Stale Thinking and Inaction Threatens G7 Illicit Finance Commitments

Last month, leaders of G7 countries met in Elmau, Germany, for their annual summit. The resulting Leaders’ Communiqué revealed little of the commitment to combat illicit finance that was so prevalent the year before during the UK presidency. Much of what was offered merely paraphrased the commitments of 2021, despite the central role played by illicit finance in Russia’s hybrid war against the West, suggesting little action has followed the talk.

G7 countries have long proved to be attractive destinations for dirty money thanks to widely exploited vulnerabilities in their defences, limited capacity of enforcement agencies, and the complacency – or wilful lack of compliance – of intermediaries (often referred to as ‘enablers’). In spite of repeated commitments on paper – such as those made at the Summit for Democracy in December 2021 and last year’s G7 interior and security commitments under the UK presidency – these shortcomings remain and have yet to be addressed in practice by G7 members.

Even as Russia’s invasion of Ukraine and President Joe Biden’s initially robust stance on anti-corruption have breathed renewed energy into countries’ commitments to tackle corruption and kleptocracy, transforming these commitments on paper into effective action will require G7 countries to move beyond mere rhetoric.

Tougher on Corruption and Kleptocracy… Again

Illicit finance and corruption have had a hard time sticking at the top of the G7 members’ agenda. An analysis of G7 summit commitments shows that illicit finance and corruption have typically attracted limited focus from G7 leaders’ meetings. Last year’s summit represented a welcomed change, as the G7 London interior and security commitments promised to convey a stronger, more unified voice, but also to take action against these treats.

This year’s communiqué does little to follow through on those commitments. While the UK presidency brought together previous commitments on illicit finance and set up a platform for action, the latest communiqué is a non-event for those hoping to see a further step forward. The document does recognise that ‘corruption and related illicit finance and proceeds of crime drain public resources, can often fuel organised crime, enable kleptocratic systems to accumulate wealth and power at the expense of citizens, [and] undermine democratic governance’. This is combined with a commitment to ‘defend the integrity and transparency of democratic systems [by continuing] to step up [the] fight against corruption in all relevant bodies’, but this is arguably little more than a reiteration of previous intentions that, unless backed up by proper action, risk going stale.

Russia’s aggression against Ukraine has clearly reignited the debate on the need to fight dirty money. In particular, it has highlighted how kleptocratic and corrupt actors can undermine democratic institutions, both by exploiting vulnerabilities in the system and by actively using financial measures to threaten the rule of law. Against this background, the G7 has been forced to act. For example, its communiqué commits to build on and intensify the work of the Russian Elites, Proxies and Oligarchs Task Force (REPO). This task force, which includes G7 countries, Australia and the European Commission, has recently published a statement on its first 100 days, in which it claimed to have successfully blocked or frozen more than $30 billion worth of sanctioned Russians’ assets, and restricted sanctioned Russians’ access to the international financial system.

If this model is proving its worth, as the G7 claims, then there is an opportunity to expand this approach to tackling kleptocracy beyond Russia, to address the broader vulnerabilities of Task Force members, and to reduce the threat represented by illicit finance globally.

Groundhog Day

Also central to the G7’s plan to strengthen democracy against illicit finance is improving transparency by ‘implementing and strengthening … beneficial ownership transparency registers, including by improving their accuracy, adequacy, and timeliness’ and promoting a swift implementation of standards on beneficial ownership transparency of legal persons by the Financial Action Task Force (FATF).

If it feels like déjà vu, it’s because it is: G7 countries have repeatedly committed to transparent beneficial ownership registers. The G7 Finance Ministers and Central Bank Governors Communiqué, published in June 2021, is almost repeated word-by-word in the 2022 document, saying members were ‘implementing and strengthening registries of company beneficial ownership information to provide timely, direct and efficient access for law enforcement and other competent authorities to adequate, accurate and up-to-date information, including through central registries’. A previous document, published in 2016, had already pledged the ‘full implementation of individual action plans on beneficial ownership … by ensuring access, consistent with domestic legislation, to such information by all relevant competent authorities from law enforcements to tax administrations’.

But despite these commitments, G7 members have repeatedly failed to follow through with the urgency needed. For example, as of 2022, Canada and the US are still in the process of introducing a beneficial ownership registry; and Italy only launched its own register just recently. Although the remaining members (Germany, France, the Netherlands and the UK) all have registers in place, their effectiveness remains in question as the quality of the information stored is varied and real owners can still exploit loopholes to hide their identities. In the UK, Companies House, the country’s register, remains a hive of criminal activity which may finally be addressed by plans announced in the recent Queen’s Speech as part of a second Economic Crime Bill, forced on the government as a result of the Russian war in Ukraine. The extent to which these plans address the shortcomings of the existing system will depend on the willingness of the post-Johnson government to accept that increased transparency is not an obstacle to the light-touch approach to company formation typically championed by the UK. And the long journey on which the UK has been since 2016 shows how far laggards like Canada and the US still have to travel.

From Theory to Practice, Finally?

The issue of Companies House highlights how political commitments must be followed by concrete action to be meaningful. Similarly, while increased focus on kleptocracy and corruption is welcome, it is important that this is translated into activities that can be undertaken both in the short and long term by member countries. So, what should these look like? Two points should be prioritised alongside the expediting of beneficial ownership reform.

A critical failing of the global effort to disrupt and dissuade corruption and kleptocracy is the poor global track record on asset tracing and confiscation. Thus, the G7 should first commit to investing more time and resources in initiatives to boost recovery of assets that are often sequestered in their own jurisdictions. Second, effective supervision of professional enablers – aimed at closing loopholes – as well as appropriate sanctioning of non-compliance should be prioritised and publicised. Civil society, journalists and whistle-blowers draw attention to these vulnerabilities time and time again, yet despite repeated commitments from G7 members, progress has been stagnant, with limited success achieved.

The Russian war in Ukraine has shocked Western democracies into reconsidering broad elements of their security. The response to illicit finance is no exception. As highlighted in the G7’s 2022 Resilient Democracies Statement, G7 members now understand that fighting corruption and illicit financial flows is a key element of strengthening the resilience of democracies. This recognition and the restating of commitments by the G7 are of course welcome, but these are no substitute for overdue action. 2022 must be the year when the G7 breaks the loop of unfulfilled illicit finance promises and leads with decisive measures to reform and strengthen the global financial system against abuse by kleptocrats.

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

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