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UK anti-corruption drive rests on offshore enablers

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"Indeed tax evasion and money launderi..."

Dan Marsh

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Jack Barton

Jack Barton

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Anti-corruption campaigners in the UK lauded a recent government move to impose transparency requirements on the financial centers of its overseas territories. But London faces a battle to compel governments and financial professionals to break a system on which they’ve thrived.

On May 1, the British government approved legislation to compel its overseas territories to adopt tougher business registration standards under new rules intended to end the secrecy and anonymity of offshore finance.

Observers told WikiTribune that while the legislation doesn’t close all of the gaps allowing criminals to hide ill-gotten wealth, it’s an important step in raising transparency standards and provides a powerful new tool for exposing global corruption.

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How to hide a billion dollars

During the late 1990s, specialist Italian anti-mafia investigators started tracking three Ukrainian businessmen involved in the oil industry. The police suspected the men were leaders of an organized crime syndicate that was expanding its drug trafficking, money laundering and violence into Western Europe.

The investigators gathered evidence of the group’s alleged criminal activities, but eventually wound up the hunt, unable to prove any criminal activity occurred in Italy.

One of the three men, Gennady Trukhanov, is now mayor of Odessa, Ukraine’s third-largest city. Another, Nikolay Fomichev, lives in Tel Aviv according to companies registered in his name. The third, Alexander Angert, has settled in London.

According to a joint investigation between the BBC and the Organized Crime and Corruption Reporting Project, all three used British overseas territories to secretly funnel the profits of their crimes.

In 1995, Angert asked his brother-in-law, Alexander Popinkev, a London-based business consultant, to help him look after his accounts.

Popinkev retained a law firm called Appleby, and established a company with no named owner, in the British Virgin Islands (BVI).

In 2017, Appleby suffered a data breach that became known as the Paradise Papers, revealing a trove of information about its wealthy clients and their use of offshore networks.

Over the course of 22 years, the company, and several others Popinkev established, had bought properties in London worth tens of millions of pounds each.

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According to anti-corruption group Global Witness, these properties were among 85,000 in Britain that are owned by entities registered in UK offshore territories, many of which are anonymous.

The less rigorous reporting and transparency standards that operate in many of these offshore centers are often the target of anti-corruption campaigners, who argue they’re set up to allow criminals to hide illicitly obtained wealth.

Research group Global Financial Integrity estimates that in 2013, $1.1 trillion was corruptly siphoned out of developing countries through such offshore networks.

Offshore secrecy in the spotlight

The Paradise Papers and earlier Panama Papers leaks and surrounding media coverage increased scrutiny on the offshore world. In March, the poisoning of former double agent Sergei Skripal and his daughter Yulia in an English city was linked by Western governments to a “pattern” of destabilizing and aggressive behavior by the Russian government, and the use of this system by President Vladimir Putin’s closest allies came under scrutiny.

The role of British assets, and London property in particular, as the favored vehicle for Russian oligarchs to store their wealth has been well documented and the UK government faced pressure to fulfill its commitments to punish Putin’s allies and prevent its territory being used to facilitate global crime.

On May 1, the British government approved an amendment to the Sanctions and Anti-Money Laundering Bill, requiring regulators in Britain’s overseas territories to create a register of “beneficial ownership” for all companies. The amendment extends legislation that had scheduled the launch of such a registry for the UK by 2021, and contains similar requirements to the EU’s Fifth Anti-Money Laundering Directive, approved by the European Parliament in April.

Advocates say these registers of beneficial ownership will help to reveal the source of wealth, and therefore prevent illegally obtained money, or the riches of people on sanctions lists, being funneled into assets in favored destinations, such as London.

“What’s crucial about the UK’s registry – and soon those of its overseas territories – is that it has to be public, which means civil society groups, journalists and citizens will be able to monitor and investigate the information in the registries, including any concerns that may arise from an absence of expected information,” Christine Clough of Global Financial Integrity told WikiTribune.

Global hunt for corruption

While British territories such as the BVI and Cayman Islands are among the most popular venues for setting up companies, known as single-purpose vehicles and used specifically to invest wealth elsewhere, Britain’s overseas territories are not alone. Panama has a reputation for secrecy due to some of the revelations uncovered in the Panama Papers. But other jurisdictions, such as the U.S. state of Delaware and St. Vincent and the Grenadines, are also popular due to the ease with which companies can be established.

While crime and corruption’s “worst offenders” might respond to the new registry requirements by moving their money to a less rigorous jurisdiction, the transparency of the beneficial owners register means that this in itself will raise a red flag to potential business partners, said Clough.

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Ben Cowdock, a researcher at anti-corruption NGO Transparency International, said while the new registry requirements do not close all of the gaps in the system, they raise standards overall.

“I like to look at it like a net closing in on corrupt individuals,” said Cowdock. “People that move to other jurisdictions are making it even more obvious they’re trying to hide something.”

There are so many companies registered in British territories, said Cowdock, that it will be obvious if a proportion of them choose to redomicile elsewhere.

“As the net closes, and the jurisdictions offering secrecy become more and more stark, the risks that those companies registered there pose to people looking to do business with them, are even higher,” said Cowdock. “People will be less and less willing to do business with companies registered in those jurisdictions.”

Blue sea in the caribbean, from ground level, with isalnds in the distance
Sunny days in financial havens like Tortola in the British Virgin Islands may be turning cloudy for criminal operations. Photo by Garrett via Flickr


Relying on professional enablers to break the system

Various territories have encouraged the development of their financial industries and fostered reputations as convenient and cost-effective places to do business.

According to the government of the BVI’s own statistics, legal services, accounting, insurance and other areas of business administration provided a combined 44 percent of the territory’s GDP in 2014.

Part of this industry is a profession of company registration agents; people who establish the shell companies or single-purpose vehicles used to invest money elsewhere, either registering them in the name of their own company or anonymously.

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These registration agents will be required to come in line with the new registration requirements, but the registers themselves will be dependent on the agents complying, and their being compelled to do so by their governments, some of whom have expressed hostility toward the UK’s demands.

“Enforcement is always going to be an issue with this sort of thing,” said Cowdock. “These company registration agents bear the responsibility to collect this information, so if they’re not doing their jobs this whole thing gets undermined – that’s a really important area the overseas territories need to focus on as well.”

However, public access to the registers will make it easier for journalists and campaigners to put pressure on the professional enablers if the reporting requirements aren’t met.

“There’s going to be a lot more scrutiny on the professionals in the overseas territories now to ensure that the regulations are being upheld. I think it’s become increasingly clear that public registers are the global norm now,” Cowdock said, pointing out that the UK and the EU are both in the process of ensuring public registers are required for a large swath of the world’s financial centers.

Other financial centers, including the UK’s “crown dependencies,” such as Jersey and the Isle of Man, on whom London cannot impose legislation, will be faced with ever-increasing pressure to stay up-to-date with these trends to maintain their reputations as responsible regulators, said Cowdock.

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Jack Barton is a staff journalist at WikiTribune where he writes about international law, human rights and finance, whilst covering daily news. He was previously a senior reporter at Law Business Research and has experience covering law and international development, with credits in the Sunday Times, the New Indian Express, and New Statesman online among others. He has an LLM in Human Rights and worked on a UN-funded research project, looking at peace processes.

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  1. Other

    I think it can be useful to look at the history of hiding wealth and avoiding taxes.

    All of this is very far from new!

    Firstly, concealing wealth and avoiding specific taxes is not always illegal, or immoral.

    For example, hiding something of value from hostile invaders, such as the ancient Romans or the Nazis. Avoiding double-taxation or punitive taxes that only exist to generate some easy money for a government.

    Of course, some of these activities are illegal and blatantly immoral, e.g. completely avoiding tax, hiding bribes, etc.

    But, British tax havens, and secrecy jurisdictions only exist because the UK government intentionally allows this.

    And, they allow it along with money laundering to some extent because they would sooner have that value sitting in British banks, than in some other country’s banks. That means its all British money that is likely to be spent and invested within the British economy, and eventually taxed in some way.

    1. Rewrite

      Indeed tax evasion and money laundering are not new. Nor is the complicity of governments in the facilitation of money laundering. You are right about governments preferring to have the money in “their” banks which is why the British welcome, for example, the Russian oligarchs.

      But if that money was stolen, as the proceeds of oligarchs bank accounts are, is the British government any less complicit in the suffering caused by the impoverishment of Russians than they are when they support, subsidised and encourage British companies to sell deadly arms to Saudi Arabia to kill people in Yemen?

  2. Rewrite

    It is not only illegal activity on which British Overseas Territories thrive but legal “laundering” too. With the complicity of successive British governments both illegal and legal financial activity helps to deprive not only the British Exchequer but most countries of billions in tax revenues. The British government is belatedly requiring more transparency to curb illegal activity but is doing nothing to stop multinational corporation avoiding tax, quite legally, by booking transactions through these tax bolt holes.

    “Transfer pricing” is where, for example, a British company has, say, a refrigerator made in China for sale in the UK. The fridge first “sold” to a company in the British Virgin Islands and the company books a profit that is subject to little or no tax. The fudge is then sold by the BVI company into the UK where the holding company books little or no profit so that it is not subject to British taxation.

    A glance at the annual reports of any international trading company will show the subsidiaries registered in British tax havens. Action Aid has campaigned to curb these practices that have been unchallenged for years.


    What Actin Aid does not draw attention to is the lobbying power of companies that are close to government (fund political parties) that are the most rampant users of transfer pricing.

    President Donald Trump’s recent tax changes have made such, legal, tax avoidance by US domicile companies less worthwhile which is why corporations like Apple are repatriating huge sums to the US that they have held offshore to avoid paying US tax. Apple is an astonishing example – it borrowed money inside the US to pay a dividend because it did not want to bring any of its offshore pile of money into the US and pay tax on it.

    My guess is that the illegal activities of oligarchs is probably dwarfed by the legal process of transfer pricing and other activities that legally reduce corporate tax.

    1. Rewrite

      I think you’re almost certainly right that the money lost to governments through the legal use of tax havens dwarfs that lost through illegal laundering. The rights and wrongs are more open to debate though – someone who leans toward a more free-market ideology might argue that tax systems in the UK and elsewhere are so arbitrary and poorly designed people should have the right to reduce their contribution if they can. The sheer scale is astonishing, as you say, and the EU in particular looks like it is making moves to change things. I’ve reached out to Margerethe Vestager for an interview without luck but would be interested in thoughts on how we can look into this?

      1. Rewrite

        One has to acknowledge that governments, the British government in particular, are complicit in facilitating tax avoidance. The British government has made no efforts to change the law or limit the tax avoiding opportunities in the many British overseas Territories including the British Virgin Islands, the Cayman Islands, Bermuda, the Channel Islands, the Isle of Man, and Gibraltar.

        One of the reasons for their complicity is of course the lobbying and funding of political parties by the biggest tax avoiders. Oh that I had the resources to research and analyse the annual reports of large corporations determine what subsidiaries they have in tax havens and the level of tax that they pay on their transfer pricing transactions. Action Aid that I mentioned in my first comment have already done a great deal of work that should be expanded.

        It is not only companies that engage in transfer pricing, Boots, a large pharmacy chain has most of its turn over and derives most of its profit from Britain including dispensing prescriptions for the state-owned National Health Service. But Boots is registered in Zug in Switzerland to minimise its UK tax. Many other household names in Britain are also, legally, registered in tax havens making them non-docmicles that therefore not subject to UK tax.

        It is notable that some of the loudest Brexiteers, like Lord Bamford owner of the earthmoving equipment maker JCB,are beneficiaries of laws allowing tax avoidance. JCB is registered in a Bermuda trust. Does James Dyson use British Overseas Territories to engage in transfer pricing to minimise tax as he moves his Hoovers around the world? He is certainly setting up his children to avoid inheritance tax by buying farmland in the UK which is exempt from inheritance tax. He is said to have become the biggest land owner in the country.

        Someone like Jacob Rees-Mogg, the Conservative MP and leading Brexiteer owns a fund management firm. It would be interesting to know the benefits his rich clients will accrue by Britain not becoming subject to increasing EU scrutiny of tax avoidance.

        Margerethe Vestager maybe encouraged to grant an interview if there is a body of evidence demonstrating that a number of those who have most vociferously promoted Brexit are avoiding tax offshore tax havens.

        There is a great reluctance among British newspapers to draw attention to tax avoidance as most of them are owned by foreign, tax avoiding tycoons who pay no UK tax.

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