21st July 2020
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London’s de-regulated City made it Russia’s laundromat of choice
Headlines covering today’s report by the UK’s Intelligence and Security Committee will be dominated by political rows over whether Russia influenced the outcome of the controversial 2016 Brexit vote.
At first glance, the Parliamentary committee’s report is a little more nuanced on that issue than some would have us believe. It observes that Russia’s intelligence services and state agencies regularly run a concerted, co-ordinated campaign of cyberattacks, disinformation and hacks with the aim of pre-vote influence in multiple countries.
But, equally, the committee’s report observes that the UK’s mostly paper-based voting system held up during the election itself.
The report’s findings are, I believe, not the fudge some claim. Indeed, the committee calls for a more detailed study of Russian’s alleged interference in the Brexit campaign and vote – and laments the fact that, unlike the US after its Presidential election, the UK has still not commissioned such a bespoke piece of research.
Political and ideological rows over the extent of Russia’s interference in Brexit will now intensify. As I write this piece, I can already see that two camps – those who believe the 2016 Brexit referendum was effectively hacked by Russia, and those who believe such claims are nonsense – are busy cherry-picking aspects of the ISC report which suit their largely pre-determined view.
Other commentators are better placed than me to assess that critical debate.
But where the ISC report is definitive – and, indeed, scathing – is on the issue of how the UK either willingly or inadvertently became Europe’s ‘laundromat’ for illicit Russian money long before the Brexit vote.
This merits further attention.
A summary of the ISC report, published on 21 July, states: “Russian influence in the UK is the new normal. Successive Governments have welcomed the oligarchs and their money with open arms, providing them with a means of recycling illicit finance through the London ‘laundromat’, and connections at the highest levels with access to UK companies and political figures.”
In writing that, the committee confirms long-held fears that the UK, and London in particular, has become a ‘cuckoos nest’ (a UK term referring to a drugs gang’s safe house) for enormous flows of illicit finance pouring out of Russia and into the global economy.
The cash involved is often under the direct control of Russia’s many oligarchs who grew enormously wealthy – usually on the back of what used to be state resources, such as oil, gas or media – following the break-up of the former Soviet Union. Or it is the illicit proceeds of Russia’s powerful organised crime gangs. Sometimes it is a combination of both, such are the overlapping interests of twenty-first-century Russia’s politics, business and organised crime – described in the ISC report as ‘symbiotic relationships’.
We have known for many years that tens of billions of dollars of illicit Russian cash has poured into the UK since the late 1990s. And because of the levels of money involved, the UK was quick to turn a blind eye because it made many UK citizens wealthy – particularly those who provided the services through which such illicit finance was integrated (or ‘washed’) into the UK’s legitimate economy.
Indeed, the ISC report asserts that the illicit cash flows “led to a growth industry of ‘enablers’ including lawyers, accountants, and estate agents who are – wittingly or unwittingly – de facto agents of the Russian state”.
The study describes such individuals and organisations as those “who manage and lobby for the Russian elite” – and the “nefarious interests” of the Russian state – in the UK.
For example, the ISC describes how a “large private security industry” has developed in the UK to service the needs of the Russian elite. As part of this, the ISC reports, “British companies protect the oligarchs and their families, seek kompromat (compromising material) on competitors, and on occasion help launder money through offshore shell companies and fabricate ‘due diligence’ reports, while lawyers provide litigation support”.
The report infers quite a list of activities which fuel, and feed off, the movement of illicit finance.
Absence of adequate due diligence by UK bodies meant London became the number one target for this enormous laundering process. The capital’s overheated property market, de-regulated finance centres and reputation for flexible and fast-moving business meant it was relatively easy to launder illicit cash – whether the Russian’s involved were allies or critics of President Putin.
Russia’s oligarchs were, of course, helped down this road by the introduction in 1994 of the UK’s flexible ‘investor visa’ scheme, which provided physical access to the UK and rights of residency.
As the ISC study observes, the UK’s open-door policy even led London to develop a nickname which reflected its status as a soft-touch for illicit Russian finance: ‘Londongrad’.
London became a key laundromat for Russia’s illicit finance (alongside other light-touch centres such as Monaco and Malta).
But for this to have happened, a succession of UK governments must have sat mostly idle while the dark money poured in. Jobs were created, economies were stirred, deals were struck – money was made. So governments from across the UK’s political spectrum repeatedly turned a blind eye to these activities – despite the many warning signs.
“There is an obvious inherent tension between the Government’s prosperity agenda and the need to protect national security,” the ISC study confirms.
Because with Russia’s wealth, came the heightened risk of Russian influence in UK affairs: alleged meddling in UK politics, murders committed by the Russian state in the UK (Litvinenko, the Salisbury poisonings etc.), and more recent allegations that Russia even attempted to steal the UK’s coronavirus vaccine research. But what the UK is now discovering is that it is too late to unpick in its entirety the mess which followed and emerged from illicit finance flows.
“To a certain extent, this cannot be untangled and the priority now must be to mitigate the risk, and ensure that where hostile activity is uncovered, the proper tools exist to tackle it at source and to challenge the impunity of Putin-linked elites,” the ISC report.
So what does the ISC recommend that the UK does in response to Russia’s threat?
Unsurprisingly, it calls for more powerful intelligence tools by which the UK’s agencies – and those of its partners – can better analyse and react to espionage threats posed by Russia. Notably, it calls for an overhaul of the UK’s Official Secrets Act, which the ISC describes as not fit for purpose.
Included within the ISC’s recommendations, however, is a demand for new UK legislation aimed at improved monitoring of ‘the illicit financial dealings of the Russian elite and the ‘enablers’ who support this activity’.
In recent months, the UK has made more extensive use of financial tools such as Unexplained Wealth Orders (UWOs), which legally require wealthy individuals to explain and prove the source of their income and/or wealth in the UK. A failure to disclose where stockpiles of cash or assets come from could now lead to prosecutions in the UK. But many experts believe that the rarely-used UWOs are insufficient in the UK’s fight against illicit finance – particularly as most Russian oligarchs have now been in the UK long enough to have thoroughly laundered and legitimised most of their wealth and assets.
Nonetheless, the ISC report calls for further investment in the UK’s National Crime Agency, designed to assist the police and others in better identifying, targeting, preventing and reclaiming illicit finance.
Reform of the Tier One ‘Investor Visa’ approval process also features among the ISC’s recommendations – meaning the UK should attempt to prevent certain Russian citizens from entering or doing business through the UK.
It remains to be seen whether the UK rolls-out these suggested reforms – and whether they will be useful in ensuring that the UK, and London in particular, is no longer perceived as Russia’s soft-touch laundromat.
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