• In this special contributor piece, longtime fincrime compliance thought leader Dev Odedra tackles a new report by a top government intelligence body on the overarching risks Russia poses to the United Kingdom.
• While not focusing singularly on financial crime, the report by the United Kingdom’s Intelligence and Security Committee (UK ISC) published this week includes a plethora of takeaways for anti-money laundering (AML) professionals.
• The report highlights counter-crime risks unique to the U.K., and other countries, including the pitfalls of when jurisdictions offer citizenship for a price, dubbed “golden visas” or “golden passports.”
• While a country may legitimately have a need for foreign capital, these arrangements can all too often open the door for money launderers and corrupt political powerbrokers to legitimize wealth.
• Part and parcel of this effort are the armies of gatekeepers – including lawyers, accountants, professional services firms and others – who not just help hide this wealth behind offshore shell companies with opaque ownership structures in secrecy jurisdictions, they also throw up legal barriers to uncovering its illicit origins.
• That is exactly what happened when the UK’s top investigative agency tried to unsheathe its Unexplained Wealth Order (UWO) regime. Investigators targeted real estate that appeared not to make sense tied to a wealthy Kazakh family – and lost.
• Further throwing salt on the wound, the courts issued a monetary judgement against the National Crime Agency (NCA), eating up much of the resources meant to go after bad guys, blunting the power of a much-ballyhooed new weapon in the fight against financial crime.

By Dev Odedra
Independent AML expert, director, Minerva Stratagem Consulting

With minor editing and content additions by ACFCS VP of Content, Brian Monroe

A new report by a top government intelligence body tackles the overarching risks Russia poses to the United Kingdom, including the pitfalls of jurisdictions offering citizenship for a price, dubbed “golden visas” or “golden passports,” and the offensive and defensive capacities of gatekeepers as “professional enablers.”  

While not focusing singularly on financial crime, the report by the United Kingdom’s Intelligence and Security Committee (UK ISC) published on Tuesday, July 21, 2020^[1], and simply titled “Russia,” should be required reading for those in risk management and compliance within financial institutions.

Why? The illicit finance elements and methodologies in the report give cause for consideration as they could be applicable to any country and not necessarily exclusive to Russia and UK.

The report found that the UK became a favorable destination for oligarchs and their wealth, particularly due to the appeal of UK’s investor visa scheme along with ‘light touch’ regulation along with “London’s strong capital and housing marketing offering sound investment opportunities.”

Whilst both regulation and visa requirements have been tightened in the UK today, issues concerning regulation, as well as exploitation of visa schemes, also called “golden passports,” are not unique to the UK.

In these arrangements, an individual can gain citizenship by spending or investing a certain amount in a given country.

Historically, some countries, while potentially legitimately seeking foreign capital to fill empty government coffers, have inadvertently drawn risky powerful individuals, who then move questionable funds to the jurisdiction and away from the prying eyes, or international sharing agreements, of the home country.  

Only this month, the Court of Justice of the European Union ordered Romania and Ireland to pay^[1] €3 million and €2 million respectively for failing to transpose in full requirements under the EU Fourth Anti-Money Laundering Directive (4AMLD), something that is more robust than the previous light touch regulation referred to in the report.

Previous research in 2018 by Global Witness and Transparency International found a lack of transparency, insufficient due diligence and weak governance in Europe’s golden visa schemes^[2].

More recent criticism early in 2020 by Global Witness pointed to Cyprus, Malta and Portugal, which it claimed continued to operate vulnerable visa schemes^[3].

The position that the UK found itself in meant it allowed a mechanism through which illicit funds could be laundered, what the report refers to as the London “laundromat.”

Beneficiaries such as “PR firms, charities, political interests, academia and cultural institutions” all contributed to “reputation laundering” as a result.

The report includes a focus on foreign political interference.

While this type of influence-peddling is typically hidden behind opaque shell companies in jurisdictions with weak transparency standards, financial crime compliance professionals should note that a report by Transparency International in 2018^[1] analyzed how corrupt and repressive regimes sought influence and legitimacy through engagement with UK Parliamentarians, including donations.

The Transparency International report focused on three countries; Azerbaijan, Russia and Bahrain.

It found an apparent lack of due diligence undertaken on who UK parliamentarians engaged with and the access/services provided to groups and individuals connected with high-level corruption or human rights abuses abroad.

The ISC report also found that several members of the foreign elite, who are closely linked to the state, were found to have been involved with charitable and/or political organizations in the UK, having donated to political parties.

This subject may be of particular interest for those in risk management and compliance functions in financial institutions.

Whilst politically-exposed person (PEP) assessments look into the Source of Wealth and backgrounds of politically exposed clients, when completing such checks it may be worth considering if there are any activities/relationships which may fall outside of the standard radar range of regular checks.

An issue to consider if you are in a compliance, risk management, know-your-customer (KYC) customer due diligence (CDD), enhanced due diligence (EDD), risk assessment (RA) or related roles is this unfortunate reality: PEPs may have illicit connections that are beyond the usual family members and business associates but as the findings suggest, may still pose risks.

Significant foreign funds into a country often involve enablers on both ends of the transaction, such as lawyers, accountants and estate agents, all which play a part in facilitating finance and investment.

In the case of the UK, the arrival of funds resulted in a growth in the enabler industry, which played a part, wittingly or unwittingly, in the extension of foreign influence in the UK.

The report also highlights the importance of due diligence.

In one particularly egregious example, the report stated that a large private security industry had developed catering for the elite and “on occasion helped launder money through offshore shell companies and fabricate ‘due diligence’ reports, while lawyers provide litigation support.”

The ISC report also notes that the National Crime Agency’s (NCA) efforts have also focused on investigation of UK-based professional enablers in the financial and property sectors in order to challenge perceptions – and address criticisms and gaps in the country’s overall counter-crime framework, many say – that the UK is a haven for illicit funds.

One such new shiny weapon in the UK’s arsenal to help reveal instances of corruption, money laundering and fraud, arriving in recent years with great fanfare, has thus far remained sheathed – blunted by legal challenges and embarrassing, costly defeats.  

Unexplained Wealth Orders (UWO), which came into force in 2018 through the Criminal Finances Act 2017, were called into question recently when the NCA failed in its attempts to impose them on property linked to a wealthy Kazakh family[2].

The report concedes that the extent to which funds can be invested and reinvested calls into question the efficacy of the UWO’s, particularly as the targets of them have long-established and what may now appear to be apparently legitimate financial interests in the UK.

Whilst these new powers under the Criminal Finances Act 2017 theoretically provide the NCA with more tools to tackle financial crime, in practicality the successful execution of them can prove to be challenging, as the recent case demonstrates.

The types of individuals the UWO’s have targeted have the financial means to ensure their lawyers, in this case playing the role of professional enablers, can challenge them.

This is in stark contrast to the resources of the NCA, or lack thereof. Why is this such a high hurdle? Because the accused launderer or corrupt oligarch may have deeper pockets than the NCA.

The financial award against the NCA in the case against the Kazakh family came at a cost of £1.5m, more than a third of the £4.3 million budget of the NCA’s international anti-corruption unit, according to media reports.

This appears to be evidenced in the report as it notes the practical issues around the use of UWO’s, where the NCA explain:

“We are, bluntly, concerned about the impact on our budget, because these are wealthy people with access to the best lawyers and the case that we have had a finding on…has been through every bit of court in the land, and I’ve got a very good legal team based within the National Crime Agency but they had a lot of resources dedicated out.”

Although the report suggested that the Security Minister was optimistic about their use in the future and is quoted as saying that intelligence had suggested individuals had approached financial advisors on how to get funds out of the UK, the NCA remained cautious.

The Director-General of the NCA is quoted in the report, noting that: “…unexplained wealth does have to be unexplained and, unfortunately…Russians have been investing for a long period of time…you can track back and you can see how they will make a case in court that their wealth is not unexplained, it is very clearly explained.”