The Economic Crime Act – A Starting Point Not an End

New economic crime legislation is welcome, but without bolder systemic reforms it will have little impact on the UK’s dirty money problem.

‘Just get with it. All money is good money, particularly if it helps build our schools and hospitals’. So went the argument from an unnamed UK government minister back in 2005, when questioned by a journalist about the flow of dubious Russian money into the UK.

This view – while not express government policy – largely prevailed in the following 17 years, with successive governments failing to fully understand the implications of turning a blind eye to the origins of wealth flowing into the UK from jurisdictions with systemic corruption problems. What a difference a day makes. The Russian invasion of Ukraine was the ultimate lesson on the foreign policy consequences of domestic inaction.

It is disappointing that it took a crisis of this magnitude to bring political salience to the UK’s dirty money problem. Nevertheless, the volte face from the government has been remarkable. At the end of January 2022 we witnessed the resignation of a UK minister frustrated at the government’s refusal to table an Economic Crime Bill. Just a month later – in the wake of the Ukraine crisis – the government had tabled legislation, fast-tracked it through Parliament, and promised further legal reforms in the summer.

The language surrounding the introduction of the Bill clearly positioned it as a vital part of the UK’s efforts to tackle Putin and his associates, with the home secretary stating that ‘time is up for Putin’s cronies hiding dirty money in the UK’ and the prime minister promising to go faster and harder ‘to tear back the façade that those supporting Putin’s campaign of destruction have been hiding behind for so long’.

All Mouth and No Trousers?

But questions remain as to whether these expedited legislative changes will have an immediate impact either on Putin’s war in Ukraine or the UK’s long-standing issues with dirty money.

Far from supercharging its efforts to tackle economic crime, the government’s promised legislative programme merely rights some long-standing wrongs within the system

The first piece of legislation, the Economic Crime (Transparency and Enforcement) Act 2022, enacted on 15 March, creates a Register of Overseas Entities aimed at ending anonymous property ownership via offshore shell companies. This will take time to implement – making immediate asset flight a real concern – and will be largely ineffective unless coupled with the long-overdue reforms to Companies House, which are scheduled for a future Bill in the summer and detailed in the government’s recent white paper. Furthermore, the measures in the Act which seek to overcome the well-documented challenges of Unexplained Wealth Orders (UWOs), including by capping the potentially deleterious costs orders, do little to overcome the capacity issues in the system.

In sum, while legislative reforms are a welcome step forward, they are unlikely to make substantial progress towards the government’s stated aim of tackling ‘the scourge of economic crime in the UK’. That is not to say, however, that they are without merit; the real value in these changes is the deterrent effect – if properly policed, future generations of criminals and kleptocrats may think twice about sequestering their illicit wealth in the UK property market or using UK companies in money-laundering schemes.

Reform, Fund and Enforce

In short, the legislative programme promised by the government, far from supercharging its efforts to tackle economic crime, merely rights some long-standing wrongs within the system. Reversing the UK from its position as the premier global money-laundering hub will require bolder reforms and more demonstrable leadership.

First, as we have previously argued, major reforms are needed to the system for supervising compliance with AML regulations in the UK, particularly of the so-called ‘enablers’ – law firms, accountants and wealth managers – who have long serviced the needs of wealthy Russian oligarchs and kleptocrats from across the globe without asking too many questions. Likewise, the Financial Conduct Authority’s supervision model, which has hitherto focussed on breaches in the retail banking sector, is ill-placed to respond to the risks of corruption wealth, which are more likely to manifest in the private banking and wealth management spheres. The response to HM Treasury’s review of AML supervision – due in the summer – needs to ensure, whatever the model chosen, that it delivers an effective, risk-based AML supervision system fit for the problem in hand.

Second, as we have frequently stated, legislation is ineffective if nobody is around to enforce it. As noted by the February 2022 Treasury Select Committee (TSC) report on economic crime, much of the issue of lax enforcement of existing economic crime law is rooted in a fragmented and under-resourced law enforcement landscape. While we do not necessarily subscribe to the TSC’s view on the need for a single economic crime agency, there is a clear need to rethink the UK’s economic crime fighting landscape, including a re-visioning of the role of the National Economic Crime Centre within it.

The current national conversation around Russian illicit wealth in the UK should act as a catalyst for greater alignment between UK foreign policy and domestic economic crime responses

However, structural reforms in isolation are not enough. If we are finally to recognise the security threats posed by economic crime, we should fund the response accordingly. It is clear that the £100 million to be raised from the forthcoming Economic Crime Levy is insufficient, and that alternative, sustainable funding solutions are needed; calls for the reinvestment of economic crime fines and enforcement receipts into the system (rather than Treasury coffers) have merit.

Finally, the current national conversation around Russian illicit wealth in the UK should act as a catalyst for greater alignment between UK foreign policy and domestic economic crime responses. If, as pointed to by the 2021 Integrated Review (and, before that, the Intelligence and Security Committee’s Russia Report), illicit finance is increasingly used as a tool of economic statecraft by malign actors to undermine democracies’ economic and security interests, it follows that foreign policy goals and domestic activity in this space must do more than co-exist.

While the Integrated Review did recognise economic crime as a threat to UK security and prosperity, it neither fully recognised the foreign policy implications of the UK’s domestic inaction, nor the need for a foreign policy dimension to the UK’s response to illicit finance – a high proportion of which emanates from overseas criminality. The Ukraine crisis has shifted the context in which the current economic crime reform conversation operates; it is essential that the role of the Foreign, Commonwealth and Development Office in tackling economic crime is re-examined against this new backdrop.

A Marathon, not a Race

In sum, if the hurried legislative package set out by the government is proposed as the primary response to both the current situation and the UK’s wider dirty money problem, it falls remarkably short. De-coupling the UK from the global laundromat will take a much more considered, long-term and ambitious set of reforms, including those set out above. Introducing long-overdue legislation should be seen as the start of the process, not the end.

Article credit: https://rusi.org/explore-our-research/publications/commentary/economic-crime-act-2022-starting-point-not-end