Londongrad and beyond: UK foreign policy and the fight against corruption

The UK’s flawed anti-cor­rup­tion regime has an impact on its glob­al role. A new round of reforms could help strength­en the rule of law at home and abroad.

The United Kingdom’s approach to cor­rup­tion often con­flicts with its for­eign pol­i­cy. Opaque British finan­cial struc­tures lie at the heart of a mon­ey-laun­der­ing scan­dalgath­er­ing pace in Denmark, as well as a grow­ing con­tro­ver­sy over cam­paign financein the UK’s vote to leave the European Union. Although con­cern about these cas­es has risen sharply in recent weeks, it has deep roots: an inabil­i­ty to con­trol the move­ment of dark mon­ey has long ham­pered British state­craft. For years, weak­ness­es in the UK’s anti-cor­rup­tion regime have inhib­it­ed gov­ern­ment efforts to pro­mote democ­ra­cy abroad, dis­tin­guish between state and crim­i­nal actors, and even defend domes­tic pol­i­tics against for­eign interference.

After com­ing under UK sanc­tions in 2011, allies of the Syrian regime alleged­ly accessed the inter­na­tion­al finan­cial sys­tem using British banks and the London prop­er­ty mar­ket. As the UK dis­bursed finan­cial aid in a push to reform Nigeria’s mil­i­tary in 2014, Nigerian lead­ers alleged­ly divert­ed gov­ern­ment rev­enue into shell com­pa­nies in British over­seas ter­ri­to­ries. And, as the UK invoked International Monetary Fund (IMF) oblig­a­tions to con­demn Ukraine’s back­slid­ing on the rule of law in 2016, politi­cians in Kyiv alleged­ly chan­nelled state funds into Scottish Limited Partnerships (SLPs). Each time, mon­ey-laun­der­ing net­works helped shape what ECFR’s Connectivity Wars calls “polit­i­cal con­flicts [fought] through the sys­tem that man­ages the glob­al economy”.

More vis­i­bly, suc­ces­sive British gov­ern­ments have allowed fig­ures linked with klep­to­crat­ic, some­times hos­tile, regimes to access London’s sprawl­ing ecosys­tem of pro­fes­sion­al ser­vices firms. An array of accoun­tan­cy, pub­lic-rela­tions, pri­vate intel­li­gence, and law firms – along with oth­er trust or com­pa­nies ser­vice providers (TCSPs) – appear to have prof­it­ed from this acqui­es­cence, as shown in work by the Financial Times, the New Yorker, and Transparency International. The Solicitors’ Regulation Authority recent­ly con­clud­ed that only 17 of 50 British law firms under review had imple­ment­ed, or were imple­ment­ing, ade­quate anti-mon­ey-laun­der­ing mea­sures. According to the National Crime Agency’s last annu­al assess­ment, its ear­li­er claim that as much as £90 bil­lion in laun­dered mon­ey affects the UK each year had been a “sig­nif­i­cant under­es­ti­mate”. Nonetheless, the UK has begun to reform its anti-cor­rup­tion regime.

The use of London as a base for the cor­rupt assets of Kremlin-con­nect­ed indi­vid­u­als … has impli­ca­tions for our nation­al security

In May, par­lia­ment passed the Sanctions and Anti-Money Laundering Act 2018. This wide-rang­ing leg­is­la­tion com­bines anti-cor­rup­tion mea­sures with mech­a­nisms for address­ing human-rights abus­es and human­i­tar­i­an crises abroad. Crucially, the bill includes a cross-par­ty amend­ment to intro­duce pub­lic reg­is­ters of com­pa­ny ben­e­fi­cial own­er­ship – which list the indi­vid­u­als behind oth­er­wise anony­mous firms – in British over­seas ter­ri­to­ries by the end of the decade.

Other pos­i­tive recent steps include a com­mit­ment in January 2018 to intro­duce pub­lic reg­is­ters of for­eign-owned UK prop­er­ty by 2021; the first enforce­ment of unex­plained wealth orders (requir­ing indi­vid­u­als to prove they acquired their UK assets legal­ly) in March; a declared crack­down on SLPs in April; and a seem­ing refusal to renew the investor visa of a Russian oli­garch short­ly there­after. All this fits with the Anti-Corruption Strategy the UK pub­lished, to lit­tle fan­fare, late last year.

As the visa episode sug­gests, grow­ing anx­i­ety about a hos­tile Russia seems to have has­tened the UK’s anti-cor­rup­tion reforms. Earlier this year, a House of Commons Foreign Affairs Committee report con­clud­ed: “the use of London as a base for the cor­rupt assets of Kremlin-con­nect­ed indi­vid­u­als … has impli­ca­tions for our nation­al secu­ri­ty. Combating it should be a major UK for­eign pol­i­cy pri­or­i­ty.” Similarly, explain­ing her spon­sor­ship of the amend­ment to the May 2018 act, one mem­ber of par­lia­ment cit­ed an esti­mate that £68 bil­lion had moved from Russia to British over­seas ter­ri­to­ries in the past decade.

As Clara Portela dis­cuss­es in a new piece for ECFR, the broad­er act shares much with the Magnitsky laws intro­duced in sev­er­al oth­er Western coun­tries in recent years. These laws are named for Sergei Magnitsky, a lawyer who was killed in cus­tody after uncov­er­ing an inter­na­tion­al fraud scheme that alleged­ly involved the Russian secu­ri­ty ser­vices – and who became, in an absur­di­ty wor­thy of The Master and Margarita, the first dead per­son to go on tri­al in post-com­mu­nist Russia.

Yet it would be a mis­take for the UK to pur­sue anti-cor­rup­tion mea­sures as mere­ly a response to Russia’s behav­iour. As a leak of more than 11 mil­lion doc­u­ments from an off­shore law firm showed in 2016, Russia is just one of many hos­tile states to have alleged­ly moved large sums of mon­ey across bor­ders using opaque British finan­cial struc­tures. By increas­ing finan­cial trans­paren­cy through sys­tems such as pub­lic reg­is­ters, the UK can bol­ster aspects of its for­eign pol­i­cy that rely on con­trol of the finan­cial system.

Given that state-linked cor­rup­tion net­works often depend on nom­i­nal­ly inde­pen­dent cit­i­zens, greater trans­paren­cy would also help address con­cerns about actors who are, as GCHQ’s direc­tor recent­ly said of the Kremlin, “blur­ring the bound­aries between crim­i­nal and state activ­i­ty”. So would more strin­gent over­sight of pro­fes­sion­al ser­vices firms. As the Financial Times report­ed in an inves­ti­ga­tion into one London-based pri­vate intel­li­gence com­pa­ny (employed by a for­mer min­is­ter from Kazakhstan), many such firms have “amassed exper­tise and trade­craft once monop­o­lised by state agen­cies and put it at the ser­vice of tyrants, oli­garchs and any­one else will­ing to pay”.

Growing anx­i­ety about a hos­tile Russia seems to have has­tened the UK’s anti-cor­rup­tion reforms 

Ultimately, the UK’s anti-cor­rup­tion reforms will only suc­ceed in so far as there is the polit­i­cal will to imple­ment and main­tain them. As such, it is wor­ry­ing that the British gov­ern­ment ini­tial­ly opposed the cross-par­ty amend­ment to the May 2018 act and that the dead­lines for intro­duc­ing over­seas and prop­er­ty pub­lic reg­is­ters are so dis­tant. Meanwhile, the omis­sion of crown depen­den­cies from the reg­is­ters leaves the act with unfin­ished business.

Hopefully, rumours that the gov­ern­ment intends to curb the inde­pen­dence of the Serious Fraud Office are unfound­ed. But the pros­e­cu­tion ear­li­er this year of a finan­cial secre­cy whis­tle-blow­er – who exposed inad­e­quate over­sight of com­pa­ny for­ma­tion on the UK main­land (an issue cen­tral to the Danish scan­dal) – sug­gests a lack of seri­ous­ness about reform. As does the fact that, by late last year, Companies House had only six employ­ees to mon­i­tor four mil­lion British firms.

However, the UK has shown that it can lead its allies on anti-cor­rup­tion. Despite prob­lems with their imple­men­ta­tion, the country’s pub­lic reg­is­ters of com­pa­ny ben­e­fi­cial own­er­ship (intro­duced on the UK main­land two years ago) appear to have helped push the EU to adopt sim­i­lar mea­sures as part of its Fifth Anti-Money Laundering Directive. And it is encour­ag­ing that the gov­ern­ment recent­ly announcedplans to boost the Serious Fraud Office’s core fund­ing by 50 percent.

As wit­ness­es to the Foreign Affairs Committee report argued, a lack of fund­ing often pre­vents UK anti-cor­rup­tion units from recruit­ing staff trained to deal with the kind of com­plex finan­cial net­works that run through many mon­ey-laun­der­ing schemes. Establishing, as one wit­ness sug­gest­ed, a more robust sys­tem for mon­i­tor­ing cross-bor­der trans­ac­tions – sim­i­lar to that in Australia – would also require greater fund­ing and exper­tise. So would com­bat­ing an over-reliance on self-report­ing in anti-mon­ey-laun­der­ing mea­sures (TCSPs filed just 77 of the UK’s 400,000 sus­pi­cious activ­i­ty reports in 2016).

Politically, the gov­ern­ment has rea­son to act. British pol­i­tics still lan­guish­es in the shad­ow of the 2007–2008 finan­cial cri­sis, which cre­at­ed – as the chair of parliament’s Treasury Select Committee said last year – “a real ‘them and us’ cul­ture” in the UK. This cul­ture is per­haps most vis­i­ble in the mis­trust of a seem­ing­ly cor­rupt elite that helped dri­ve the country’s vote to leave the EU. Indeed, accord­ing to a YouGov poll tak­en in November 2014, the major­i­ty of UK cit­i­zens sawcor­rup­tion as the most sig­nif­i­cant cause of the finan­cial cri­sis. A more robust anti-cor­rup­tion regime would help address the sense of dis­en­chant­ment that runs through British pub­lic life, and that deep­ens social divi­sions hos­tile states some­times exploit.

In its ongo­ing glob­al review of cor­rup­tion, the IMF argues: “when cheat­ing is reward­ed, and when elites are seen to play by dif­fer­ent rules, trust will give way to cyn­i­cism, and social cohe­sion will frag­ment.” Such frag­men­ta­tion may help explain why, as a new ECFR study finds, European pol­i­cy­mak­ers see for­eign inter­fer­ence in domes­tic pol­i­tics as a grow­ing threat. If the UK is to pre­vent a greater col­lapse in trust, it needs to address the per­cep­tion that impuni­ty is for sale – that, whether for for­eign klep­to­crats or their domes­tic enablers, the rule of law only extends so far up the eco­nom­ic ladder.

Chris Raggett

Londongrad and beyond: UK for­eign pol­i­cy and the fight against corruption

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