U.K.-registered companies are popular tools in money laundering and tax evasion schemes, including ones used by people in Ukraine. So is London real estate. And multiple commentators have dubbed London the money laundering capital of the world.
In the past few years the U.K. has introduced multiple pieces of legislation to fight against the flow of so-called dark money through its economy. However, lawmakers and experts have recently identified enforcement weaknesses that might let sophisticated operators slip through the cracks. New transparency rules in Britain’s overseas territories have also run into delays.
Furthermore, with the looming threat of Brexit, uncertainty exists about the future of the U.K.’s anti money laundering capacity. Separation from European investigators may complicate the U.K.’s continued progress towards transparency, unless specific agreements are secured and specific laws are passed.
“So far, the U.K. does not enforce anti-money laundering laws in any serious way,” Bill Browder, a British financier who fights Russia’s dark money networks, told the Kyiv Post.
Experts previously told the Kyiv Post that Ukraine, with its limited gross domestic product, is a relatively small player in the massive world of dark finance. However, what happens in the U.K. affects what kind of international arrangements can be made by Ukrainian asset holders. This includes oligarchs with a sophisticated grasp of how to extract and keep as much money as possible from their holdings, both legitimate and illegitimate.
Deficiencies identified
The U. K. and Ukraine were among the first countries to implement public registers of beneficial ownership of companies registered within their borders. Transparency International Ukraine project manager Kateryna Ryzhenko said that there is a global push towards transparency on beneficial ownership, with the U.K. taking a leading role.
Over the past few years the high-profile Panama Papers and Paradise Papers leaks, along with the Danske Bank and Swedbank scandals, have revealed how dark money has penetrated even the best-developed European economies. Hundreds of billions of euros have been laundered globally.
The scandals helped put a spotlight on the role of U.K.-based Limited Liability Partnerships or LLPs. These types of companies are easy to register and can give a veneer of legitimacy to an offshore scheme.
Even though LLP information is publicly available at the Companies House registry, their controlling entities are often listed as companies based in tax havens like Nevis, the Seychelles, or the British Overseas Territories. Some LLPs have “persons with significant control” who signed off on the companies’ creation but have little to do with their operation.
John Christensen, an economist with the watchdog Tax Justice Network, wrote in January that despite the U.K.’s move towards transparency, it continues to sustain “a spider’s web of satellite tax havens and secrecy jurisdictions” that undermine international cooperation against laundering. The transparency is “something of a Potemkin village… the information available from Companies House is frequently out of date, inaccurate and consequently useless,” according to Christensen.
A panel of British lawmakers and financial experts on March 7 found that “there are money laundering risks associated with company formation” and that laundering risk through U.K. and offshore structures is “high.” Companies House doesn’t have to carry out anti-money-laundering checks, and is a weak point in the country’s strategy, the panel found.
Lawmakers also concluded that anti-money-laundering enforcement is “fragmented,” with two dozen U.K. agencies involved. These need to consolidate to function effectively, panelists said. Graham Barrow, an international anti-money laundering expert based in the U.K. agreed, telling the Kyiv Post that British regulators need a “more cohesive, assertive regulatory environment.”
Positive steps delayed
To its credit, the U.K. has made some moves towards more assertive regulations. Last year, it introduced legislation that will force overseas territories such as the Cayman Islands and British Virgin Islands to have registries of beneficial owners that law enforcement can examine. The deadline was 2020, but following pushback from the territories, it was extended to 2023.
Another transparency bill was introduced for the Crown Dependencies — Jersey, Guernsey and the Isle of Man, which are massively implicated in sketchy financial schemes. But on March 4, a voting delay on this bill was forced, despite there being broad support among lawmakers.
In a more radical move, the U.K. introduced Unexplained Wealth Orders or UWOs last year. These let courts force someone with assets in the country to reveal the source of their wealth or risk having those assets seized. A year later, the first such order was issued to Zamira Hajiyeva, the wife of the Bank of Azerbaijan’s former chairman, Jahangir Hajiyev.
“Unexplained wealth orders are… a potentially devastating tool, because it changes the burden of proof from prosecutor to the person who received the money,” said Browder. However, “it’s only been used so far against the enemies of autocrats, instead of autocrats themselves.”
Experts, including Barrow and researchers at Ukraine’s Anti-Corruption Action Center, said that U.K. courts are trying to be careful to establish good legal precedents with such orders. That’s why they’re taking their time.
ANTAC researchers said the problem with taking it slow is by the time the courts are ready, the perpetrators will have documents ready to “prove” that the money is legitimate. Additionally, UWOs aren’t likely to work well on sophisticated schemes. Experienced oligarchs can put together very solid proof that all their overseas holdings are completely legitimate, they said.
The lack of cooperation by foreign governments, especially ones with a lot of corruption, has hamstrung the U.K. courts in prosecuting dark money cases before.
For example, Mykola Zlochevsky, a former ecology minister under Yanukovych, was accused of money laundering and illegally issuing hydrocarbon licenses to his companies. He was investigated in the U.K. where a bank account under his name with $23 million was frozen. However, Ukrainian prosecutors refused to supply their British counterparts with the necessary documents to continue the investigation. A British judge decided to stop the inquiry and unfreeze the assets, due to a lack of evidence.
“In order to get prosecution, you need to show a predicate crime,” said Barrow. “Money laundering has to be related to a specific crime and if that crime happened in Kharkiv or Baku, our ability to show that is virtually zero.”
Ukraine has taken some positive steps as well, said Viktoriya Fomenko, a partner at Integrites law firm’s tax and customs practice. For example, a type of scheme that uses inflated prices to disguise the movement of money between two companies is made harder by Ukraine’s adoption of international transfer pricing rules.
But Ukraine has also run into delays. President Petro Poroshenko promised that Ukraine would adopt the Organization for Economic Co-operation and Development’s common reporting standard, which helps combat tax evasion, by the end of 2018. But it has yet to be implemented.
Brexit
To deal with Brexit, the U.K.’s possible exit from the European Union, the country plans to convert some existing EU money laundering directives into domestic law. The U. K. has already implemented the 4th EU Money Laundering Directive, and committed itself to implementing the updated 5th version. True to their name, these directives are designed to fight money laundering and terrorist financing.
However, if Brexit comes to pass, the U.K. may lose access to some of the intelligence-sharing arrangements with the EU, which might make it tougher to fight crime, including financial crime, according to last year’s comments by the National Crime Agency. This echoed what some experts told the Kyiv Post.
The NCA also said that it’s likely that the U.K. will come into increased contact with corrupt markets if the country looks to increase its trade with non-EU members. This might lead to more opportunities for money laundering by putting dirty cash into British businesses and assets. Russia, Pakistan and Nigeria have been identified as the most risky markets.
Glen Grant, a defense expert with the Ukrainian Institute for the Future, said that continuing the fight requires putting the U.K., the EU and the U.S. treasury “on a new post-Brexit footing.”
“As the U.K. prepares to leave the European Union, our exposure to new markets is both a risk and an opportunity,” Duncan Hames, the director of policy at Transparency International U. K., wrote in a statement in March.
Old networks
Barrow said that despite the U.K.’s moves towards stricter due diligence, it’s still easy to find dubious companies in operation. Many of these companies are linked to Eastern European assets, including Ukraine’s.
Back in the days of now-fugitive Ukrainian President Viktor Yanukovych, six offshore firms were linked to a multitude of schemes. These are Ireland & Overseas Acquisitions and Milltown Corporate Services — originally registered in Ireland, then the British Virgin Islands, and then Belize; the Seychelles companies Intrahold AG and Monohold AG; and the Nevis companies Tallberg Ltd and Uniwell Inc.
Some of the many British LLPs created by these companies continue to operate to this day. One example is Renton Resources LLP, which has been linked to the export of fuel from the Russian-occupied parts of Ukraine’s Luhansk Oblast, and the country’s so-called former deputy energy minister of the unrecognized Luhansk People’s Republic, Oleksandr Melnychuk, who has been sanctioned by the United States. According to media reports, some of these hydrocarbons may have been exported to Poland and the rest of Ukraine.
Another two are Fineroad Business LLP and Riverberg Ventures LLP, one beneficial owner of which was Yashar Khodzhaiev, a Ukrainian from Donetsk Oblast. In 2015, he bought Tantalit, a company that legally owns Yanukovych’s estate near Mezhyhirya near Kyiv. He has been linked to companies that were alleged to be laundering money for Yanukovych’s son Oleksandr. Last April, the Pechersk District Court of Kyiv lifted the arrest on the accounts of these companies.
Both presidential candidates have been linked in some way to offshore structures involving the U. K. President Petro Poroshenko was revealed in 2016 to have set up a holding company in the British Virgin Islands, whose financial authority investigated it for money laundering. Poroshenko had previously stated that he and his companies had done nothing wrong.
And actor Volodymyr Zelenskiy, who is favored to win the presidency, has also been accused of having ties to oligarch Ihor Kolomoisky, who was alleged by the Ukrainian government to have siphoned billions into offshore instruments. ANTAC pointed to about $1.7 billion being transferred to three U.K.-based companies in a scheme disguised as the purchase of goods that were never delivered. Ukrainian authorities also accused Kolomoisky in 2015 of evading hundreds of thousands of dollars in taxes. Zelenskiy vehemently denies that he is beholden to Kolomoisky, while Kolomoisky himself has also denied wrongdoing.
An example of a Ukrainian company with U.K. holdings and unclear connections to Russia is Eurolab, where Zelenskiy took a drug test as part of his election campaign to challenge Poroshenko. The owner, Andriy Palchevsky, co-owns Eurolab through an LLP registered to a nominal address, and has political connections to Russia.
