The so-called "Troika Laundromat" fraud, uncovered after one of the largest banking information leaks ever, highlights the ever-growing importance for those within the regulated sector to implement robust customer due diligence ("CDD") policies which are tailored to the specific money laundering risks posed by their customers.
It also pulls into sharp focus what many say is an overdue need for the UK to increase transparency in relation to the beneficial ownership of companies (both on home soil and in its so-called "tax havens"); but to what extent is this already being addressed by the UK government?
What is the Troika Laundromat?
The Troika Dialog bank in Russia (once Russia's largest private investment bank, now state-owned) is reported to have orchestrated the blending of Russian proceeds of crime with legitimate funds through the use of 70 offshore "shell" companies; thus making it impossible to differentiate between the "clean" and "dirty" money. It is said that 3.5 billion US dollars moved between those companies through myriad fake transactions (1.3 million in total) for non-existent goods, and that the companies' ownership was concealed by the use of "nominees" who apparently signed transactional documentation (some of whom have since been identified as low-paid Armenian workers, such as builders and cleaners). This scheme is said to have been coordinated by staff at Troika bank whilst the transactions took place at Lithuania's Ukio bank. Following circulation amongst the shell companies, often multiple times, the funds were eventually integrated into western banks. It has also been reported that some of the funds received into the Troika Laundromat originated from a huge tax fraud exposed by Sergei Magnitsky, the murdered lawyer who spoke out about Russian state corruption.
What are the alleged UK links to the Troika Laundromat?
Press reports flowing from the uncovering of the Troika Laundromat have alleged that a large group of UK-incorporated LLPs, including law firms, played a part in transactions which resulted in tainted Russian funds moving from the Baltic to Europe. Three shell companies based in the British Virgin Islands ("BVI") have been described as the "cornerstone" of the Troika Laundromat; payments from these companies having allegedly been made to a "formation agent" which created the network of companies within the scheme, thus keeping the entire fraudulent network operating.
Reports have also highlighted links between fifty British private schools and anonymously-owned shell companies incorporated in various so called British "tax havens", companies who were said to either be customers of Ukio bank, or operated by a division of it. The schools have been criticised for not carrying out better checks on the origin of the funds they received in payment of fees, and not flagging up suspicions through the submission of Suspicious Activity Reports. Security Minister Ben Wallace commented: "So the purveyors of luxury goods, the public schools, the sporting institutions, who don't ask many questions if suspicious people come along with cash or other activities: we will come down on them". Whilst such statements may generate headlines, they miss the point that schools are not in fact part of the regulated sector, and therefore they are able to rely on a defence of "adequate consideration" in such circumstances; hence they have no legal obligation to report.
What are the weaknesses in the UK's anti-money laundering regime?
A recent report of the Commons' Treasury Committee has deeply criticised the UK financial system as being particularly vulnerable to money laundering on a massive scale, due to the fragmented approach taken by the various parts of the regulated sector (despite regulations being tougher than ever before). Press reports circulating the Troika Laundromat story that complain of the UK's "dirty money problem" are perhaps to be expected, when one recognises what is arguably a blind spot when it comes to the visibility of the beneficial ownership of companies based in the UK's Crown Dependencies and British Overseas Territories ("OTs").
This chink in the UK's anti-money laundering ("AML") armour has the potential to have a detrimental impact on the effectiveness of regulated persons' customer due diligence capabilities, and therefore on the effectiveness of the UK's AML regime as a whole. It is important to recognise however that there are key differences between the constitutional relationship that the UK has with its Crown Dependencies and its relationship with the OTs, and those differences restrict the UK government's influence in terms of the AML practices that it is able to enforce within those jurisdictions.
In terms of registers capable of assisting regulated persons in carrying out adequate customer due diligence, the UK has set up a publicly available register of beneficial ownership of UK companies (the "People with Significant Control (PSC) register") which is kept by Companies House, but Companies House is not obliged to carry out its own AML checks on the companies which populate that register. There is no equivalent publicly available register of beneficial ownership kept by either the UK's Crown Dependencies (Jersey, Guernsey and the Isle of Man) or the OTs (of which there are fourteen in total, including the BVI and the Cayman Islands). Had there been such a tool available to the UK regulated persons now caught up in the Troika Laundromat scandal, which would have assisted them in carrying out their customer due diligence obligations, it is possible that their role in the fraud could have been prevented.
There is no register, publicly available or otherwise, which contains information about the beneficial owners of UK property (the Land Registry only holds information in relation direct legal owners); this can be seen as a clear impediment to the UK's property sector and estate agents being able to fully execute their customer due diligence obligations.
What changes have the 2017 money laundering regulations brought to the UK's anti-money laundering regime?
The catchily titled "Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017" ("the Regulations") came into force on 26 June 2017, and implement the Fourth Money Laundering Directive of the EU. The Regulations (the first to be enacted in ten years) represent a shift in the UK's AML regime, introducing stricter and more detailed customer due diligence obligations (particularly in relation to "Politically Exposed Persons" of the type identified in the Troika Laundromat case), and stringent safeguards for transacting with customers based in or with links to "High Risk Jurisdictions", which include Russia and Lithuania.
Arguably though the most ground-breaking of the changes brought in by the Regulations is the requirement for both companies and trustees to provide HMRC with specific identifying information in relation to both beneficial ownership and the potential beneficiaries of UK "taxable relevant trusts". This information is currently only available to law enforcement bodies and the UK's Financial Information Unit. However as a result of the Fifth Money Laundering Directive of the EU ("5MLD") (which came into force on 9 July 2018, but which carries a deadline for implementation by all EU members of 10 January 2020), this requirement will expand and members of the public will be able to access the trust data if they can demonstrate a "legitimate interest". While the UK has said it will implement this provision, the detail is as yet unclear, due in part to the protracted uncertainty surrounding the UK's departure from the EU.
The UK's Crown Dependencies and the Financial Services Bill
During the same week that the Troika Laundromat was uncovered, it was announced that a proposed Commons debate in relation to the Financial Services Bill would be postponed. An amendment to the Bill would have required the governments of the Crown Dependencies and the OTs to create public registers of beneficial ownership of companies based in those jurisdictions. The Crown Dependencies vehemently oppose the legislation, describing it as "contrary to the established constitutional relationships that exist between the United Kingdom and each of the Crown Dependencies", saying that "if passed, would produce inoperable legislation", and adding: "We also consider the legislation to be wholly unnecessary in the context of our robust existing approach to the retention and sharing of beneficial ownership information". The UK's power to pass legislation affecting the Crown Dependencies has been a topic of fierce debate in the aftermath of the delay to the Bill.
A recent Commons briefing stated that the UK government intends to use its "best endeavours" to "promote public registers of company beneficial ownership as the global standard. The Government would expect the Crown Dependencies to adopt public registers in line with changes in global standards and they have committed to doing so". The fact that the proposed move has been postponed indefinitely by the UK government is hard to reconcile with this public statement. It remains to be seen when the Bill will be debated; again as with the implementation of the 5MLD, the continued uncertainty surrounding the UK's exit from the EU may well further delay this issue.
The British Overseas Territories, and the Sanctions and Anti-Money Laundering Act 2018
According to Transparency International, more than half of the offshore companies referred to in the "Panama Papers" were set up in the BVI. Such statistics have served to damage the public image of such financial centres, labelling them as easy targets for money launderers. The identification of the BVI companies as participants in the Troika Laundromat has done nothing to improve that image.
The BVI, the Cayman Islands, Gibraltar and Bermuda maintain central registers of beneficial ownership, which are accessible to UK law enforcement and tax authorities (but not to the general public). This is due to change however, as following the introduction on 23 May 2018 of the Sanctions and Anti Money Laundering Act 2018 ("SAMLA") those territories are required to implement public registers of beneficial ownership. In contrast to the Crown Dependencies UK legislation can apply to the OT: a UK government white paper issued in 2012 noted that the UK's power to legislate for the British Overseas Territories is "unlimited".
Section 51 of SAMLA states that "The Secretary of State must, no later than 31 December 2020, prepare a draft Order in Council requiring the government of any British Overseas Territory that has not introduced a publicly accessible register of the beneficial ownership of companies within its jurisdiction to do so". The UK government, through the Foreign and Commonwealth minister Lord Ahmad, said that the SAMLA does not specify the date by which the registers must be operational, interpreting the 2020 date to be the date by which the UK government may begin to issue orders against the OTs who have not implemented public registers by then. The deadline for such registers to be publicly accessible has been set as 2023.
A Foreign Affairs Select Committee has described the delay as damaging to national security: "Those who seek to undermine our security and that of our allies must not be able to use the OTs to launder their funds. We cannot wait until public registers are the global norm". In response, the government stated that the 2023 deadline is "part of the government's call for all countries to make public registers the global norm by 2023. Our approach both respects the will of parliament and delivers this in a fair way for all our OTs".
What can be learned from the "Troika Laundromat"?
Reports such as those triggered by the Troika Laundromat fraud, which is reported to have utilised a global network of entities to launder criminal funds, will naturally place the spotlight on the UK's anti-money laundering regime as well as the UK's position as a global financial hub. When links are said to have been exposed between UK companies and alleged foreign criminal activity, this will always have the potential to cause embarrassment to the UK government, and raise questions about whether the UK's anti-money laundering regime is fit for purpose.
Notwithstanding any protracted delays to the proposed implementation of public registers of beneficial ownership in the UK's "tax havens", the fact that such measures have been tabled indicates that the UK's anti-money laundering regime is set to be bolstered, or at the very least that the UK government considers that such compliance matters need to be addressed further. The provisions of the 5MLD, for example, expand the scope of the regulated sector to include virtual currency exchanges – an area said to be particularly vulnerable to both money laundering risks.
Greater transparency of beneficial ownership would go some way to protecting not only UK regulated persons from regulatory and criminal proceedings, but would also protect the UK financial system as a whole from the criticism that it is being used as a conduit for money laundering of the type reported in the Troika Laundromat. The Troika Laundromat serves as a stark reminder to regulated persons that they must take their customer due diligence obligations seriously, especially when dealing with customers in high risk jurisdictions. It also shines a light on institutions outside the regulated sector (such as the private schools, luxury goods retailers and sporting institutions criticised by Ben Wallace MP): whilst they might not currently be bound by the Regulations, it would surely not be surprising if they were to become the focus of future enhanced AML regulation.
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