45.Money laundering is a foreign policy issue, as the 2018 National Security Capability Review made clear.61 It allows those who would do harm to the UK to obscure their sources of financial support, and enables human rights abusers and kleptocrats to hide money that they have stolen from their own people. Measures to combat money laundering should therefore form a central aspect of Government strategy towards hostile regimes, including that of President Putin.
46.In the light of the scale of the UK’s financial services industry and the characteristics of the London property market, there is no single measure that can eliminate all of the so-called dirty money being laundered through London. The Government has taken several steps in recent years to crack down on money laundering in the UK, including introducing Unexplained Wealth Orders and a register of beneficial ownership for UK companies, and establishing the Joint Money Laundering Intelligence Taskforce (JMLIT) and the FCA-based Office for Professional Body Anti-Money Laundering Supervision (OPBAS). The National Security Capability Review also included a commitment to reform the Suspicious Activity Reports system,62 which one witness to this inquiry described as a “major black hole”,63 and the Department for Business, Energy and Industrial Strategy has launched a review into the possible exploitation of Scottish limited partnerships for money-laundering purposes.64
47.Some witnesses to this inquiry said that the regulatory architecture for combating money laundering is fairly robust, and that the right laws and frameworks are by and large already in place.65 However, witnesses also emphasised the need for the Government to dedicate sufficient resources to anti-money laundering (AML) measures, to co-ordinate more effectively, and to demonstrate greater political will in tackling the problem.66
48.This report focuses on the elements of the AML regime with a foreign affairs element and where there is a locus for the involvement of the FCO. The AML regime as a whole will be covered more extensively by the inquiry into Economic Crime launched by the Treasury Select Committee on 29 March 2018.67 Their inquiry will examine the detail of the regulatory landscape in the UK, and will also explore the implementation side of the sanctions regime. We encourage the Government and those with an interest in combating illegal money-laundering to engage closely with that inquiry, and we look forward to its conclusions and recommendations.
49.Since 2016, UK companies and limited liability partnerships have been required to declare, in a public and searchable register, the names of any individuals controlling more than a 25% stake in them. However, this measure does not currently apply to owners of overseas companies operating or purchasing property in the UK. According to Transparency International:
TI-UK has identified 176 properties worth £4.4 billion in the UK that have been bought with suspicious wealth—over a fifth of which is wealth from Russian individuals. The owners of these properties were only brought to light due to open source material, such as data leaks and court documents, and so this is likely to be just the tip of the iceberg.68
50.In 2016 the then-Prime Minister David Cameron announced plans to introduce a register for owners of overseas companies that own or purchase UK property, or are involved in Government contracts.69 The Government initially committed to introducing legislation on this register by April 2018, although its timeline has now slipped.70 Tom Keatinge of RUSI called the delay “regrettable” in evidence to this inquiry.71
51.During the March 2018 debate on the Sanctions and Anti Money Laundering Bill, Economic Secretary to the Treasury John Glen told the House that the Government have “committed to publishing a draft Bill before the summer to introduce the Bill early in the second Session and for the register to be operational in 2021”.72 Asked to explain why the register could not be put in place more quickly, he said:
A 12-month timetable to draft and pass primary and secondary legislation, empower the responsible agencies and commence the obligations is not realistic. The rush to meet such an unrealistic deadline would inevitably lead to loopholes that would be readily exploited by those seeking to evade the new requirements.73
52.We welcome the Government’s commitment to establishing a register of ownership for overseas companies that own or wish to own property in the UK, or are involved in Government contracts. Such a measure will be essential in exposing individuals who purchase UK property through offshore shell companies, disguising their identities and the potentially corrupt sources of their funding.
53.The delay in introducing legislation to establish a register of ownership for overseas companies that own property in the UK is regrettable. The legislation should be put in place as early as possible, ideally enabling the register to be established before the Government’s target date of 2021. We call on the Government to review this timescale, with a view to expediting it or setting out in more detail why the process needs to take so long.
54.Witnesses were clear that lack of resources was a major problem for law enforcement agencies involved in investigating and prosecuting money laundering.74 In a written submission, journalist Oliver Bullough said:
Parliament must properly resource our law enforcement bodies to allow them to enforce the laws Britain already has. Both the National Crime Agency and the City of London Police have testified to the fact they struggle to retain staff in the face of private sector competition. (In evidence to the Home Affairs Committee on the Proceeds of Crime, printed June 29, 2016). If the NCA and City police were resourced properly, they would secure more prosecutions, which would raise morale, help them retain staff, and thus work more efficiently, and hence secure further prosecutions. This is the top priority, without this, all other efforts can be at best a partial success.75
55.Tom Keatinge of RUSI made two additional points regarding the capabilities of law enforcement bodies. First, he noted the complexity of the issues with which they have to grapple:
Fundamentally … we do not really understand the landscape here. We are quite good at what the NCA might call drugs and thugs and cash in the car park—that bit we are not bad at—but on what they call high-end money laundering, with the best will in the world, your average NCA officer is not going to understand the kinds of structures that we used to put together at J. P. Morgan. Simple as that. I have sat in rooms where lawyers and accountants have explained what they do. Law enforcement are very honest; they say, “Can you explain that again? We don’t understand.” So there is that capability point.76
He then referred to the lack of intelligence that the UK has on financial crime, comparing it unfavourably to Australia:
In this country, the data we have to determine financial crime is based on the suspicious activity reports regime, and it is discussed extensively how behind the door that is. We do not have any other information. Take Australia as an example: they record every financial transaction that crosses their border; they record every financial transaction that is more than 10,000 Australian dollars, I think. They have a huge amount of data that they can use to understand where a cash flow is coming from, and so on. For me, that is something that we should be considering.77
56.Some witnesses said that political will has been the main element missing from the Government’s attempts to stamp out money laundering. Journalist Juliette Garside said
I think it comes down to political will. It comes down to these agencies—the SFO, the NCA and HMRC—being given their head. They do not need to take down a lot of big scalps, but they need to do a few very public prosecutions every once in a while. In that sense, it is a question not so much of resource but of permission.78
In the same evidence session, Tom Keatinge noted that
The theme of a number of our comments is that we need the political will to engage with those ideas, to take them forward and to actually deliver on them and to invest in them.79
57.Vladimir Ashurkov of the Anti-Corruption Foundation told the Committee that the Serious Fraud Office (SFO) remained under-staffed and under-resourced, and that he was not receiving responses after bringing cases to the SFO’s attention.80 He told us:
I think there are several reasons why the Serious Fraud Office and other regulators in Britain turn a blind eye towards Russian corrupt money flows. One is that they do not have enough resources: monetary, staffing etc. There is also a perceived need to get evidence from Russia if they are investigating a particular case of corruption, which may not be true. And there is no real political will to go after corrupt money flows. Maybe it will change in the current political situation. They can expect that the billionaires whom they will investigate will hire the best legal help available, and would the SFO want to compete with the best lawyers? So, on balance, I think they decide it is not very economical to pursue such cases.81
Asked whether new legislation or regulations were needed, he said:
Britain has existing legislation—the Bribery Act, the Proceeds of Crime Act and the recently introduced unexplained wealth orders—that, if there was the political will to apply it in a consistent manner, would go a long way to targeting and rooting out corruption.82
58.Tom Keatinge also noted that individuals applying for investor visas should be subject to enhanced due diligence procedures, which would require the Government to share their names with banks. He said:
The government should help the financial sector in this regard by providing the names of such individuals. Concerns about privacy have previously restricted such cooperation from occurring, however the information sharing gateway provided to the Joint Money Laundering Intelligence Taskforce under Section 7 of the Crime and Courts Act offers an ideal mechanism for transferring this information to the banking community.83
59.We repeatedly asked the Foreign Secretary what the FCO and the Government more broadly could do to help stop the flow of corrupt money into the UK. He appeared to suggest, however, that there was no real role for Government in this process. He told us:
There are powers, under the Criminal Finances Act of April last year, to make unexplained wealth orders against people who law enforcement agencies determine have corruptly or illicitly obtained their wealth. We have the National Crime Agency currently working very hard on various lists of names, as you can imagine, of persons of interest to them. I should stress that they are persons of interest to them. We have to be clear about how this country works. This is not a country where we in the Government can say, “Oi! We think this so-and-so deserves to have his or her collar felt.” That is not how it works here.84
Put to him that Government policy was an important element in ensuring that law enforcement agencies had the funding and support to carry out such investigations, he replied, “it is very important for the Committee to understand that it cannot be Government policy to single out individuals and to say that they are right for persecution, or prosecution.”85
60.This was echoed by the Chancellor of the Exchequer in evidence to the Treasury Select Committee. Asked about HMRC’s role in preventing money laundering, he said:
we live in a country that is governed by the rule of law and HMRC does not operate on the basis of pounding down the door because it does not like the look of somebody. It operates on the basis of evidence and the rigorous interpretation of legal rules. That is why we have lawyers in HMRC. Any information that is provided to HMRC will be acted upon but only if there is a legal basis to do so.86
61.The UK is governed by the rule of law, and Ministers are right to assert that they cannot order law enforcement agencies to investigate or prosecute individuals with no basis in evidence. But observing due process cannot be an excuse for inaction or lethargy. There is a clear need for stronger political leadership to show the Government’s commitment to ending the flow of dirty money into the UK. This must be demonstrated by allocating sufficient resources and capacity to the relevant law enforcement agencies, and by ensuring that those running the agencies are able to draw on information from across Government departments. The Government also needs to consider more effective ways to share intelligence between Departments, including between the FCO and AML supervisors such as the FCA and HMRC, and with the banking sector.
62.The role of the Overseas Territories and Crown Dependencies in illegal money-laundering activity has come under increasing scrutiny in recent years, with the publication of the Panama papers data leak in 2015 and the Paradise papers in 2017. These investigations have demonstrated the key role that shell corporations, which can be used to disguise the real ownership of the assets that are transferred through them, play in funnelling dirty money into the UK. These are often registered in the OTs and Crown Dependencies. In a written submission to this inquiry, Transparency International stated that, in 2011,
over 75 per cent of corruption cases involving property investigated by the (then) Metropolitan Police’s Proceeds of Corruption Unit (POCU) involved anonymous companies registered in ‘secrecy jurisdictions’. Of these, 78 per cent of the companies involved were registered in either the UK’s Overseas Territories or Crown Dependencies.87
63.Journalist Juliette Garside, who investigated the Panama papers and Paradise papers for the Guardian, told the Committee that
In Russia, one of the names for a shell company—one of the words people use—is BVI. They just call them BVIs as shorthand, whether they are registered in Saint Kitts or the British Virgin Islands. We have also noticed slightly more sophisticated set-ups recently in the Isle of Man. We can see there that certain corporate service providers have a very large number of Russian clients. Corporate service providers do what Mossack Fonseca used to do: they incorporate a shell company and offer their staff to act as pretend directors and shareholders of those companies so that the real directors and shareholders can be hidden … The truth is that even those intermediaries are often not aware of whose companies they are. Those entities can then open a company in the UK and become its shareholder, and that UK company, because it is registered here, can open a bank account. That is the key. That is how you get the money in.88
64.Tom Keatinge of RUSI’s Centre for Financial Crime and Security Studies outlined the extent of the problem in a written submission, stating:
The continued appearance of UK Overseas Territories at the centre of illicit finance revelations is a matter that the UK government can no longer ignore. The sense from ministerial rhetoric is that there is nothing much Westminster can do to bring the OTs into line with global expectations on transparency. This seems to stem from a combination of a lack of willingness to exert influence over the OTs and a recognition that a number of OTs thrive on the financial business they attract. The result is that the OTs seemingly have a free reign to benefit from their association with the UK without adhering to the expectation and standards increasingly required of those operating within the UK itself.89
65.In 2016, several of the Overseas Territories and Crown Dependencies agreed with the UK Government to establish private registers of beneficial ownership that could be accessed by law enforcement agencies in their respective territories and in the UK.90 The British Virgin Islands were the first to do so, introducing in 2017 a secure, non-public and technologically innovative search platform called BOSS (Beneficial Ownership Secure Search System). BOSS is a central register of all persons who directly or indirectly own 25% or more of companies registered in the BVI or under BVI law, and is accessible by competent authorities in the BVI and the UK. However, companies registered elsewhere that own more than 25% of BVI-registered companies do not have to be included in the database.
66.The Government has been reluctant to consider introducing legislation to compel the OTs and Crown Dependencies to make beneficial ownership registers, such as BOSS, publicly accessible.91 During the Report stage of the Sanctions and Anti-Money Laundering Bill on 1 May, however, the Government accepted a cross-party amendment that requires it to “provide all reasonable assistance” to enable the governments of the OTs to establish a publicly accessible register of the beneficial ownership of companies registered in each government’s jurisdiction. The new clause also requires the UK Government to prepare a draft Order in Council by 31 December 2020, requiring any OTs that have not yet introduced such a register to do so.
67.In our March 2018 Report on the UK’s response to hurricanes in its Overseas Territories, we asked the FCO to be more active in assisting in their economic recovery, and to provide us, by 1 September 2018, with a strategy for widening their economic bases.92 The FCO committed to doing so in its response to that Report.93
68.While the Government should continue to respect the autonomy and constitutional integrity of the Overseas Territories and Crown Dependencies on devolved matters, money laundering is now a matter of national security, and therefore constitutionally under the jurisdiction of the UK. The Overseas Territories and Crown Dependencies are important routes through which dirty money enters the UK. This cannot continue. While we recognise the important innovations that Overseas Territories such as the British Virgin Islands have made in making registers of beneficial ownership available to UK law enforcement, the scale of the problem and the implications for the UK’s security now demand a greater response. We welcome the Government’s commitment, now included in the Sanctions and Anti-Money Laundering Bill, to assist the Overseas Territories in establishing publicly accessible registers of beneficial ownership. The Government should do everything in its power to enable the Overseas Territories to put these registers in place voluntarily, before the end of 2020.
69.The Government should also recognise the potential impact that the creation of publicly accessible beneficial ownership registers could have on the economies of the Overseas Territories, particularly for those continuing to rebuild after the devastation of Hurricane Irma. The UK should share the burden of reconstruction, just as they are sharing the burden of keeping our financial systems clean. We look forward to receiving the Government’s detailed strategy for widening the economic bases of the Overseas Territories, as promised in its response to our March 2018 Report on the UK’s response to hurricanes, by 1 September 2018.
70.In its response to this report, the Government should set out its plans for assisting the governments of the Overseas Territories to establish publicly accessible beneficial ownership registers before 31 December 2020. We also call on the Government to provide the same level of assistance to the Crown Dependencies, and to encourage them to take steps to meet the same standard of transparency.
61 HM Government, National Security Capability Review, p 23
62 HM Government, National Security Capability Review, p 24
64 Department for Business, Energy and Industrial Strategy, Review of limited partnership: call for evidence, 16 January 2018
67 Treasury Select Committee, Economic Crime inquiry terms of reference
69 Registers of beneficial ownership, Briefing Paper no 8259, House of Commons Library, 15 March 2018
84 Oral evidence taken on 21 March 2018, HC (2017–19) 538, Q181
85 Oral evidence taken on 21 March 2018, HC (2017–19) 538, Q214
86 Oral evidence taken before the Treasury Select Committee, 25 April 2018, HC (2017–19) 424, Q179
90 Foreign and Commonwealth Office, Beneficial ownership: UK Overseas Territories and Crown Dependencies, 21 April 2016
92 Foreign Affairs Committee, Fifth Report of Session 2017–19, The UK’s response to hurricanes in its Overseas Territories, HC 722, para 18
93 Foreign Affairs Committee, Ninth Special Report of Session 2017–19, The UK’s response to hurricanes in its Overseas Territories: Government response to the Committee’s 5th Report of Session 2017–19, HC 1052, para 26 (publication imminent)
Published: 21 May 2018