Anti-corruption campaigners in the UK have 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 the 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.
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.
According to anti-corruption group Global Witness, these properties were among 85,000 in the UK that are owned by entities registered in its 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.
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.
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.”
Relying on professional enablers to break the system
Various territories have encouraged the development of their financial industries and fostered reputations as a 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.
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 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.