‘Plugging’ the Money-Laundering Intelligence Gap: Case Studies from Post-Soviet States

The UK government’s recent National Risk Assessment of Money Laundering and Terrorist Financing (NRA) and subsequent Action Plan identified the need to fill intelligence gaps in relation to high-end money laundering in the UK. In particular it seeks a better understanding of the role of the financial and professional services sectors, such as banks, lawyers, accountants, and trust and company service providers (TCSPs), in laundering proceeds of crime.

There are numerous case studies of how money has been laundered through the UK, a systematic examination of which would begin to fill some of the current gaps. Two schemes originating in post-Soviet jurisdictions help to identify certain risks. The UK is often only one part of the broader intelligence picture that should be analysed more fully to understand the real money-laundering risks.

The first case study concerns what has been dubbed the ‘Russian Laundromat’. It involved two UK-registered companies signing a bogus contract, with one company lending a fictitious amount of money to the other. When the borrower purported to refuse to repay the debt, the guarantors of the loan, based in Russia, took the case to Moldovan courts. A corrupt and complicit judge then certified the fake debt as enforceable, and money was transferred from the Russian guarantors to the ‘lending’ company’s account which, as in many such cases, was situated in Latvia.

A problem facing the UK’s regulatory environment, therefore, is the absence of checks to verify the veracity of business activity conducted by UK-registered companies. Companies House, responsible for incorporating and dissolving companies in the UK, is, however, not responsible for verifying the accuracy of information submitted by companies that are registering. This represents a potential vulnerability that can be abused, given the ease with which companies can be registered in the UK. This presents a challenge, as the UK will not wish to undermine this ease of doing business in the UK, particularly in post-Brexit economic uncertainty. However, it is a theme that needs further consideration within the NCA and possibly the Department for Business, Innovation and Skills, which oversees Companies House, since fictitious business activity between two UK-registered companies has featured in many money-laundering schemes. 

The $1 billion theft from a group of Moldovan banks in 2015 highlighted a key risk surrounding UK-based trust and company service providers. TCSPs are often crucial enablers to money laundering, which the Action Plan recognises as part of the intelligence gap that must be filled. A report by investigative consultancy firm Kroll claimed to have uncovered a group of UK companies, many, again, with Latvian bank accounts, which were allegedly used to funnel the stolen money offshore. One of the key companies allegedly with a title to the missing £1 billion was formed by an Edinburgh-based formation agent, and registered in the UK as a limited partnership of two Seychelles-registered companies.   

This case highlights vulnerabilities in due diligence requirements. The UK’s Money Laundering Regulations, which should be updated in line with the European Union’s Fourth Money Laundering Directive, requires regulated companies to take risk-based customer due diligence measures to gain comfort that the business is not involved in illicit activity. In a BBC interview with an individual running the Edinburgh-based formation agent responsible for the set-up of the Seychelles-owned limited company, - it subsequently emerged that the Seychelles-owned limited partnership’s beneficial owners were known to the formation agent, but questions were, allegedly, not asked about the nature of the business, as required by customer due diligence measures when establishing a commercial relationship. The individual said that asking such questions was the role of the Latvian-based intermediary agent with whom they worked. The UK Money Laundering Regulations do allow for ‘reliance’ on another relevant person to conduct due diligence on their behalf in other EEA states; there are narrow professional requirements as to what kind of individual or company can take on this role, and it is unclear whether the intermediary met these requirements. An added risk is that there are many companies in Latvia working as ‘business introducers’, which assist clients (usually from former Soviet states) in setting up shell firms and bank accounts for clients abroad.

This case raises doubts over the adequacy of the sector’s regulatory and enforcement oversight of whether companies are conducting due diligence effectively or whether they are simply meeting regulatory requirements. HM Revenue and Customs is the UK’s main supervisor of TCSPs, although the supervisory regime is fragmented across other organisations, such as the Financial Conduct Authority and professional bodies, depending on the activity of the TCSP. TCSP supervisors conduct desk-based reviews and compliance visits, but, given that the NRA identified the role of TCSPs in money laundering as part of the intelligence gap, it is difficult to know whether supervisors can be confident that they understand the risks about them well enough to be as effective as possible. Supervisors and law enforcement could, for example, draw on the successes of the Joint Money Laundering Intelligence Taskforce (JMLIT), which has been helpful in public–private financial sector intelligence sharing and confidence building. 

Numerous other ex-Soviet state cases provide useful focus points for filling the intelligence gap, such as the Russian fraud highlighted by the late lawyer Sergei Magnitsky, which involved UK-based companies systematically wiring embezzled money offshore, or a Surrey-based mansion owned through an anonymous company linked to a Kyrgyzstan-based money-laundering scheme.

By analysing such case studies, a fuller picture of where the UK fits into these schemes begins to form. Money-laundering ‘red flags’ can be more specifically identified and better prioritised by sector or business activity. Better questions can be asked as to why a company is structured or transacts in the way it does. It will also help to identify which jurisdictions the relevant supervisors and law enforcement could connect with more to build a fuller intelligence picture, with Latvia a good example. Without this, a ‘risk-based approach’ will continue to go only as far as the integrity and interpretation of the company in question.