Russia (Sanctions) (EU Exit) (Amendment) (No. 3) Regulations 2024

Debate between Lord Vaux of Harrowden and Lord Purvis of Tweed

Tuesday 15th October 2024 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, I too welcome this SI, as far as it goes—in particular, the expansion of the sanctions regime against ships that are used to facilitate Russian oil exports, the so-called shadow tankers to which the noble Lord referred.

Could the Minister perhaps explain in a bit more detail what actual real-world impact that this will have on the number of shadow tankers that Russia uses and the amount of oil that Russia is currently able to export? I am slightly dubious as to how much real difference this will make, so I would be interested to know how it will work in reality. In particular, will this have any impact on the very dangerous ship-to-ship transfers that seem to be taking place off the coast of Greece, which are obviously an environmental disaster waiting to happen? The size of the shadow fleet is continuing to grow. I gather it is 70% bigger this year than it was last year. What other actions are we taking to deal with this problem?

There would not actually be a problem with the shadow tankers, if there were not countries ready and willing to take the Russian oil. That brings me to another loophole that Russia is using to keep its oil exports running and under which this country is still importing oil products that originate in Russia. The loophole is that, if Russian oil is refined in another country, it is no longer considered to have originated in Russia. As a result, third countries—in particular, China, India and Turkey—are buying large quantities of Russian crude, processing it and selling it on. India is now importing 13 times as much crude from Russia as it was before the war started.

Since Russia’s invasion of Ukraine, direct imports of Russian oil into the UK have fallen from about £4.5 billion a year to pretty much zero, which is a good result. But UK imports of refined oil products from India, China and Turkey have all risen quite significantly, to around £2.2 billion in 2023. A significant proportion of those will have originated in Russia. There is an estimate of 5.2 million barrels of Russian-originated oil having been imported into the UK in 2023, mostly for the aviation industry. Apparently, about one in 20 UK flights has used Russian-originated oil.

This laundering of oil through China, India and Turkey means that the UK is continuing to contribute, albeit indirectly, to Russia’s war coffers. Does the Minister recognise those figures and this problem? If he does not recognise those figures, how many Russian-originated oil products does he believe the UK is currently importing? What plans do the Government have to close the loophole? Given that a very big chunk of this comes through India, is this matter being taken into account in the trade agreement discussions with India?

[Lord Purvis of Tweed (LD)]

My Lords, following the very valid points made by noble Lords in this short but important debate, I offer the Government support for this. The Government were caught by a timetabling aspect, with the Summer Recess and then the conference break, so it is positive that they have ensured that there will be some parliamentary scrutiny and the ability for Members to ask questions on these matters. We have just seen the value of raising these pertinent points.

The Minister will not be surprised that I support these measures. He and I have been in many debates—in fact, all the debates on the Russian sanctions when the noble Lord, Lord Ahmad, was the Minister—and there was consensus across the Committee. I will ask a few further questions that have not been asked so far, and will perhaps emphasise some of the points that have been made.

First, I return to the issue of enforcement. Not for the first time, the noble Lord, Lord Alton, asked questions that I was going to ask. I would be grateful if the Minister could give an update on the securing of frozen assets that could be put to good use by Ukraine in this conflict. The Minister was a doughty campaigner on Chelsea when he and I were asking the noble Lord, Lord Cameron, about this in the Chamber. An update would be very useful. Is it still the case that we need to change any of the legislative or administrative processes in the UK so that we can carry out the repurposing of frozen assets into secured assets that can be put to use, around which consensus was sought in the G7? Or is it the Government’s position that we look purely at the EU proposals on the interest of assets—or, if assets are sold, that we use some of that? An update would be useful.

I periodically monitor the website of the Office of Financial Sanctions Implementation, which is tasked with ensuring that the sanctions regimes we put in place in the UK are properly enforced and policed. It is interesting that only one enforcement for circumventing UK sanctions has been carried out this year, to the tune of £15,000; since 2022 and the full invasion of Ukraine, there have been only four, totalling £60,000. Given the scale of the impact of the sanctions regime that the previous and current Governments have indicated, is it the Minister’s view that this is an accurate reflection of how the sanctions are being enforced?

We could look at it in two ways: either there is circumvention and the enforcement is not effective; or the UK is remarkably good at getting all our businesses to adhere to all of the sanctions. There may be an element of truth in both, but what is the Government’s assessment? That speaks to the valid point made by the noble Lord, Lord Alton, about the opportunity for a fundamental review not just of the overall impact of the sanctions—including an assessment of the impact of the sanctions, given the fact that they are in place until we rescind them—but of their enforcement.

The second aspect I wish to ask about is the services provided, either those in the shadow fleets or those that can now be determined under the sanctions regimes. I strongly support the Government with regard to not only persons who are directly or indirectly in the enterprises or linked with the fleets but those providing financial services to them. Why have the Government taken the view that legal services are not included in that? We all know that London in particular is the home of many legal services that have been part of the grey area of advice when it comes to these sanctions. I would be grateful to hear whether the Minister has any comments on that. We would certainly be supportive of ensuring that there is no loophole when it comes to financial services that can be masked as legal services; we need to ensure that there is no loophole for that.

I also wish to pick up on the point about our support for those in the fleets as far as the oil or dual-use goods on the shipping are concerned, as well as with regard to our position on the countries where they are landed. The point was made eloquently that many of those are our trading allies. I know that the Government have previously had frank—I hope—conversations, but surely we are now beyond the point of having frank conversations; we need to be considering actions.

In that regard, I would be grateful if the Minister could comment on the news from the end of August that the United States is moving towards secondary sanctions on those operating on financial services in jurisdictions where it believes that the sanctions regimes are being circumvented. I believe that secondary sanctions on financial institutions would be effective; I would be grateful if the UK were part of that. Indeed, what is the Government’s current position on considering secondary sanctions? This is obviously a sensitive diplomatic area, but I believe that it is important.

Can the Minister address a question that I asked his predecessor on jurisdiction? I acknowledge that these measures are UK-wide but I asked previously about the overseas territories when it comes to shipping and potential licences that are exemptions to them. We know that, when certain tankers land in overseas territories, they can operate under a different regime. I would be grateful for clarification that they are also covered by these sanctions.

I wish to ask a minor question regarding limited exemptions. Obviously, we know that there should be the capacity for some kind of exceptions in the regulations, but, to prevent an exception becoming a loophole, can the Minister confirm that the exceptions in these sanctions are defined across the G7 and our partners, so that there is no distinction between exceptions under these sanctions and those in the United States or the European Union? If the Minister could respond to these points, I would be grateful.

My final point is that the Government have our full support in ensuring that there is as much consequence for the Russian war economy as possible. No UK entities, whether in the City of London, finance, shipping or insurance, should have any part in supporting the Russian war regime. We continuously support the Government to ensure that there are no limits to what we can do to ensure Ukraine’s support.

Money Laundering and Terrorist Financing (High-Risk Countries) (Amendment) Regulations 2023

Debate between Lord Vaux of Harrowden and Lord Purvis of Tweed

Wednesday 19th July 2023 Grand Committee

[Lord Vaux of Harrowden (CB)]

My Lords, I thank the Minister for introducing and explaining the regulations. I realise that all they do is follow the recommendations of the Financial Action Task Force, FATF, to change the list of countries designated as high risk and therefore subject to enhanced due diligence requirements in relation to anti-money laundering, counterterrorism financing and counterproliferation financing. In that respect, so far so uncontroversial.

It has to be said, however, that the list is somewhat surprising—both for those on it and, in particular, those not on it. The changes made by these regulations are also somewhat surprising: they remove Morocco and Cambodia from the high-risk list. It seems rather odd that Cambodia, which is generally regarded as among the most corrupt countries in Asia, is no longer treated as high risk. I am very fond of Cambodia and have spent a lot of time in that country, but that does not change the fact that it is extremely corrupt.

According to Transparency International’s Corruption Perceptions Index, Cambodia is ranked 150 out of 180 countries on the index. This is a slight improvement on previous years, but still considerably lower than many countries that remain on the high-risk list, such as Albania at 101, Panama at 101, the Philippines at 116, Barbados at 65, Burkina Faso at 77, Iran—which is on the blacklist—at 147, Jamaica at 69, Jordan at 61 and Mali at 137. I could go on. In fact, Cambodia has a worse corruption score than all but seven of the 27 countries that remain on the FATF high-risk list. It is not only Transparency International that ranks Cambodia badly. With perhaps more relevance to this regulation, the Basel AML Index ranks Cambodia as having globally the seventh worst money laundering and terrorism financing score. Despite that, we are reducing the level of due diligence that the regulated sector will have to apply to it. Seriously, is there anybody in this Room who believes that Cambodia should be treated better than, say, Gibraltar, Barbados or even the Philippines? I should like the Minister to look me in the eye and state that she really believes Cambodia is not a high-risk country for corruption.

This starts to beg the question about the value and legitimacy of the FATF high-risk assessment process, known as the mutual evaluation assessment. That value is called into even greater question when we look at the countries not included in the high-risk designation. I will give a high-profile example: until February of this year, Russia was a member of the FATF. In February, the FATF suspended its membership because of the war against Ukraine—somewhat belatedly, one could say. I emphasise “suspended”; Russia has not been expelled. It is evidently a paragon of virtue when it comes to money laundering and terrorism financing because, unlike the British territory of Gibraltar, Russia is not designated as high risk and therefore not subject to enhanced due diligence. It is odd, then, that we have spent so much time passing Bills in this House specifically to deal with the stolen laundered money coming from Russia. Almost unbelievably, in its last review of Russia in 2019, the FATF praised Russia’s efforts to prosecute terrorist financiers and suggested that AML/CFT is afforded the highest priority by the Russian Government. This is a country that finances and supports organisations such as the Wagner Group, while Putin’s Government is generally regarded as a kleptocracy. Other countries not on the list, and therefore not subject to enhanced due diligence, include such famously uncorrupt ones such as Somalia, Venezuela, Libya, Turkmenistan, Nicaragua and Zimbabwe, to name but a few. All score worse than Cambodia in the corruption index; all are apparently low risk, according to the FATF. The Explanatory Memorandum refers to the FATF’s “robust assessment processes”; frankly, those do not stand up terribly well to scrutiny, if this list is anything to go by.

It is worth quoting the recently departed FATF CEO, David Lewis, who was very highly regarded. He said the agency structure of “mid-level bureaucrats” means that it does not have the scale to take on the big global financial crime issues. He said that they are

“very comfortable dealing with the finest minutiae of technical detail, but aren’t comfortable or able to have big picture discussions and are often only in their jobs for one of two years”.

He stated that genuine reform of the FATF is difficult to achieve, with typically two to four countries blocking consensus, meaning it is rare that you can get any meaningful change, which probably explains the list we are looking at.

Concerns are often raised about the FATF’s lack of transparency. The minutes of plenary sessions that make these risk designations are not published and it is clear that political horse-trading plays a significant role in the decision-making process. To be fair, there is no doubt that the FATF has had a positive impact on global financial crime since its inception in 1989, but there are growing doubts about its ability to cope with the challenging global situation we currently face. In an article for RUSI, Tom Keatinge of the Centre for Financial Crime and Security Studies makes some helpful suggestions about how the FATF could be improved. He suggests, first, greater transparency: it should provide greater assurance of independence and oversight. Its activities should be overseen by an independent board and its evaluation should be independently reviewed, not subject to the evidently politicised horse-trading that occurs currently. The minutes of the plenaries should be published, or the plenaries themselves could be livestreamed. Secondly, it needs to create a dedicated technical-assistance capability to ensure that unintended negative consequences, such as financial exclusion and the use of the FATF recommendations by autocratic regimes against civil society organisations, are addressed.

Thirdly, he suggests that the FATF needs to show greater ambition. Ultimately, the question is whether it is addressing financial crime effectively. It currently evaluates how effectively its recommendations are implemented, but not the extent to which financial crime is addressed as a result. He suggests an independent review of the FATF’s effectiveness, which seems a simple and sensible suggestion 45 years after it was founded.

Fatima Alsancak, also of the Centre for Financial Crime and Security Studies, suggests that Russia is a good

“case study in the deficiencies of the … FATF mutual evaluation process, which allows countries with high levels of institutionalised corruption to complete their evaluations despite the lack of integrity in their AML systems”.

She goes on to say:

“It is essential for the watchdog to revisit its standards”,


and again highlights the need for greater transparency in the decision-making and listing process.

I was going to ask why South Africa, Nigeria, Croatia, Cameroon and Vietnam are not the list, but the Minister answered that in her opening statement. I mentioned earlier that Gibraltar, a British Overseas Territory, is on the high-risk list. Will she please comment on that, too?

There are important questions to answer about the value of the FATF evaluation process. We should not rely passively on what are, frankly, flawed recommendations. Do the Government agree that FATF’s procedures and the high-risk list itself appear to have important deficiencies and, if so, what are they doing about it? Do they agree with the recommendations that I referred to earlier?

[Lord Purvis of Tweed (LD)]

My Lords, it is a pleasure to follow the noble Lord, Lord Vaux, who made a probing and persuasive argument about the deficiencies in some of the process. I have two questions for the Minister.

In a debate on a previous instrument, in which I spoke, the Government made the case that, with the new freedom as a result of Brexit, they would immediately make the decision to remove British sovereignty by having an automatic updated list of the Financial Action Task Force. I thought that rather inconsistent with the argument that we had left the European Union to gain freedom: the very first act was to give that freedom away.

The noble Lord highlighted the inconsistencies, and I will add another. The Minister has heard me talk about the Wagner Group and its lack of proscription, and the fact that it operates almost with impunity in many countries. One of the countries in which it has been operating, which is not on the list, is Sudan. It is beyond me that the UK, having done excellent work through our diplomats, development and security operations in that conflict-afflicted country, would not want the ability to act immediately in putting Sudan on the list, whose two warring parties, the Sudanese Armed Forces and the Rapid Support Forces, are operating across organised crime, including conflict. Why would that not be a high-risk third country? If the Minister is saying that we have made the decision simply to adopt an external organisation for making determinations of what would be high-risk third countries, what was the point of seeking the sovereignty to make decisions ourselves?

My second question relates to the United Arab Emirates, which maintains its position on the list. I have asked for the text of the UK-UAE investment agreement, but it has not been forthcoming. Why not? If there is an investment agreement that binds the UK into certain preferential market treatment for financial vehicles within the UAE, and the UAE is on a UK list of high-risk third countries, we should, as a matter of good governance, be able to see the text of the UK-UAE investment agreement and to consider what elements in it ensure that we comply with all the elements that would be required of our financial relationship with the UAE. This is even more important given that, in Grand Committee debates on the sanctions regime for Russia, we have raised the joint ventures that operate between the UAE, Russia, the Wagner Group and countries such as Sudan. I hope the Minister will be able to respond by saying that new regulations will be brought forward at pace to ensure that these loopholes are now closed.