British foreign affairs committee recommends an aggressive crackdown on Russian money in the City of London

British foreign affairs committee recommends an aggressive crackdown on Russian money in the City of London
UK foreign select committee recommends a crack down on using London to launder Russian cash
By Ben Aris in Berlin May 21, 2018

Moscow’s Basmanny District court has become increasingly busy over the last few years charging former governors and state officials for stealing state money.

In the most recent case the urbane former deputy culture minister Grigory Pirumov was on trial for the second time accused of embezzling RUB450mn ($7.3mn) that was supposed to be spent on repairs to the iconic Hermitage Museum, and placed on remand as the prosecutor was afraid he would, like so many other corrupt businessmen and officials, flee to London. Pirumov has already been convicted once for embezzling funds connected to his work in the ministry.

A report released by the UK foreign select committee has called for tougher action to close London to men like this and has made a number of controversial calls for action.

"There is no excuse for the UK to turn a blind eye as President [Vladimir] Putin’s kleptocrats and human rights abusers use money laundered through London to corrupt our friends, weaken our alliances, and erode faith in our institutions,” the committee chairman Tom Tugendhat said in remarks cited by Reuters.

London has become a haven for corrupt Russians, who arrive and claim political asylum on the grounds that they will not face a fair trial at home. However, men like Pirumov have no connection to either the opposition or politics, but it appears that simply having a lot of money is enough to grant them immunity from extradition to Russia.

The most notorious case is the former head of Bank of Moscow Andrey Borodin who allegedly cut up hundreds of millions of dollars worth of credits to fictitious companies into small enough pieces that they wouldn’t trigger the Central Bank of Russia (CBR) money laundering red flags. In the final tally, VTB estimated that there was a $9bn hole in the bank’s balance sheet, which required the largest bailout in Russia’s banking history of $14bn — more than the entire amount lent by the CBR to shore up the entire banking sector during the worst of the 2008 financial instability. Borodin fled to London where he bought the most expensive house in the country, a $174mn spread in Henley-on-Thames. The Kremlin issued an Interpol Red Notice for his arrest in 2011 but he was granted political asylum in the UK in 2013. Today he lives in the lap of luxury and is the subject of breathless puff pieces in the British press about his house and supermodel wife, which dub him an “alleged fugitive” but make little mention of his allegedly pulling off the biggest bank robbery in modern Russian history.

That may be about to change. Russian uber-oligarch Roman Abramovich missed the FA Cup final this weekend where his team Chelsea FC beat Manchester City because his British visa expired three weeks ago and he has not been granted a new one. Abramovich’s spokesman has not commented on the reason for the delay and the visa has not been refused according to reports, but Abramovich is one of 700 rich Russians that hold a special investors’ visa that are being reviewed by the authorities. Under the scheme anyone that invests $2mn into the UK is granted a special visa and is eligible for a permanent residency visa after five years.

Many of the rich Russians in London are legitimately wealthy businessmen and London is to Moscow today what Paris was to the Tsarist elite pre-revolution: everyone wants a house there if they can afford it. However, this flood of cash is riddled through with dirty money, which is at best simply avoiding Russian taxes and at worst earned from bribes or criminal schemes.

Many, including former investor turned the Kremlin’s nemesis Bill Browder, have called on the UK authorities to crack down on the “London Laundromat” that is used to wash Russian ill gotten gains. London’s real estate market is notorious for its lack of oversight that has made it a favourite mechanism for washing black money, and Russians account for between 5% and 15% of the billions cleaned in this way, as bne IntelliNews investigated in a cover story “Russian money infects London” in March 2015. But thanks to the geopolitical tensions they are getting more attention.

Clean up?

Abramovich’s visa problem has raised the spectre of the UK ejecting Russia’s rich from the British capital and maybe even seizing their assets.

The case came up on the same weekend as the British foreign affairs select committee issued an extremely aggressively worded report entitled “Moscow's Gold: Russian Corruption in the UK” on all the Russian money in the UK, accusing the Kremlin of being a “hostile power” and suggesting Russian cash was infecting British politics.

“The use of London as a base for the corrupt assets of Kremlin-connected individuals is now clearly linked to a wider Russian strategy and has implications for our national security. Combating it should be a major UK foreign policy priority. The assets stored and laundered in London both directly and indirectly support President Putin’s campaign to subvert the international rules-based system, undermine our allies, and erode the mutually-reinforcing international networks that support UK foreign policy,” the report concludes.

“The size of London’s financial markets and their importance to Russian investors gives the UK considerable leverage over the Kremlin. But turning a blind eye to London’s role in hiding the proceeds of Kremlin-connected corruption risks signalling that the UK is not serious about confronting the full spectrum of President Putin’s offensive measures,” the report continues.

The report singles out Oleg Deripaska’s EN+ energy holding, asking how “gaps in the sanctions regime” could have allowed the company to be listed on the London Stock Exchange, despite the fact that the listing was greeted with great fanfare in November 2017, well before Kremlin-insider Deripaska was included in the US Specially Designated Nationals And Blocked Persons List (SDN List) in April this year.

The report goes on to recommend that targeted sanctions against rich Russians “demonstrates the potential value in targeting Kremlin-linked individuals as a way of putting pressure on the regime to change its aggressive and destabilising behaviour.”

“We call on the government to broaden its approach to sanctions by including individuals closely connected to hostile regimes, where appropriate, while retaining the practice of linking sanctions relief to specific actions. The UK should work with EU partners, both before and after leaving the EU, to identify and sanction the individuals and entities on whom the Kremlin relies in carrying out its acts of aggression—including, but not limited to, destabilisation of its neighbours, disinformation campaigns, interference in democratic processes and assassination attempts on foreign soil. This should be done in close consultation with the US Treasury and intelligence agencies,” the committee recommends.

The report goes on to suggest that a form of the so-called Magnitsky act should be included in new sanctions legislation that is being introduced to the UK parliament to allow the government to punish foreigners on the grounds of human rights abuses.

In what will be one of the most controversial points the committee also targets Russian sovereign bond issues, recommending any attempts to limit bond issues be agreed with partners in the EU and US.

“The government should work with the EU, and with the US, to prohibit the purchase of bonds in which a sanctioned entity has acted as book runner. It should also seek EU agreement to bar the European clearing houses from making available Russian sovereign debt,” the report says.

The dichotomy of Britain’s “get-tough” stance on Russia and the amount of money it makes from Russia was highlighted in April when Prime Minister Theresa May gave a speech to the House announcing the expulsion of 23 diplomats, when at exactly the same time on the other side of the city state-owned gas giant Gazprom was in the process of raising €750mn with a Eurobond that was met by strong demand. Two days later Russia’s Ministry of Finance issued $4bn worth of exchange bonds despite the acid rhetoric flying between the two capitals.

The US has so far shied away from targeting sovereign bonds for the chaos that could cause on the international capital markets as these bonds are widely held, and specifically for the pain it could cause to US investors: since Russia was upgraded to investment grade earlier this year many US pension funds not only have bought Russian sovereign bonds, but are obliged to hold them by their mandates.

Finally the report recommends increasing the transparency of investments into or via British Overseas Territories. These tax havens such as the British Virgin Islands are the last vestiges of the British Empire and exist on their tax free and opaque declaration rules that have made them a favourite for investors wanting to hide the ownership and origin of their wealth.

The whole tone of the report is aggressive and combative, making use of some of the rhetoric common in the anti-Russian narrative. If the recommendations are put through — especially the restriction on the sovereign bond issues by pressuring the international settlement companies to refuse to work with Russian bonds — the Kremlin would take that as an act of economic warfare with unpredictable consequences.

“As a nuclear-armed, permanent member of the United Nations Security Council, Russia remains a major player in global affairs with an important voice and a seat at the table. It has the potential to be a force for security and stability,” the report continues. “But instead of participating in the international rules-based system, President Putin’s regime uses asymmetric methods to achieve its goals, and others — so-called useful idiots—magnify that effect by supporting its propaganda. Russia’s economy — which, it is worth recalling, is approximately the size of Spain’s — is deeply interconnected to the Western financial system. This gives the US, EU and other G7 countries, acting together, significant leverage in seeking to counter the Kremlin’s aggressive behaviour.”

However, the problem of London’s role as an international money laundering centre is real and is related not so much to Russia’s abuse of the loopholes, but the poor state of the legislation and disclosure requirements associated with buying and selling property in London. Russians make active use of this market, but they are in the minority, so a basic clean-up of the business is long overdue.