Russian money: too big to sanction?

As the Crimea crisis has developed, there have been calls to freeze Russian and Ukrainian assets in the UK.

Russian money is unusual for two reasons. First, the sheer volume. Secondly, because there have been persistent allegations that a substantial proportion of it is dirty money – gained through organised crime and corruption in a state that has descended into kleptocracy. Russia ranks as number 127 out of 177 in the Corruption Perceptions Index. The Ukraine crisis has already led to the freezing of assets of those associated with the Yanukovich regime in several countries. The public exposure of that regime as being riddled with corruption – think of Yanukovich’s palace – begs the question of why such corrupt money was allowed into the UK in the first place. The same debate could be held on Russian assets. If the allegations are so plentiful, why is the money not kept out by the UK’s anti-money laundering systems?

It is difficult to know the size of corrupt Russian assets laundered through London because by their nature people try to hide them. It is almost certainly hundreds of millions of dollars, probably billions, and possibly tens of billions. There is no adequate source for such information. But a recent article contained two interesting indicators. Last year, there were 2,174 Russian pupils boarding at Britain’s independent schools – bringing the total fees to roughly $100 million per annum, or $500 million over a five-year school career. And in the same year, 5% of prime London property was bought by Russian citizens.

There have been allegations for a decade that the City and professional advisers are complicit in laundering questionable Russian money – at best turning a blind eye and at worst actively trying to assist. A leaked document suggests this might even have been government policy. We have no way of knowing whether that document was a paper exploring many policy options for the UK Government or whether it was presenting the Government’s undeclared policy position. Either way, it raises the question: does the UK’s economic self-interest make Russia too big to sanction?

In this blog the heads of Transparency International in Russia and the UK explore this question.

What can be done?

By Robert Barrington, Executive Director, Transparency International UK

As the Ukrainian freeze has shown, it is relatively easy to order a freeze if you can put together a list of named individuals and there is little political cost. Actually freezing the assets might be prove tricky – if Mr Y is on your list, you need to know what assets Mr Y and his family actually hold, and in the complex world of blind trusts and shell companies, combined with being a very large financial market, assets are easily hidden in the UK.

We should remember that sanctions are different to seizures of corrupt assets. Corrupt assets should never have been here in the first place. Sanctions are a political weapon against an entire country. Asking whether to impose sanctions is asking the wrong question. The right question is how did so much dirty money get into the UK’s system over such a long period?

When the political and military crisis in the Ukraine is over, the UK will need to step back and ask itself some searching questions about how easily dirty money gets laundered through ‘Londongrad’; why so few questions are asked; and the extent to which the City and the UK’s economic policy makers are complicit in supporting corruption in Russia and elsewhere.

There are a range of policy and enforcement options available to deter and punish corrupt individuals and institutions. They all require political will and coordination. Three of these are:

• Targeted and assertive law enforcement – such as launching active Bribery Act investigations of allegedly corrupt Russian companies with UK connections, perhaps using the Treasury’s blockbuster funding provision;
• Asset freezing – this can be based on sanctions or allocating investigative and intelligence resources to undertake due diligence on key individuals whose assets can then be frozen when there is a reasonable suspicion;
• Focussing on intermediaries: using regulatory mechanisms to ensure that law firms, accountants, banks, estate agents and other intermediaries are highly vigilant in detecting corrupt Russian assets and not complicit in hiding them. For example, those 2,174 pupils at boarding schools: has the due diligence been done on the origin of their school fees, and in how many cases should those fees be reported and frozen pending further investigation?

However, the uncomfortable truth is that the Ukrainian freeze has illustrated that our current asset recovery regime is not fit for purpose. It is slow, cumbersome, depends on mythical cooperation from overseas governments, is easily evaded and kicks in long after the money has been laundered, not when it first appears. Moreover, nobody is in charge. The actions outlined above would need to be coordinated. Who by? This is a systemic problem that needs fixing.

For now, the focus is on sanctions and not the longer term issue. The economic reality is that sanctions hurt – not just the country at which they are targeted but the country imposing them. The reason we have an economic relationship with Russia is because people make money from it. In this case, the UK makes quite a lot of money – the estate agents, law firms, accountants, PR companies, bankers, businesses which receive extra investment, trade revenues, schools and universities, auction houses, car dealers, luxury goods sellers, restaurants – it is a very long list. There was a convincing case made in the Financial Times that large banks would be hit hardest if sanctions are properly enforced. While that may cause few tears to be shed outside the City, the fact cannot be ignored that imposing sanctions would undoubtedly have economic consequences for the UK. Arguably, UK society would be better off without the distortive effects of a foreign uber-elite – but that, again, is an argument for another day.

We know what could be done. Perhaps the key question is this: is it worth taking the pain? Would it really make a difference to the attitude of Mr Putin’s government towards corruption?

Would it work?

By Elena Panfilova, Executive Director, Transparency International Russia

“Why does a G8 country so easily welcome the money of our public officials?” is probably one of the most popular questions asked about the UK amongst the Russian civic community and Russian anti-corruption NGOs. For many years this question was asked rhetorically but today – on the wave of the Ukrainian political crisis – we see it becoming one of the burning priorities for wider international discussion. Ironically, there is one rather old and well-forgotten G8 statement on “Fighting High Level Corruption” made in 2006. Maybe it is time to remind both the Russian and the UK governments what they agreed on eight years ago:

“Corruption threatens our shared agenda on global security and stability, open markets and free trade, economic prosperity, and the rule of law. We recognize the link between corruption and weak governance. We underscore our commitment to prosecute acts of corruption and to preventing corrupt holders of public office from gaining access to the fruits of their kleptocratic activities in our financial systems… We have committed to seek, when appropriate and in accordance with national laws, to deny entry and safe haven to public officials found guilty of corruption, enforce rigorously our anti-bribery laws, and establish procedures and controls to conduct enhanced due diligence on accounts of “politically exposed persons.”

So what’s happened about the promised “enhanced due diligence” on accounts of public officials who are so nicely settled with their families on UK soil? What have the authorities done to check all that money paid for tuition and property against declarations of income and assets of foreign – Russian, for example – public officials? Is there any evidence of such attempts? If the answer is “no”, then why have G8 membership in the first place? Why try to look like a “transparency committed” country if it is all only about words and nice statements but not actions. Or is it not?

In the last decade we have seen in so many Western countries a strange – and to a certain extent hypocritical – attitude towards corrupt money from systemically corrupt countries. There is evidence that corrupt laundered money that is invested in the national economy is viewed as some kind of “noble” laundered money. Everyone knows that it is laundered, but since it is not the proceeds from drug, human or arms trafficking, it is OK to accept it.

The bad news for those who share this attitude is that it is not OK. Corrupt money may appear to be more “noble” and slightly “cleaner” than money that stems from other forms of organised crime, but it is still criminal and it still brings to the host country not only the profit of investment, but all the dirt of its origin. And if the host country is too slow to react and too weak in its position, then relatively soon this dirt will take root and will become a national problem. It is not an assumption, it is an axiom.

It is no longer just about Russia or trying to influence the Russian Government or its individual officials. It is about standing up to the UK’s own commitments and about making sure that the immediate profitability of accepting corrupt money does not mutate into institutional and financial losses in the long run.

This blog was originally published by Transparency International UK. You can view that post here.

Carousel image: Creative commons, Flickr/ Wojtek Gurak