What more can Westminster do to fight financial crime?

Having reclassified fraud as a national security threat, the government’s resolve against financial crime – particularly money-laundering – is hardening. But will the new legislative measures it’s considering go far enough?

The City of London Corporation’s website boasts of the UK’s status as “the world’s most global financial centre”, but what it doesn’t mention is that this country is also a magnet for international financial crime. The problem has grown to such a scale that the government announced last month that it was classifying fraud as a national security threat – a move that UK Finance, the trade body representing the financial services sector, had been calling for since September 2021.

UK Finance’s director, international illicit finance, Nick van Benschoten, explains that the reason for fraud’s reclassification is that it’s “endemic in the UK and often linked to other forms of financial crime, such as money-laundering, corruption and the financing of terrorism”.

Money-laundering is a particular sore point. The National Crime Agency has estimated that this alone costs the UK economy about £100bn a year.

Russia has been the source of much of the dirty money. Graeme Biggar, director-general of the National Crime Agency, indicated the extent of the problem when he told the Treasury select committee in 2021: “We have done some analysis recently on some of the laundromats that have come out of Russia and the former Soviet Union. A disturbing proportion of the money that comes out of them – not much shy of 50% in one case – was laundered through UK corporate structures.”

According to the parliamentary intelligence and security committee, oligarchs were allowed to recycle “illicit finance through the London laundromat” with virtual impunity for many years until Russia’s invasion of Ukraine in 2022 finally prompted the government to sanction individuals with links to the Putin regime and freeze their assets.

Why transparency isn’t enough

In rushing through the Economic Crime (Transparency and Enforcement) Act 2022 last March in response to the war, the government has required “foreign owners of UK properties to reveal their true identities”, but many MPs and legal experts believe that the legislation could and should go considerably further.

A huge proportion of shell companies that are set up to perpetrate fraud and other financial crimes are incorporated overseas, so they won’t fall within the remit of Companies House or the UK courts
Two all-party parliamentary groups (APPGs) – on fair business banking and anti-corruption and responsible tax – published an Economic Crime Manifesto in May 2022. The document argues that the act should be amended so that, as well as creating a register of foreign property owners, it tightens the rules governing shell companies, (which it calls “the money-launderer’s best friend”) and makes significant changes to Companies House.

The government has taken the APPGs’ recommendations on board, so at least some of these are likely to be incorporated in the economic crime and corporate transparency bill, which is set to be enacted this summer. Despite this, Professor Marc Moore, chair in corporate and financial law at University College London, doubts that the proposed changes would have the desired effect.

“Even wholesale reforms of Companies House are unlikely to make a difference,” he argues. “Unfortunately, a huge proportion of shell companies that are set up to perpetrate fraud and other financial crimes are incorporated overseas, so they won’t fall within the remit of Companies House or the UK courts. I’m therefore not completely hopeful, in the absence of cooperation from registrars in those other jurisdictions, for reforms of this nature.”

Helena Wood, who heads the UK economic crime programme at the Royal United Service Institute’s Centre for Financial Crime and Security Studies, is more optimistic about the forthcoming legislation.

“While the UK is not the only net exporter of shell companies, a sizeable number of those listed in the Panama, Paradise and Pandora papers were British. Providing that Companies House is properly resourced to vet who is coming through the front door of our corporate registry, I believe that the bill will have a significant impact on stymying economic crime,” she says.

A step in the right direction?

Wood does agree with Moore that the legislation won’t “entirely eliminate the use of shell companies to conceal illicit finance. There are several tiny islands that have based their economies on this business model, so they aren’t going to stop any time soon. Yet I believe that the UK’s decision to clean up shop will create greater transparency in international finance. In time, that alone will shine more of a spotlight on the shady practices of shell companies operating from far-flung locales.”

Is there a case for simply banning the use of shell companies altogether?

“In an ideal world, legislators would certainly consider such a step,” Moore says. “But the reality is that it’s hard to distinguish legally between the legitimate use of a limited-liability partnership or subsidiary company and a shell company arrangement. Many bona fide businesses set up subsidiaries for perfectly legitimate reasons. To shut down a shell company that’s being used to launder money, for instance, requires determined investigation – and not all jurisdictions have the will and/or resources to do so.”

A £250m solution

Moore’s last point highlights the need for a properly resourced and coordinated enforcement effort. If this is lacking, any number of legislative reforms won’t improve the situation. “It will require a transnational approach,” he says.

Wood agrees, arguing that “a far broader and more ambitious reform of UK economic crime policing” will also be crucial. She adds: “If we really want to combat financial crime, the government will need to establish a single command structure with an annual budget of about £250m.”

And the opportunity cost of failing to do so? Van Benschoten outlines the likely ramifications if the crime-fighting agencies in this sector aren’t given the right legal powers or the resources to wield them effectively.

“Failing to take a robust approach across the whole economic crime landscape will jeopardise the UK’s global reputation as a facilitator of convenient, fast, diverse and competitive markets,” he says. “The markets require proper controls, which engender trust. If trust in our financial system ebbs away, there’s a risk that those markets will clog up. As a result, the UK might lose not only its competitive edge but also its reputation as a safe, transparent economy.”

Article Credit: https://www.raconteur.net/risk-regulation/what-more-can-westminster-do-to-fight-financial-crime/