How we can help stop Russia undermining European democracy
What we’ve done in the UK over the past month
Over a month since the Russian invasion of Ukraine and we’ve seen the introduction of the Economic Crime (Transparency and Enforcement) Bill which intends to help the National Crime Agency prevent money laundering in the UK and make Unexplained Wealth Orders (UWOs) easier to issue. The legislation includes use of a Register of Overseas Entities was introduced within legislation on 1 March 2022, and applies retrospectively for up to 20 years in England and Wales.
The register is to require anonymous property owners to disclose identities and mean it is harder to hide behind shell companies. For example, a ‘Beneficial owner’ will face restrictions on selling property, where sanctions exist, and the penalty is 5 years in prison. Trusts will also be bought in scope of as asset holders, to ensure shell companies and foundations are also included. A further economic crime bill to include a Kleptocracy Unit, and will look to introduce new powers to seize crypto assets and introduce reforms regarding use of limited partnerships for facilitating money laundering and illegal arms movements.
However welcome these measures are, and long overdue, they are unlikely to be very useful to have a significant impact in Ukraine so long as delays are built in to let those impacted by sanctions have time to dispose of assets. For example, in the EU and US we saw the number of sanctioned individuals far higher than in the UK (on 15 March, since the invasion on 24 February, the EU has sanctioned 424 individuals who have not been sanctioned by the UK), with the UK waiting a month for sanctions to take effect, whilst the EU took immediate action. Moreover, it is questionable how hard hitting these measures will be so long as our monitoring institutions are underfunded, and financial regulations designed to avoid ‘red tape’ post-Brexit.
Financial Transparency in the EU since the financial crisis
It is not new that the EU has been leading the way in terms of financial transparency, regulation and supervision. Financial transparency has been a key focus in the EU for some time, with the Markets in Financial Instruments Directive (MiFID) brought in a year after the financial crash to ensure transparency and oversight of financial instruments, and MiFID II later in 2019, in order to extend regulation to cover other types of assets.
The EU has been increasing international regulatory reforms since the financial crash and improving transparency within the banking sector too, with the introduction of Basel III which begun in 2009 and is still being implemented in 2022 as a way of ensuring minimum leverage ratios and reserves of capital designed to prevent the financial collapse we saw in 2008.
On 31 December 2021, the Brexit transition period came to an end and the effect of EU legislation in the UK also lapsed. The Financial Services Act 2021 (29 April 2021) ‘aimed to cut red tape and maintain UK’s position as centre of excellence’, pointing to lower regulatory standards and supervision in the post-Brexit financial markets.
Money laundering in the UK
The UK is home to £100bn of stolen cash which gets washed every year. There were 810,316 companies registered in the UK last year. We know that often shell companies are created and are a way to obscure the identities of asset owners. For example, at Kemp House City Road, there are 62,259 companies registered according to Oliver Bullough.
Although the UK has strict Anti-Money Laundering laws in place, such as the Proceeds of Crime Act 2002, which means that those found guilty (even of tipping off) are liable to 14 years in prison, we know that there is significant laundering of cash in the capital. Arguably the National Crime Agency (NCA) is under funded, and any new laws which the Government brings in now to combat Russian dirty money in the capital will be ineffective as a result.
Overseas territories
We know that it is harder to trace dirty money when other shell companies are set up in overseas locations. The Cayman Islands is a UK overseas territory, home to Ugland House which is the registered address for 40,000 entities.
By multi-layering, using different companies and obscuring the location behind others, it is easy to avoid tax and hide the identities of owners. Therefore, more should be done in terms of verifying sources of income as a requirement of financial regulations and accounting standards. Moreover, as British Overseas Territories are linked to the crown, and politically linked to the UK, there is no excuse for the UK Government not to clamp down and ensure proper oversight of those companies which operate in the UK and attempt to hide dirty money in our overseas dependencies. In addition to identifying money laundering, given more funding, the NCA would be able to generate more tax revenue by verifying where companies are managed and controlled from, and confirm where they should be paying tax. This could pay for any further investment required from the treasury.
Why is this important for democracy?
There have been claims of Russian interference in the UK and US politics for many years. The Government quashed the Russia Report in 2020, around the same time that Evgeny Lebedev was nominated for a life peerage to the House of Lords, and Lubov Chernukhin made donations to the Conservative Party.
Since 2014, when the Russia invaded Crimea and Donbas, the UK has been turning a blind eye to Russian attacks on Western democracies. Carole Cadwalladr called this the ‘the Great information War’, and points to soviet style tactics of using disinformation to fight it’s opponents during this time where social media, and political commentary on social media, exploded. We know that in the US, the Mueller Report found interference in the 2016 presidential election; and in the UK the Russia report found interference in the 2016 Brexit Referendum.
Arguably the conflicts of interest between our governing party in terms of Russian donations, and a shared interest with Russia in the form of Brexit (destabilisation of Europe from Russian perspective, and a desire to avoidance of increased financial regulation in Europe from the Conservative party) has helped embolden Russia and weaken Europe.
If we want to stand with Ukraine and fight Russia, we need to vote for a governing party which stands for European solidarity, democracy, financial transparency and ensures that we do our bit in terms of cleansing London of Russian dirty money, corrupt politicians, and ensure that our financial regulations are not only on par with the EU’s, but exceeded by using our relationships with crown dependencies to clamp down on dirty money and tax evasion.
Louisa Metcalfe (MSc International Political Economy, LSE) is a Chartered Accountant, and has 13 years’ experience in audit including external audit of funds in the Cayman Islands
