session – including on reforms to Companies House and a register of overseas property ownership’. The intended postponement of the Economic Crime Bill is one of the reasons Lord Agnew resigned with such fanfare last month.

Third, he announced – much to the reported surprise of the National Crime Agency (NCA) – that the government ‘will set up a new dedicated “Kleptocracy Cell” in the National Crime Agency to target sanctions evasion and corrupt Russian assets hidden in the UK’.

This is catchy, yet the NCA has been home to the International Corruption Unit (ICU) and the International Anti-Corruption Coordination Centre for years. The ICU has a specific mandate to investigate ‘money laundering in the UK resulting from corruption of high-ranking officials overseas’. Why is another unit needed? Why not properly resource existing capabilities so they can do the job they are intended for? This announcement is a smokescreen; an attempt to pull an eye-catching rabbit from a hat. With no price tag attached to this unit, this may be yet another hollow promise, designed to obfuscate a decade of cuts to law enforcement and prosecutorial capacity.

The government may have announced worthy objectives, but it has taken war in Europe for the UK’s leadership to act. War has not made this money dirty – it has been here, corroding society and undermining the country’s institutions, for decades. The failings that we hope the Economic Crime Bill will address have long been identified, yet they have been ignored through incompetence, disinterest or worse.

So, yes, we need updated legislation and we need measures in place that allow the NCA to tackle kleptocrats without bankrupting the agency in a legal gunfight – something that the former NCA Director General raised with the Intelligence and Security Committee for its Russia report. But these measures do little to overcome the fundamental capacity and capability gaps in the system.

But while new legislation is needed, the UK already has a well-stocked toolbox to use against illicit finance. So why is the country’s response so anaemic? Why have the oligarchs (and others) been allowed to hide their money in the UK? Were we content to let the money flow in as long as it funded galleries, political parties and other ‘worthy causes’? The situation resembles the willingness of previous governments to provide jihadis with safe havens in the UK as long as they caused no harm. We know how that policy ended up in July 2005.

Three fundamental issues are still lacking – issues on which parliamentarians, across the divide, must relentlessly pursue the government.

First, leadership. The array of ministers from the Department of Business, Energy and Industrial Strategy, HM Treasury, the Home Office and the Foreign, Commonwealth and Development Office that come to Parliament to answer questions on matters of illicit finance clearly indicates that tackling illicit finance is no one’s priority. Who is accountable for success? No one minister’s career hinges on successfully taking on the UK’s dirty money problem. The closest we have seen to accountability in recent times were the efforts of Ben Wallace when he was Security and Economic Crime minister. He genuinely cared. When did a cabinet minister last speak, convincingly (if at all), about this national security threat? And Damian Hinds, Wallace’s successor, has had economic crime scrubbed from his title.

Second, prioritisation. Despite weeks of rhetoric, the government was unable to muster more than a handful of names to publish at the time of its ‘massive’ sanctions on Russia, and these were mainly copied from other regimes. This suggests that within government, understanding of who has links to the Kremlin and their financial profile is scant. If dirty money represents a national security threat, what is being done to collect and develop intelligence? Vagaries and estimates from the NCA will not suffice. Imagine if such an approach were taken to that other national security threat, terrorism.

Third, resourcing. The UK has ample tools in the box, yet these tools are underutilised. For example, what is being done to exploit the access UK agencies have (via the exchange of notes mechanism) to company registration information held in UK Overseas Territories to actively identify and target front and shell companies linked to the Kremlin and its supporters? Journalists and authors seemingly have a better grasp of the problem than the government.

Sanctions are a tool of delegation; they require others (primarily the private sector) to take action. They allow the government to say, ‘look what we have done’ and stand back while others go to work on their behalf. This is not the way to tackle the fundamental and systemic issues that have made the UK a global illicit finance hub.

The way forward is not complicated. It requires leadership, prioritisation and resources, all absent from the UK government’s response when it comes to genuinely confronting the UK’s illicit finance vulnerability – a vulnerability that is, by the government’s own assessment, a national security threat, and which is supporting a global crisis.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

Have an idea for a Commentary you’d like to write for us? Send a short pitch to commentaries@rusi.org and we’ll get back to you if it fits into our research interests. Full guidelines for contributors can be found here.