Moscow's Gold: Russian Corruption in the UK Contents

1London and the oligarchs

Government response to the Salisbury attack

1.On 4 March 2018, former Russian military intelligence officer Sergei Skripal and his daughter Yulia were poisoned in Salisbury by a Novichok nerve agent. The Prime Minister told the House of Commons on 14 March that

There is no alternative conclusion other than that the Russian state was culpable for the attempted murder of Mr Skripal and his daughter, and for threatening the lives of other British citizens in Salisbury, including Detective Sergeant Nick Bailey. This represents an unlawful use of force by the Russian state against the United Kingdom. As I set out on Monday, it has taken place against the backdrop of a well-established pattern of Russian state aggression across Europe and beyond.1

In response to the attack, the Prime Minister told the House that the Government would expel 23 Russian diplomats identified as undeclared intelligence officers, and take a range of other actions.2 In solidarity with the UK, 27 other countries and NATO also expelled a combined total of over 150 Russian diplomats.3

Financing Russia’s foreign policy

2.In a letter to the Committee on 4 May 2018, the Foreign Secretary wrote:

In response to blatant aggression by the Russian state, the UK has consistently responded with strength and determination. As the Salisbury response highlighted, we are united with our partners in our determination to confront Russia’s destabilising actions, which undermine international law and threaten our collective security and the international institutions that protect us.4

3.This robust rhetoric, however, is somewhat undermined by, as Transparency International argued in evidence to us, London remaining a “top destination” for Russian oligarchs with links to the Kremlin to launder proceeds of corruption and to hide their assets.5 Most Russians in the UK have no links to corruption or to the Putin regime. However, as Tom Keatinge of the Royal United Services Institute told the Committee, “the fact of the matter is that there is an agglomeration of Russian money in the UK, and with that comes people and activity that I am not sure we want to have here.”6

4.Attempting to quantify the extent of the problem remains challenging, because it is difficult to establish for certain that individuals of concern obtained some or all their wealth through corrupt practices. According to the National Crime Agency, “many hundreds of billions of pounds of international criminal money is laundered through UK banks, including their subsidiaries, each year”.7 Vladimir Ashurkov of the Anti-Corruption Foundation told us that

there have been some estimates of money coming from Russia to Britain over the last 20 years—100 billion is probably a good number. Most of that money is legitimate; I think only a fraction of that is the proceeds of corruption and crime.8

5.Witnesses emphasised that oligarchs have sought to bring their money to London for many years, not least because the UK actively encouraged them to do so until recently. Tom Keatinge said that

we have had the welcome mat out to money—it has been financial investment as opposed to industrial investment over the past 20 years. We have had a regulatory stance that has welcomed that money—it is not something that we have been particularly concerned about, so why would we consider it a security risk?9

Later, he added:

I worked in investment banking for 20 years, and I do not mind saying that I look back on some of the deals that happened during that time and wonder whether we would have done those deals today. There are assets that have been listed on the London stock market over the past 20 years, where London wanted to win that business rather than seeing it go to New York or anywhere else, and London facilitated those transactions in London rather than somewhere else.10

6.Vladimir Ashurkov of the Anti-Corruption Foundation also stressed the general attractiveness of London for wealthy Russians, telling the Committee:

The UK is a natural magnet for Russians. If they learn any foreign language, it is likely to be English, which comes in handy here. London is a large metropolitan city, similar to Moscow. It has a lot to offer in many respects. London is the capital of finance and business. People trust the British education system and the British court system.11

7.Witnesses told the Committee that the UK financial system was seen as an easy target for Kremlin-connected oligarchs seeking to hide assets in London and to launder money obtained through corrupt means in Russia. Journalist Luke Harding said that

there is a view that basically we—the UK—are suckers, and that you can take advantage of all the freedoms and legal protections you have here while stealing at home. So you steal in a place of legal nihilism and you offshore in a place of legal solidity.12

The Kremlin’s coffers

8.There is a direct relationship between the oligarchs’ wealth and the ability of President Putin to execute his aggressive foreign policy and domestic agenda. The contemporary oligarchs owe their wealth to the President and act, in exchange, as a source of private finance for the Kremlin. Oliver Bullough told us:

Essentially, rather in the way that aristocrats in the middle ages held property at the pleasure of the king, oligarchs hold property at the pleasure of Mr Putin. They get to own it and enjoy it in return for the fact that he gets whatever he wants whenever he wants.13

Anti-corruption campaigner Roman Borisovich described the relationship in similar terms:

You have to look at the Russian oligarchs as a class. No matter how different they seem to you—one owns a football club, another donated money to Oxford for a school of government, another sat in a Russian jail for six years under communism, another was a civil servant—they all have very particular things in common. They can all be measured with the same yardstick … They are not self-made businessmen in the American sense. Every one of them made money through a relationship with the Russian Government … That bond forces them to do all sorts of chores for Putin, whether hidden, visible or invisible. It might be donating $7 million to the GOP in the year of the presidential election in the States, or supporting an anti-EU think tank in Germany. They all do something; it is just that we don’t see most of it.14

9.In a written submission to the Committee, Garry Kasparov, author and anti-Putin activist, said that the oligarchs were “gangsters”. He told us:

They are agents of a rogue Russian criminal regime, not businessmen. They are complicit in Putin’s countless crimes. Their money is not truly theirs, it is Russia’s. Their companies are not mere international corporations, but the means to launder money and spread corruption and influence.15

10.Dr Mark Galeotti of the Institute of International Relations in Prague expanded on the role of the oligarchs in advancing the Kremlin’s foreign policy goals:

If you look, for example, at the western Balkans, it is clear there is a certain nudging towards “We would like you to buy lots of real estate in Serbia or invest in the pharmaceuticals industry in Bosnia” because this gives useful leverage. Going back to this point about the oligarchs having their money because the state allows them, there is clearly also a willingness to put requirements on them … It is often in small-scale stuff, such as “Wouldn’t it be nice if you thought it was worthwhile donating some money to this particular alternative media website or to that particular populist politician?” What they are trying to do is create the illusion that this is individual activity rather than a part of a state campaign.16

11.Roman Borisovich said that the best way to stand up to Russian aggression would be to target the Kremlin’s illegal sources of finance. He said:

You have to understand that Russia is an absolute kleptocracy. That means that the political elite is plundering the country—robbing their fellow taxpayers blind—but the money doesn’t stay in Russia. As soon as it is stolen it comes out immediately, and after a quick spin in the laundromat of British offshore territories, it comes here. It doesn’t sit under a palm tree in the Cayman Islands; it is invested in stocks, shares, bonds, properties, yachts, planes and reputation laundering. It all comes here, so we must cut the link that allows the elite to export their loot. Killing the laundromat is how you fight the regime. There is no other way.17

12.Mr Borisovich also told us that the Government’s diplomatic response to the Skripal attack would not be seen as serious by the oligarchs, because their ability to hide money in London would remain unchanged. He said:

I think the lack of serious response to [money laundering], which has been evidenced over years, has completely emboldened the Russian kleptocratic elites, to the extent that they think that they own Britain. It is true that is anecdotal evidence, but when, instead of going after where it hurts the kleptocracy—by hitting it in its wallet—Britain sends out 23 diplomats, 123 Russian oligarchs have a party, because their assets have been preserved. Their influence and place in society has not changed. It’s the status quo: business as usual. That means that they have a legitimate claim to come here and do business. That has to change not only for the sake of the UK, but for the sake of Russia. Money laundering should be a foreign policy issue, rather than criminal.18

Asked to elaborate on the foreign policy dimension of the money-laundering and financial corruption issue, he added:

You have a system that is built on exporting illegal wealth. That system has become aggressive to its neighbours. It can become aggressive in going against multilateral—unilateralism. It is going against democracy. It is undermining democratic processes in the US, in the UK and in Europe. It is totally emboldened by the fact that, unlike in the time of the cold war—in the Soviet era—people who are perceived to be new enemies are allowed to access banks and all financial instruments of the west. Their money is hidden somewhere in plain sight, somewhere here, and nothing is being done to them.19

Mixed messages: En+ and the Russian sovereign debt auction

13.The flotation of En+ Group on the London Stock Exchange in November 2017, which raised around £1bn in share sales, provides an example of the contradictions inherent in UK Government policy towards Russia. En+ Group is an energy firm that, at the time of its initial public offering (IPO) on the London Stock Exchange, was controlled by billionaire and Kremlin associate Oleg Deripaska. En+, in turn, held a controlling stake in Rusal, a major Russian aluminium firm. VTB Capital and Gazprombank—both subject to sanctions since 2014—were among the banks involved in the listing, which was facilitated by UK legal firm Linklaters. Emile Simpson, Research Fellow at Harvard University, explained the key issues around the flotation of En+ as follows:

in terms of the controversies surrounding that IPO in November last year, one issue was that En+ is the holding company for Rusal … Rusal’s own website says that it supplied military material to the Russian military that was potentially used in Syria. That arguably should have attracted the attention of the regulators, given that the EU has sectoral sanctions on the Russian defence sector. The second reason it was controversial was because VTB Bank, which is a sanctioned Russian bank, has a stake in En+. The third reason it was controversial was that En+ had a loan of almost $1 billion from VTB. Using the proceeds of the IPO, which raised £1.5 billion [in London], En+ repaid that loan to VTB in a way that did not breach sanctions.20

14.Oleg Deripaska was placed on a new list of sanctioned individuals by the United States Treasury on 6 April 2018.21 Although Mr Deripaska was not subject to sanctions at the time of the En+ IPO, his proximity to the Kremlin was well known; Roman Borisovich, for example, noted that Deripaska had been asked to build the international airport in Sochi for the 2014 Winter Olympics.22 Asked whether the flotation should have been allowed, Emile Simpson told us that was “a good question for the regulator”, adding: “I think there needs to be an investigation into what processes failed in the regulator. There needs to be a look at the regulator’s code.”23

15.In February 2018, press reports emerged suggesting that both MI6 and US security officials had expressed serious concern about the IPO.24 One unnamed US official reportedly told the Telegraph: “What is the point of the U.S. imposing sanctions on Russia if the Russians can then get round them in Britain?”25 When the addition of Deripaska to the US sanctions list re-kindled interest in the En+ case, the Telegraph reported a spokesman for the Financial Conduct Authority as saying: “We consulted with the relevant authorities according to the usual protocols. Having done so, there were no grounds for the application to be refused”.26

16.The sale of Russian sovereign debt in London is another example of the inconsistency in UK strategy towards the Russian regime. On 16 March 2018—two days after the Government announced the expulsion of 23 Russian diplomats from the UK—Russia raised $4bn in eurobond issuances, nearly half of which were bought by investors from the UK.27 VTB Bank acted as the book runner for the sale, taking advantage of a loophole in the EU sanctions regime that allows it to do so despite being a sanctioned entity unable to access EU capital markets in its own right.28 Moreover, this came only a day after Gazprom PJSC made a €750m bond sale of which some bonds were bought by UK investors, according to the book-runner VTB Capital.29 In response to that sale, the Russian Embassy in the UK tweeted:

Source: Russian Embassy, UK, 15 March 2018

17.The ease with which the Russian government was able to raise funds in London despite the strong measures that the Government took in the wake of the Salisbury attack raises serious questions about the Government’s commitment to combating Russian state aggression. As Dr Mark Galeotti told the Committee:

If I can put this in a political context … I think it is clear from the conversations in Moscow that the presence of loopholes in the existing sanctions regime is one of the things that they point to to “prove” that the West is either not serious about sanctions, or just incompetent.30

We address the question of whether Russian sovereign debt should be allowed to be sold in the UK later in this report.

18.Both the En+ IPO and the sale of Russian debt in London appear to have been carried out in accordance with the relevant rules and regulatory systems, and there is no obvious evidence of impropriety in a legal sense.31 However, the ease with which such large-scale transactions occur also sends political messages that undermine the Government’s condemnation of what the Prime Minister has called the “well-established pattern of Russian state aggression”, encouraging President Putin and his associates to conclude that the money supporting that aggression is safe and welcome in London.32

19.We asked Linklaters to appear before the Committee to explain their involvement in the flotation of En+ and to give their assessment of the regulatory framework that enabled the flotation to take place. They refused. We regret their unwillingness to engage with our inquiry and must leave others to judge whether their work at “the forefront of financial, corporate and commercial developments in Russia” has left them so entwined in the corruption of the Kremlin and its supporters that they are no longer able to meet the standards expected of a UK-regulated law firm.33

20.The use of London as a base for the corrupt assets of Kremlin-connected individuals is now clearly linked to a wider Russian strategy and has implications for our national security. Combating it should be a major UK foreign policy priority. The assets stored and laundered in London both directly and indirectly support President Putin’s campaign to subvert the international rules-based system, undermine our allies, and erode the mutually-reinforcing international networks that support UK foreign policy. The size of London’s financial markets and their importance to Russian investors gives the UK considerable leverage over the Kremlin. But turning a blind eye to London’s role in hiding the proceeds of Kremlin-connected corruption risks signalling that the UK is not serious about confronting the full spectrum of President Putin’s offensive measures.

21.We call on the Government to investigate the gaps in the sanctions regime that allowed a company such as En+ to float on the London Stock Exchange, and to work with the G7, whose markets dominate the financial world, and other international partners, to close those gaps as soon as possible.

1 HC Deb, 14 March 2018, col 885 [Commons chamber]

2 These included: an amendment to the Sanctions and Anti-Money Laundering Bill to strengthen powers to impose sanctions in response to the violation of human rights (a so-called “Magnitsky” amendment); new legislative powers to counter hostile state activity, including the power to detain those suspected of hostile state activity at the UK border; increasing checks on private flights, customs and freight; freezing Russian state assets if they are used to threaten the life or property of UK nationals or residents; proposals for new counter-espionage powers; and the suspension of all planned high-level bilateral contacts between the UK and Russia, including revoking the invitation to Sergei Lavrov, Russia’s Foreign Minister, to pay a reciprocal visit to the UK following the Foreign Secretary’s visit to Moscow in April 2017. Ministers or members of the royal family will not attend the World Cup in Russia this summer.

4 Foreign and Commonwealth Office (RSC0010) para 3

5 Transparency International UK (RSC0002) Summary

6 Q10

7 National Crime Agency, Money laundering, last accessed 23 April 2018

8 Q89

9 Q3

10 Q4

15 Garry Kasparov (RSC0011) paras 2.1–2.1.1

21 Deripaska stepped down as President of both EN+ and Rusal in February 2018, but at the time of the IPO retained controlling stakes in both companies (Financial Times, Deripaska to give up direct control of EN+ and Rusal, 19 February 2018).

28 Emile Simpson (RSC0008) para 39

31 See oral evidence taken before the Treasury Select Committee, 25 April 2018, HC (2017–19) 424, Qq122–123

32 HC Deb, 14 March 2018, col 885 [Commons chamber]

33 Linklaters in Russia, last accessed 8 May 2018. The standards expected of UK-regulated law firms are set out in the main in the Legal Services Act 2007, and the Solicitors’ Regulatory Authority Principles, Code of Conduct and Overseas Rules.

Published: 21 May 2018