Money Laundering and Beneficial Ownership: Challenges for the Government

One outcome of last week’s corruption summit saw David Cameron pledging to set up a mandatory register for beneficial owners of those foreign companies that own UK property. The register would require those foreign companies that own or wish to buy UK property to declare their beneficial owners.

Buying property through anonymous companies registered offshore is an ideal way to legitimise money earned through corrupt means. The UK, and particularly the City of London, have long been criticised for ‘turning a blind eye’ to money laundered through our financial system and markets. Cameron’s initiative in principle presents a positive step towards cleaning up UK property markets. However, a lack of information on how this register will be implemented, coupled with the recent acknowledgement in the UK National Risk Assessment of Money Laundering and Terrorist Financing of a lack of understanding within law enforcement about how money laundering works, raises questions around how the UK government should best use information from this register.

Taking paperwork at face value is inadequate, particularly as organisations or individuals wishing to hide corrupt funds adapt in the face of new rules. Cameron addressed this exact point by saying that he wants to reverse ‘the burden of proof, so that if we suspect people of using stolen money to buy property we can force them to prove they accumulated their wealth legitimately’. But in this statement Cameron has not acknowledged that those laundering money have also become adept at manufacturing evidence of business activity as a means of ‘proof’ that they accumulated wealth legitimately. Uncovering beneficial ownership is a first step, but there are other factors to consider in determining whether property is used to launder corrupt funds.

The UK National Risk Assessment of Money Laundering and Terrorist Financing acknowledged that there are significant intelligence gaps in law enforcement’s understanding of how ‘high-end’ money laundering works, and the government has since released an action plan that seeks to address this. So it appears that the UK government and law enforcement are not necessarily turning a blind eye; what they lack are resources and specialist knowledge in examining the complexities of money laundering. As a result, the role of investigative due diligence in the UK has been primarily transferred to banks, law firms, accountants and other third parties. These third parties represent the first lines of defence against money laundering, but they also act as potential facilitators, given the differences between the private sector and the public sector in terms of risk appetite and commercial incentives. If such gaps continue, there is a risk that the potential value of the beneficial ownership registry will not be optimised.

Russia has emerged as a favourite case study when discussing risks around money laundering in the UK, particularly through the UK property market. Projects, such as the documentary ‘From Russia with Cash’, have highlighted the willingness of estate agents selling lucrative properties to ignore obvious red flags related to their customers. It is an over-simplification to assume all Russian money coming to the UK markets is ‘dirty’, but most banks deem it a high-risk jurisdiction from a compliance perspective.

What is required to truly ascertain risk is not only in-depth understanding of financial mechanisms for money laundering, but a deeper understanding of how business is done in the jurisdiction in question. Although mechanisms for money laundering are not necessarily exclusive to one country, contextual knowledge of how business networks work in Russia will enhance capacity to recognise red flags and will fundamentally improve the judgement upon which a ‘risk-based approach’ is supposed to be formed.

For example, Russian views on ‘ultimate beneficial ownership’ from a registration perspective may still not represent the full reality. Russian businesses’ ability to hide ownership is well developed, as it has been a form of protection against hostile takeovers or appropriation by competitors or the state. Even registered beneficial ownership should be met with some scepticism. Sanctions on Russian individuals have shown that restructuring corporate assets and ‘officially’ selling them to other people does not necessarily mean exchanging ownership. In the wake of EU and US sanctions, Arkady Rotenberg sold his stake in oil field services company Gazprom Bureniye, or ‘Gazprom Drilling’, to his son Igor. Arkady’s brother Boris Rotenberg sold Langvik Capital, which owns a number of Finnish assets, to his son Roman. It is unlikely that, although they are no longer the registered owners, the Rotenberg brothers exert no control or influence, or indeed extract no benefit, from these assets.

Determining the source of funds can be challenging when owners have gone to great lengths to try to hide their origins. Again, Russia offers a case study. The Organized Crime and Corruption Reporting Project (OCCRP) has highlighted that using complex and multi-jurisdictional chains of companies and transactions is how the origin of corrupt funds can be masked. In a process it dubbed the ‘Russian Laundromat’, the OCCRP explains how $20 billion of corrupt money was moved into the legitimate banking system using UK shell companies registered offshore in Belize, bogus loan agreements and a corrupt judge in a Moldovan court. Money ‘won’ from a settlement in the Moldovan court over failed repayment of the bogus loan was then wired via a Latvian bank. Given historically strong business ties between Russia and Latvia, the latter often features in money laundering involving Russia and other former Soviet states, particularly those of Central Asia. Knowledge of the beneficial owner of the Belize company alone, and self-declarations of source of income without investigation, would not necessarily uncover this kind of activity.

Understanding the nexus between politics, business, and criminal groups is also key to understanding how schemes are structured to potentially blur the identity of the beneficiaries and legitimise their funds. Even those familiar with Russian business would not necessarily have recognised the name Sergei Roldugin as an immediate red flag. However, the Panama Papers show that his political connections and source of funds raise serious questions, involving uncommercial loans and suspicious share transactions. Moreover, the papers highlighted that self-declarations need probing, given that on his forms Roldugin claimed he had no political connections, despite being a godfather to Putin’s daughter. Given his career as a musician, it was surprising to find that he owned 3.2% of Rossiya Bank, which was sanctioned by the US for being seen as the ‘personal bank’ of senior Russian officials. Roldugin also owns 12.5% of a large television advertising agency, Video International, and was offered an option to buy a minority stake in Russian lorry-maker Kamaz.

Again, this demonstrates that minority shareholders need to be understood as much as any larger registered beneficiary. The nexus between official, business and criminal groups have been highlighted by Aleksey Navalny’s investigation into Russia’s general prosecutor Yuriy Chaika and Spain’s investigation into the Tambov and Malyshev gangs, two of Russia’s largest criminal organisations.

To effectively judge the risks of money laundering it is crucial to have contextual knowledge of a country, particularly knowledge related to perceptions of beneficial ownership and what it means in the broader business context. The UK government has recognised gaps in knowledge. It could build a better intelligence picture by engaging with compliance departments of banks more directly, which would help to build trust, and also engaging with civil society and NGOs who have proven their investigative skills in this area.