Understanding money laundering and the enablers

FEATURE

Understanding money laundering and the enablers

By Alastair Logan OBE

Recent events have caused our profession to be accused of being “enablers” to those seeking to launder dirty money. The vast majority of the profession has not had any involvement with money laundering save for implementing processes to prevent them being used for such a purpose.

There have been sustained and high-profile allegations made against lawyers, some of which have been made by Ministers who should know better. Firms have been “named and shamed” in Parliament using the cloak of Parliamentary Privilege. Our Prime Minister is quoted as saying: “The legal profession and everyone involved in assisting those who wish to hide money in London and in assisting corrupt oligarchs have been set on notice that their actions are under scrutiny”. This from the Leader of the Party in Government which is mired with allegations of accepting Russian money and gifts in exchange for influence. 1 Most people do not understand the complexities of offshore tax which has co-existed with the ordinary world for years. What makes the offshore tax havens so attractive is the secrecy that they offer to those who use them. Coupled with absent or inconsistent scrutiny, they have served the rich well. They have become a way for individuals to hide money as well as for banks to derive income and to move cash around to avoid fluctuations in the currency rates.

All this started to change when the Panama Papers 2 became available in 2016. The Panama Papers are 11.5 million leaked documents that detail financial and lawyer–client information for more than 214,488 offshore entities. The whistle-blower who leaked the documents to German journalist Bastian Obermayer, from the newspaper Süddeutsche Zeitung, remains anonymous. Journalists from 107 media organizations in 80 countries analysed documents detailing the operations of the law firm. After more than a year of analysis, the first news stories were published on April 3, 2016, along with 150 of the documents themselves. The project represents an important milestone in the use of data journalism software tools and mobile collaboration. The documents, some dating back to the 1970s, were created by, and taken from, a Panamanian law firm and corporate service provider called Mossack Fonseca. The documents contain personal financial information about wealthy individuals and public officials that had previously been kept private. While offshore business entities are legal, reporters found that some of the Mossack Fonseca shell corporations were used for illegal purposes, including fraud, tax evasion, and evading international sanctions. The unprecedented release of these documents will do little to help Panama with its decadeslong trouble with money laundering. Since the days of Noriega’s dictatorship, Panama has worked to enact legislation against money-laundering but have done little to enforce it. According to a 2014 report from the International Monetary Fund (IMF), “authorities [had] not conducted any study or assessment of the risks of money laundering or terrorist financing associated with drug trafficking and other related crimes”. The Panama Papers show how Mossack Fonseca handled the assets of, inter alia, many heads of state who are accused of laundering money, evading tax, and avoiding sanctions.

A second mass of 13.4 million leaked documents occurred in 2017 relating to a Bermudan law firm called Appleby, an international trust and corporate services company operating worldwide, and 19 tax havens' company registries. These are now known as the Paradise Papers. 3 These became subject to a special investigation by The Guardian and 95 media partners worldwide. The files reveal the offshore financial affairs of some of the world’s biggest multinational companies and richest individuals and exposed to scrutiny the myriad ways in which tax can be avoided using artificial structures. Appleby was found wanting in 12 compliance reviews over a decade in the Isle of Man, Cayman Islands, British Virgin Islands and Bermuda. A Bermuda Monetary Authority review found that “oversight weaknesses were repeated in high-risk findings in both the 2013 and 2014 reports". At around the same time the firm was part of a consortium lobbying against reform of tax havens. The Paradise Papers reveal the arcane schemes used by the world’s wealthiest individuals and corporations. Heads of state, technology giants and government officials (and even our Monarch) are among those whose interests in tax havens have been brought into the cold light of day. Appleby commenced legal proceedings in the UK against The Guardian newspaper and the BBC but settled those proceedings on terms that permitted the defendants to continue with their investigative journalism.

Not everyone named in the leaks was using offshore structures to avoid tax or to launder money. Going “offshore” to avoid tax is not against the law but it is increasingly controversial. The World Economic Forum stated in Davos in 2018 that global cooperation is needed to reform the international corporation tax system in the aftermath of the Paradise Papers. Winnie Byanyima, the executive director of Oxfam International, said international tax avoidance was an affront to human rights. “It’s about people who don’t have access to the services they need to lift themselves out of poverty because of tax avoidance,” she said. She called for a shift towards public transparency around corporate tax affairs as part of the solution and dismissed the suggestion that corporations were entitled to keep their tax affairs private. The Nobel prize-winning economist Joseph Stiglitz agreed with the suggestion that the OECD was unable to represent developing nations in tax discussions. “The problem is it’s trying to fix a broken system by (using) the guys who are making a profit out of the broken system,” he said. He said the Panama Papers and Paradise Papers investigations had exposed the problem of people hiding assets illicitly. “But there’s a problem of a global tax system that allows people legally to avoid paying taxes and leads to a global race to the bottom [in corporate tax policy]. 4

Rachel Owens, Head of EU advocacy for Global Witness said: “Anonymous companies and trusts are getaway cars that enable money laundering, corruption, terrorism, tax evasion and human trafficking – with devastating impacts for people across and beyond Europe. The best way to tackle this problem is to shine the light of transparency and reveal those behind these secret structures. Member States of the EU in considering the anti-money laundering rules must agree to publicly reveal the true owners of all EU companies and trusts. They have spent the last year blocking proposed changes that would tackle these problems: by failing to act they are complicit in this corrupt system.”

Many of those identified as using secret trusts to conceal money and the possession of it are part of what has been called “the Russian Kleptocracy”. 17 UK high street banks processed nearly $714 million from a vast money-laundering operation run by Russian criminals with links to the Russian government and the KGB. Among those are HSBC, the Royal Bank of Scotland, Lloyds, Barclays and Coutts. Between 2010 and 2014 some $20 billion appears to have been moved out of Russia but the true figure could be $80 billion. It has become known as the “Global Laundromat”. A group of approximately 500 Russians including oligarchs, Moscow bankers and figures working for or connected to the FSB were involved. British registered companies played a prominent role in this extensive moneylaundering network. The real owners of most of the firms used in the scheme remain secret because of the anonymity provided by offshore systems and laws. The details of the “Global Laundromat” were obtained by the Organised Crime and Corruption Reporting Project (OCCRP) and the Noveya Gazeta from anonymous sources. The details include 70,000 banking instructions including 1,920 that went through UK banks. The conspiracy involved billions of dollars being sent from Russia via accounts in Latvia and Moldova through banks notorious for their exposure to money-laundering scams. The trail led investigators to 96 countries and to a network of anonymously owned firms most of them registered at Companies House in London but when the light of day was shone on these companies 21 of the core companies were immediately dissolved. 5 Inevitably the dissolved companies were replaced by others leaving investigators playing “whack a mole”. The Guardian challenged all the banks on the authenticity of the data. None of them challenged the authenticity but all insisted that they had strict anti-money-laundering policies.

In the Magnitsky case, Prevezon Holdings Ltd, a Russian investment company that was used to launder the proceeds of the tax fraud identified by Sergei Magnitsky, a tax lawyer employed by Hermitage Capital, to investigate fraud using Hermitage’s companies in Russia. Prevezon Holdings Ltd was represented by Natalia Veselnitskaya, a Kremlin-linked Russian attorney who subsequently became linked to the Mueller investigation into Russian interference with the US election. Investigations by the US government found that part of the $230m stolen was laundered by a Russian criminal network into upscale New York condominiums through a network of shell companies many of which were formed in British Overseas Territories. The holding in Prevezon, a Cypriot-registered company, was traced to Denys Katsyv, the head of a criminal enterprise very closely linked with the Kremlin. According to US prosecutors, the crime began in 2007, when Russian mafia figures stole assets from companies held by Hermitage Capital Management.

The group re-registered the companies under their own names and filed sham lawsuits against themselves. Then, claiming fake losses, the companies lobbied corrupt government officials for tax refunds to the tune of $230 million. Just days before the civil case against Prevezon taken by the US government was set for trial in May 2017, Prevezon settled with the US Government for $5.9 million and did not acknowledge wrongdoing. Corporate filings to New York state regulators show that several of the Prevezon companies allegedly used for money laundering were registered to a Russian accountant’s offices. Sergei Magnitsky, who went to the Russian Authorities with the evidence of the fraud, paid the ultimate price when he was murdered in a Russian prison, after a lengthy period of denial of medical attention, aged 37 in 2009. Subsequently after his death the Russian State put him on trial for fraud in 2013. Lawyers were court appointed to defend him and denied permission to decline the appointment. He was convicted, as was William Browder who has managed singlehandedly to promote the Magnitsky legislation for sanctioning those who have committed grave breaches of human rights. Browder was sentenced to 9 years in prison in his absence. The judge said that Magnitsky would not have to serve the 9-year jail sentence as he was already dead. 6

The goal of any money laundering operation is to disguise where the money from shady or criminal activities actually came from, and make it appear to have been legitimately acquired. Rather than deposit illicit funds into a bank account, where it can be tracked, criminals often buy high-end property and cash out after selling it or borrow money from a bank against the value of the real estate. Manafort, Donald Trump’s former campaign chair, was convicted of bank fraud for a similar scheme. 7 Enquiries have established a money trail that snakes from Russia to the Baltic states and from there to Europe and America. The Global Laundromat scheme was an ingenious way of allowing the powerful in Russia and Kremlin insiders to shift cash abroad.

According to a study by Deutsche Bank, £138 billion has flowed into the UK in recent years and a considerable amount of that money came from Russia. As a former Moscow banker, now living in exile, said “Money-laundering is the biggest business in Russia. You steal from the budget you’ve got this dirty money. You have to do something with it.” 8 By transferring the money from Russian companies to banks in Moldova and Latvia, and latterly Estonia, the money had been “cleaned” and was now inside the EU both properly and legally. It was now possible to transfer it anywhere. Most of the money has vanished into the “twilight world of offshore companies” mingling fake transactions with real ones. The laundromat ran from 2010 until 2014 and was one of the most successful money-laundering frauds ever undertaken.

Nobody in Britain noticed, certainly not the UK banks with their “sophisticated” and “robust” anti-money laundering processes. All the U.K.’s major high street banks including HSBC, Lloyds, NatWest and Royal Bank of Scotland allowed more than $738 million to pass through their accounts. HSBC via its UK and foreign branches processed the most namely $545.3 million. RBS, which is still owned by UK taxpayers, processed $113.1 million. Six companies identified by Moldovan police as vehicles for the laundromat money transferred $110.5 million to a firm managed in the Isle of Man called RF Procurement Ltd whose ownership remains unclear. An Isle of Man company offered financial services to corporate and private clients around the world and acts as a registered agent for RF Procurement Ltd and therefore should know who its true owner is. The $738 million initially flowed through 21 companies most of them set up and registered in the United Kingdom with addresses in London, Birmingham, Edinburgh, Glasgow and North Yorkshire. Their owners or ultimate beneficiaries were invisible, and all had nominee directors. As enquiries proceeded and more information came to light many of these companies were quietly liquidated. 9

Many UK retailers are caught up in the scheme. Some of the money linked to the laundromat went on luxury items purchased in the UK. Bogus invoices would be sent to the UK banks. The trail also leads to real estate in London identifying companies registered in the UK and in the British Virgin Islands. Accountants have been identified providing accountancy services to companies involved in the Laundromat scheme. Companies trying to export to Russia were caught in a sophisticated Russian scam which involved paying brokers for the necessary authorities and typically making payments of 30 to 40% of the value of any shipment. The logistics chain was complex and mostly involved taking the goods to Baltic states before they were then transferred to Russia. A Russian Parliamentary committee said that the scams had cost the Russian state $40 billion. In many cases, once the goods had been transferred to Russia, the UK companies that were the vehicles used to provide legitimacy were liquidated. No duty was paid, and often Russian tax inspectors took the UK companies to court largely without any effect because the owners could never be traced. In the meantime, new UK firms were registered, and the merry-go-round continued. 10

Claims have been made by Transparency International that some £4.4 billion worth of UK property may have been purchased by persons connected with the Laundromat. They have identified 176 properties. In a report released in March 2018, Transparency International stated “London has routinely been the choice destination for Russians with suspicious wealth to move to and they have had little trouble in doing so taking advantage of lax regulation and offshore secrecy.” The NGO claimed that Russian investment had grown from just 2 to 11% of market share in Islington, Clapham and Pimlico. Although there may be no evidence of the Russians continuing to use similar schemes to invest in the London property market, Knight Frank believe that there is a new generation of wealth in Russia, persons who have been commercially successful, who will be wishing to invest in London property.

The government introduced new measures in the wake of the Skripal poisoning and said it was reviewing the visas of over 700 Russian millionaires intending, so it claimed, to make them prove that their wealth was not built on “dirty” money. The government appeared to accept the allegation of Transparency International that the UK is a “top destination” for money-laundering with the level of illicit money flowing through the UK in excess of £90 billion per annum. In addition to some tightening of the rules around money-laundering, the government introduced a new weapon to combat dirty money known as the Unexplained Wealth Order (UWO). 11 None have been obtained since the end of 2019. There have been high-profile successes and failures. Options for reform of the regime are being explored, including capping the cost for law enforcement of applying for a UWO. 12 Belatedly, and only after the Russian Invasion of Ukraine started on 24 February 2022, the Government rushed through the Economic Crime Act 2022 which received Royal Assent on 15 March 2022 which will improve the transparency of property ownership in the UK and provides a Register for overseas entities.

Bill Browder, who has been running a constant campaign against those responsible for Magnitsky’s death and the Laundromat, prepared a 37-page dossier which was handed to the UK National Crime Agency. Jon Benton, the former head of the NCA’s International Corruption Unit, has told the Daily Telegraph that despite the dossier claiming that $30 million of illicit funds had been laundered through UK banks via Lithuanian accounts, the NCA made a decision not to investigate the allegations because of “instructions from his superiors on two different occasions” to close the investigation. Media speculation includes the suggestion that there was political direction from the Foreign Office. 13

Browder contends that the Laundromat could not have operated in the UK without “enablers”. He contends that Prevezon, in common with many other participants in the Scheme, spent vast amounts of money on Westerners to help them launder the money. Unlike the US Global Magnitsky Act (“the Act”), the UK does not have the ability to impose sanctions on intermediaries which are defined in that Act as someone who “has materially assisted, sponsored or provided financial, material, or technological support for, or goods or services in support of” either human rights abuses or various acts of corruption. This would cover those who act as creators, managers and nominees in the shell company facilitation as well as lawyers, accountants, financiers and the providers of other services. Browder says British law, in theory, does the same thing, but he has no faith in its ability to catch those involved in money laundering or to dissuade money-laundering. So far as the EU is concerned bureaucracy has been resistant to the implementation of a Magnitsky Act and the EU Parliament’s repeated requests to implement such an act had always been rejected until 2020 when the legislation was passed. In Estonia government investigations prompted by the OCCRP 14 investigations and local media persistence have revealed that close to $230 billion dollars of Russian money went through just one branch of Danske Bank in Estonia before travelling to Europe and other parts of the world. There has been no comparative investigation in relation to the funds that passed and may be are still passing through UK banks despite the Criminal Finances Act 2017 and the Proceeds of Crime Act 2002.

Browder said: “When it comes to fighting money laundering, you have a lot of good laws in place. And you have truly incapable prosecutors and police forces, who are unable to understand, identify and prosecute money-laundering. At the moment, we have absolutely just shameful lack of enforcement in countries like Britain”. 15 He might have added that the UK government and the UK regulators have been singularly slow in realising the problem, identifying the issues and have showed a singular lack of enthusiasm to investigate them or challenge them.

The World Economic Forum 16 have identified enablers as:

■ Beneficial owners of the shell companies created in complex circumstances designed to frustrate attempts to identify the real owners;

■ The professionals whose skills create the shell companies and the complexity of companies in ownership which is the essence of concealment;

■ The professionals who provide advice to the moneylaunderers designed to make their transactions tamperproof;

■ The professionals who identify the assets into which the dirty money is converted;

■ The professionals who provide legal advice;

■ The professionals who act as a conduit for the dirty money; service providers, such as: (a) credit institutions (b) financial institutions (c) auditors, external accountants and tax advisers (d) lawyers (e) notaries (f) trust and company service providers

The World Economic Forum also warns that as anti-money laundering regimes become tighter and scrutiny greater, the money launderers will look for less stringent regimes and enablers who can be corrupted to assist them with their laundering. Attempts by the UK government to require offshore British Dependencies to provide information concerning ownership or shell companies have been met with a rebuff. After all, most of the income of those states is founded on the enablers’ provision of such services and once the protection of secrecy is lost the income will reduce or evaporate because they are no longer of any use to the money launderers. ■

Alastair Logan OBE

Alastair Logan OBE

1. Law Gazette 4 March 2022

2. https://www.icij.org/investigations/panama-papers/

3. https://www.icij.org/investigations/paradise-papers/

4. https://www.theguardian.com/business/2018/jan/25/ paradise-papers-davos-panel-calls-for-global-corporate-taxreform

5. https://www.theguardian.com/world/2017/mar/20/britishbanks-handled-vast-sums-of-laundered-russian-money

6. https://www.theguardian.com/world/2013/jul/11/sergeimagnitsky-russia-trial-verdict-tax-fraud

7. https://en.wikipedia.org/wiki/Trials_of_Paul_ Manafort#:~:text=release%20their%20names.- ,Verdict,on%20the%20remaining%2010%20charges

8. https://www.theguardian.com/world/2017/mar/20/how-dirtymoney-from-russia-flooded-into-the-uk-and-where-it-went

9. https://www.theguardian.com/world/2017/mar/20/how-dirtymoney-from-russia-flooded-into-the-uk-and -where-it-went

10. https://www.independent.co.uk/news/business/news/uk- banks-russia-money-laundering-hsbc-barclays-coutts--65- billion-rbs-royal-bank-of-scotland-queen-a7640861.html

11. UWOs were introduced by sections 1–2 of the Criminal Finances Act 2017 and are governed by sections 362A–362T of Part 8 of the Proceeds of Crime Act 2002

12. https://commonslibrary.parliament.uk/research-briefings/ cbp-9098/#:~:text=None%20have%20been%20 obtained%20since,of%20applying%20for%20a%20UWO

13. https://www.whatdotheyknow.com/request/620322/ response/1484800/attach/3/FOI%201137%2019%20 response.pdf?cookie_passthrough=1

14. Organised Crime and Corruption Reporting Project: https://www.occrp.org/en

15. https://www.the-american-interest.com/2018/11/05/goingafter-the-enablers/

16. http://reports.weforum.org/organized-crime-enablers- 2012/#chapter-enablers-of-money-laundering