War in Ukraine: Illicit Finance

Neil Coyle Excerpts

Thursday 17th November 2022 Westminster Hall

[Bob Seely (Isle of Wight) (Con)]

I beg to move,

That this House has considered the Second Report of the Foreign Affairs Committee, The cost of complacency: illicit finance and the war in Ukraine, HC 168, and the Government response, HC 688.

It is a pleasure to serve under your chairmanship, Mr Efford. In speaking to the report today, I will outline a series of points made by the Committee in this report and in its 2018 “Moscow’s Gold” report. I will also talk about SLAPPs—strategic lawsuits against public participation —and the case for more action on lawfare.

Our report finds that the UK sanctions response to the war, while ambitious, was initially limited by a lack of resourcing, and the new beneficial owners register still contains loopholes that put some individuals under the threshold for having to declare beneficial ownership. That is against the public interest. The report, which I strongly endorse—I encourage folks to read it should they have time—proposes a number of reforms, including new transatlantic sanctions partnerships, so that London and New York can work more closely together, and the appropriate resourcing of enforcement agencies. Both reports, and the Intelligence and Security Committee, note the lack of funding for the National Crime Agency and other serious crime organisations in the country and that some of them are threatened by the lawyers of oligarchs—potential bad actors. We believe that to be very strongly against our national interest.

In my opinion, and I think also in the opinion of the Committee and many people engaged with this issue, including the right hon. Member for Barking (Dame Margaret Hodge) and other hon. Members, the UK and its offshore territories have for too long turned a blind eye to the transfer and concealment of illicit or semi-licit—if that is a word—wealth, and have granted a number of high-risk individuals political and judicial protections that they do not deserve.

We have built a significant industry catering to the needs of some really quite unsavoury characters. To date, vast sums of both illicit and licit finance have been recycled through the UK’s bespoke package of the financial services industry, legal services, public relations services, private eyes, estate agents, luxury assets, concierge services, visa and citizenship routes and the private education system.

Transparency International and various other bodies have estimated that the amount of wealth, criminal or otherwise, that has flowed from the former Soviet Union via corrupt German and Scandinavian banks, via UK shell companies, to tax havens—sadly, very often the UK—is probably between £500 billion and £1 trillion. That is one of the greatest flows, probably the greatest flow, of illicit wealth in the history of humanity. The fact that we in London are a core part of that flow is frankly pretty shameful.

I was discussing the issue with the great Bill Browder the other day. One of the problems is that this is not just Colombian drug cartel money; this is money that has come from deeply corrupt, but potentially legal deals. For example, an executive at one of the big state gas or oil firms at some points in the 1990s could, if they had the connections, buy an oilfield or a gasfield equivalent to the North sea, for $100,000.

By borrowing that money off organised crime or other areas, that person would effectively become a billionaire overnight, by the sometimes legal, sometimes not, but deeply unethical transfer of state assets—the privatisation of state assets using organised crime as muscle and bureaucratic connections to facilitate it. That is what has happened in the former Soviet Union—in not only Russia, but also Ukraine back in the day, especially under Yanukovych and others, and Kazakhstan. Clearly, that has enriched a small number of people in the United Kingdom, but I do not believe it has been good for the United Kingdom as a whole. It is not good for our reputation and for London as a service industry—although it is undoubtedly true that it has very considerably enriched a small number of people.

In 2018, the Foreign Affairs Committee published an excellent report under the previous Chairman, my right hon. Friend the Member for Tonbridge and Malling (Tom Tugendhat), called “Moscow’s Gold: Russian Corruption in the UK”. That report detailed that, despite the Government’s crackdown on Russian activity in the wake of the Skripal poisoning, back before the Ukraine war, business simply continued as usual for most of Putin’s allies in the United Kingdom.

One of the depressing things for me is that I was saying this before I was an MP, so nobody was listening, and have said it as an MP—and still nobody really listened. In 2007, back in the Munich conference speech, Putin declared a new cold war against the west. We have studiously done our best to turn a blind eye because it was too difficult for western states to get their heads around the fact that, in President Putin, we had an aggressive rival who did not accept the international system, would openly challenge it and would fight wars on his borders to secure what he thought were his vital interests—we can debate that or not. After his speech the invasion of Georgia happened, and then in 2014 there was the invasion of Ukraine through proxy groups that confused some people, but should not have done.

Before, during and after those events we have had a wave of assassinations, imprisonments and arrests. I met with Alexei Navalny’s chief of staff. Navalny now may be the most high profile political prisoner in the world; he is in a detention camp in permanent solitary confinement. That is the price for challenging President Putin. Last night, I was chatting to Marina Litvinenko, the wonderful wife of Alexander Litvinenko, who was murdered in Piccadilly back in 2006—he died of radiation poisoning. The problem is that we repeatedly turned a blind eye. Our love of Russian money flowing through the financial and legal systems clouded our moral judgment. That has enabled Putin’s regime. We need to learn from those errors and mistakes.

What is the scale of the problem today? From 2008 to 2015, there were no state checks on tier 1 golden visas. At least eight individuals now sanctioned, or under investigation, are thought to have obtained citizenship through those means. They are citizens like you or me, Mr Efford. How can that be right or in the national interest? The National Crime Agency estimates that money laundering costs the UK £100 billion annually. Serious or organised crime is estimated to have a price tag of £37 billion.

Russians accused of corruption or having close links to the Putin regime have bought at least £1.5 billion worth of property in Great Britain according to Transparency International—that is a vast amount of property. One of the reasons why so many people are struggling with their mortgages is that there are vastly inflated prices for property in London and the south-east. That is in part because it is seen as an easy way to launder money: to pay over the odds for property and then to sell. Even if it is then sold at a loss of 10% or 20%, these people have laundered—legalised—a vast amount of corrupt and criminal, or semi-corrupt and semi-criminal, money.

That £1.5 billion is part of nearly £5.5 billion worth of property in the UK that has been purchased through offshore shell companies. That problem happened under new Labour and the coalition with the Liberal Democrats. What on earth is this country doing allowing offshore shell companies to be vehicles to buy property? It is just wrong. It is wrong that so many people close to Putin own so much property in this country. It is wrong that so many offshore vehicles have been used. What on earth are we doing allowing that to happen, and what on earth are we going to do to stop it? I would love the Minister to reassure us, rather than just saying that we are concerned about it.

[Neil Coyle (Bermondsey and Old Southwark) (Ind)]

The hon. Gentleman is making an excellent speech and I congratulate him. I want to be clear that this is not just an issue about Russia. In my constituency and elsewhere, the red princes and princesses of communist China are buying up property and inflating prices. We should not just focus on Russia when we talk about illicit finance.

[Bob Seely]

I thank the hon. Member for his very sensible point. There is absolutely a wider issue. As well as shell companies, there are vast developments on the south side of the river, around the US embassy, where entire blocks are being bought up as investment options rather than being used to provide housing for Londoners. That is shocking, especially because we have a housing shortage. There is a wider argument on reform of our housing in the UK for giving options first to allow ordinary folks to be buying it, rather than—as much as we love them—Hong Kong, Chinese or Indonesian investors to block buy endless numbers of flat and rent them out or never have them occupied.

I was going to talk a bit about the Azerbaijani laundromat. Between 2012 and 2014, about £3 billion went through UK shell companies as part of the so-called Azerbaijani laundromat; funding was dispersed from Azerbaijani officials to various outlets in this country. As well as that, London’s open economic environment has been a key centre for raising finance for companies or individuals over whom there are now very considerable question marks.

In 2017, En+ was floated on the London stock exchange, raising £1.5 billion from international investors in an initial public offering. We now know—well, we knew at the time—that En+ was very closely associated with Oleg Deripaska, despite his ownership of companies linked to supplying Russian military materials and sanctioned Russian shareholders. He himself is now sanctioned, I believe. En+ and Oleg Deripaska were part of a considerable lobbying effort by a former Member of the House of Lords—a former Conservative Minister, as much as it shames me to say it—to separate Deripaska from En+ in frankly pretty questionable circumstances.

Shortly after the Skripal poisoning, Russia continued to sell Russian sovereign debt in London, facilitated by the sanctioned Russian bank VTB. While our financial services provide anonymity to those who wish to invest, many UK legal firms have sought to further silence those who question the origin of investments.

--- Later in debate ---

[Neil Coyle (Bermondsey and Old Southwark) (Ind)]

It is a pleasure to rise with you in the Chair, Mr Efford. I thank the Liaison Committee for providing time for the debate, and congratulate the hon. Member for Isle of Wight (Bob Seely) on his excellent opening speech. I also thank the Foreign Affairs Committee Clerks for notes in advance of the debate, and the UK Anti-Corruption Coalition for its excellent briefing. I speak as a member of the Foreign Affairs Committee, and also as someone who is just glad to be reunited with the hon. Member for Strangford (Jim Shannon)—I knew he would be here today.

The FAC report, “The cost of complacency: illicit finance and the war in Ukraine”, in October made many recommendations, some of which have been touched on. Those that have not been mentioned include the need to implement beneficial ownership rules and to reform Companies House, including by giving the registrar powers to verify information and to remove corporate entities for wrongdoing and provide robust identity verification mechanisms. It also recommends making enforcement more effective by reforming unexplained wealth orders, or by at least assessing why they have not been as effective as the Government originally intended. The report also suggests making better use of the exchange of notes process in relation to companies incorporated overseas, reforming corporate criminal liability laws and whistleblower legislation, professionalising the sanctions unit of the Foreign, Commonwealth and Development Office, and making more concerted efforts to seize assets that have been frozen by sanctions.

The Government’s response is, at best, tepid. They say that they are aware of the security threat of illicit finance and suggest that the war in Ukraine is the driving political force for action, but that leaves many people who are focused on this issue concerned that no effort was made previously and wondering why it has taken a war in Europe to drive reform and action in this area, when it has been clear to so many that illicit finance has been entering the UK at colossal levels for some time.

The Government’s response is largely being taken forward in the Economic Crime and Corporate Transparency Bill, but there is broad concern that it does not go far enough. For example, the Government have committed to reform of Companies House, but the UK Anti-Corruption Coalition says that they need to go much further to prevent UK-registered companies from providing a veneer of legitimacy for secretive offshore networks, by ensuring transparency over shareholders, partners and members. The Government have acknowledged the risk associated with opaque corporate ownership, but the Bill in its current form does not make the changes that would prohibit private limited companies, limited liability partnerships, limited partnerships or Scottish limited partnerships from having opaque corporate partners, and it must go further.

The UK Anti-Corruption Coalition also asked the Government to improve the register’s accuracy by verifying and publishing shareholder information. The information it holds on shareholders needs to be transparent and accurate, including names, company numbers and addresses—all the criteria that we assume is held but is not. The Bill also needs to give Companies House the power to review verification documents provided by third-party agents—usually trust and company service providers—because without that level of work, Companies House’s data will simply not be robust enough.

The Government have said that they will undertake a review of whistleblower protections and are assessing time and scope. It would be really good to have an update on that, because there is a lot of concern that, while journalists may be covered, they are not the only people who warrant protection. Journalists rely on whistleblowers inside companies and organisations, and they should be the focus of further and greater protection. I hope, therefore, that the Minister will tell us whether the Government are considering introducing a whistle- blowing Bill to protect those who seek to speak out against or uncover economic crimes and wrongdoing. That is not covered by current Government plans, so I hope the Government will follow through on their commitment to review the UK’s whistleblowing framework and present the timeline and scope of that review.

The Government say that they accept the Committee’s recommendation to establish a professional and permanent sanctions group within the FCDO. However, the global anti-corruption sanctions regime, which the UK introduced its in April 2021, has been used significantly fewer times than the 30 designations a year that the Government originally envisaged. Why has the performance been so much worse than expected? What steps are being taken to improve it, when will they be implemented, and when will they be put to use?

In response to the Committee’s recommendation to grant additional funding for law enforcement, all the Government have offered is money to fund the reform of Companies House, and they have said that the Home Office will set out an annual report to Parliament on unexplained wealth orders. Frankly, that is pathetic, and today’s statement means that the uplift in the Serious Fraud Office’s core resources budget is simply not good enough to match the level of crime in this country. The UK spends £850 million a year on funding core national level economic crime enforcement bodies, but economic crime costs the UK £290 billion a year. The National Crime Agency has suffered a 4.2% decrease in its core budget over the past five years, yet fraud has risen dramatically. It accounts for 40% of all recorded crime, yet fraud prosecutions have fallen from 42,000 in 2011 to 13,500 in 2021—a 67% decrease in a decade. The Government are simply lagging far behind the scale of the problem. The NCA needs resourcing to the scale required, and the Minister needs to raise the Government’s game.

The Committee has put forward additional asks. Given the speed with which the two economic crime Bills were put before the House, does the Minister anticipate additional legislation to rectify any gaps? Will the Government be reviewing the implementation of the two Acts? When does the Minister expect to see measurable outcomes from changes to resourcing the fight against economic crime? What outcomes is he prioritising? How does the new sustainable funding model support long-term planning to support those goals? How does public-private information sharing feed into those enforcement aims?

It would be good to hear from the Minister what progress is being made on suspicious activity reports reform. The Government have mentioned that they are interested in that, but we have not seen action on it yet. It would also be good to hear from the Minister whether the Government’s understanding of the threat of economic crime has changed. Do they see illicit finance as primarily a criminal issue or a security threat?

Golden visas—the tier 1 visa scheme—allowed a recipient to stay in the UK for three years in exchange for a minimum £1 million investment, but they became a vehicle for much laundering of corrupt money in the UK because of a lack of checks. That scheme was shut in February in response to the full-scale invasion—the second invasion—of Ukraine, but a review of the scheme, commissioned by the Home Office in March 2018, has still not been published. The Committee called for the review to be published without delay. The Government have said that they will publish it “in the near future”. I really hope that the Minister can tell us what is happening. If the Government are at all serious on this issue, they will be able to tell us today when that report will be published.

The Government did not even bother to respond to the Committee’s recommendation that they review visas issued since 2015. Have the Government concluded that none of the outstanding visa holders pose a security threat? Especially given that the Government tell us that they have changed their policy towards both Russia and China in recent weeks, will the Government be reviewing that decision? The Government have not responded to whether they plan to review those granted visas who had gone on to gain residency or citizenship. The Home Office should set out how it will deal with people with corrupt or criminal sources of wealth who have already received indefinite leave to remain or subsequent citizenship through the golden visa route. Those visas may still need to be withdrawn and other measures taken.

It would be good to hear what the Government plan to do, especially in the face of those of us who deal with the Home Office week in, week out, on behalf of constituents desperate to get family members into this country to work here, to contribute here and to care for other family members who are sick here. I have constituents who have had family members pass away while waiting for visa application decisions. I recently saw a constituent who has waited more than a decade for an asylum application to be decided—while corrupt millionaires have been able to gain access under a Government-sponsored programme, which is, frankly, simply despicable.

The UK Anti-Corruption Coalition says that 6,312 tier 1 visas—more than half of all golden visas—are being reviewed for possible national security risks. That is the scale of the problem. The Government opened the door to this. By April 2022, 10 Russian nationals subject to sanctions had previously been granted golden visas. That is what this Government have permitted in this country. In the light of today’s news from the director general of MI5 about potential attacks in this country from Iranian agents, could the Minister tell us whether any of these golden visas were issued to Iranian nationals?

How many people got this red-carpet treatment when they should have had the rug pulled from under their feet? And how are the Government now quantifying the level of damage that these visas, and their approach, have caused? The message sent across the globe has been that London and the UK have been open to blood- soaked money from wherever it comes. Frankly, secret meetings with agents of other countries—this goes right to the top of Government under the right hon. Member for Uxbridge and South Ruislip (Boris Johnson)— have simply not been documented. This is a Government who have undermined national security on so many levels and damaged the UK.

The Government have made some reforms to tier 1 visas since 2015, but there remain glaring loopholes, including one that allowed 100 golden visa applicants to borrow money from a firm owned by Russian nationals in order to make investments that ultimately went back to Russia. How are the Government penalising those involved, and how are they seeking to capture the money that should have been here? Can the Minister give any further clarity on timing for the review of the whistleblower legislation?

I have three final points, which are much wider. The first is on corporate criminal liability. The Committee said that the Foreign Office should work across Government to encourage reform of outdated and ineffective corporate criminal liability laws that mean that it is difficult to hold large companies to account for economic crime. In response, all the Government said was that they had commissioned a report from the Law Commission and were considering further action. The initial call for evidence by the Government concluded in March 2017—five and a half years ago. The Government then reported on this in November two years ago. And the Law Commission’s options paper was published in June 2022. I hope the Minister can give us today an update on progress, because frankly it looks like the Government are not even dragging their feet; they have not even got out of bed.

I have already touched on unexplained wealth orders. Since the passage of the emergency legislation this year, only one unexplained wealth order has been applied for by law enforcement. In total, only nine UWOs relating to four cases have been obtained by the NCA since the tool was introduced in January 2018, and just one unsuccessful application for a UWO left the NCA facing £1.5 million in legal costs. The hon. Member for Isle of Wight touched on the cost imbalance and the resourcing issue. The problem is much wider, because aid cuts have led to a £3.6 million budget cut for law enforcement bodies tackling illicit finance and doing international corruption work, and have resulted in the target for the use of UWOs based on aid-funded investigations being reduced to zero. I ask the Government to increase their ambition. Through the Government, law enforcement should be able to obtain UWOs, and they should have a boost in resources to fund the expert staff and technical capabilities that they require.

The UK Anti-Corruption Coalition suggests hypothecation to boost resources and capability. It suggests that funds generated through law enforcement activities be reinvested in law enforcement budgets to fund things such as the state-of-the-art IT infrastructure and data analysis capabilities required to do the job. Law enforcement bodies are hamstrung at the moment and are desperate for resources and capability.

Between 2016 and 2021, law enforcement bodies responsible for fighting economic crime in the UK brought in £3.9 billion in confiscation and forfeiture orders and fines. If that money had been reinvested in the agencies on top of their core budgets, an additional £748 million a year would have been provided to help tackle the problem. That is nearly double the resources that the Government currently provide, so I hope the Minister will respond to the UK Anti-Corruption Coalition’s recommendation.

SLAPPs allow oligarchs to supress evidence of their corruption and protect their reputation through vexatious litigation, unfortunately and very sadly through British law firms, against those seeking to tell truth to power, including journalists and publishers. The pressure of excessive costs coupled with the personal strain of legal threats hampers the ability of investigative journalists, academics and campaigners to shine a light on evidence of illicit wealth. Between March and May, the Government called for evidence on SLAPPs, and concluded in their report that they intend to pursue legislative reform at the earliest opportunity. That requires significant change, so will the Minister outline how the Government will take forward that well overdue legislation? Will they introduce early dismissal so that courts can dismiss any case that is in the public interest, and cost protection for defendants? I hope the Minister will tell us when the Government will legislate and, more importantly, when those powers will be in place to protect those who seek to shine a light on illicit finance in the UK, which is a growing problem.

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[Leo Docherty]

Although I am grateful for the invitation to speak for the Home Secretary, I am going to pass on that opportunity. The hon. Member might seek clarification from the Home Secretary herself.

We are proud that we have sanctioned more than 1,200 individuals and 120 entities since the start of Putin’s outrageous invasion of Ukraine. That includes sanctioning Russia’s major banks, as well as more than 120 oligarchs with a combined net worth of more than £140 billion. This was made possible due to cross-Government planning months before the Russian invasion. Our planning proved pivotal to the swift designation of individuals and the introduction of new measures within days of the invasion. The legislation enabled the Foreign Secretary to sanction more individuals and entities at a greater pace.

We are taking robust action across Government, and with our international partners, to ensure that sanctions are effectively enforced. That is done through the Russian elites, proxies and oligarchs taskforce, which brings together international partners to ensure the effective enforcement of financial sanctions implemented against Kremlin-linked elites and entities.

[Neil Coyle]

Ten of the people sanctioned by the Government are Russian nationals who were recipients of tier 1 visas. Does the Minister have any sense of shame at the level of misuse of that system? When will the review of the 6,000 people who took tier 1 visas but were under investigation for being a national security risk conclude? He has not given us any information on that.

[Leo Docherty]

I repeat that the review will be published in due course. We recognise that there has been a problem, which is why it is under review. It will come forward in good time, I hope.

Let me turn to the resources committed to sanctions. As noted in the Government’s response to the report, we agree that the skillset of staff focused on sanctions has been central to our success in bringing those sanctions to bear. In recognition of the central role that sanctions continue to play as a key part of UK foreign policy, our Department has established a permanent sanctions directorate, in line with one of the report’s recommendations. As part of this new directorate, our Department has established a cadre of sanctions experts to build the enduring expertise that we need in the long term.

Additionally, I can confirm that the Office of Financial Sanctions Implementation will have more than 100 staff by the end of this financial year, with current staffing having already more than double compared to last year. That will enable the OFSI to continue to lead the implementation of UK sanctions and ensure that assets in the UK are frozen.

On our approach to asset freezes as opposed to seizures, and getting that balance right—many colleagues have mentioned this and it has come up on the Floor of the House—we are exploring further options to finance the reconstruction of Ukraine using Russian-linked assets. That presents complex legal and policy challenges that officials are considering in detail with other Departments. We are looking at it seriously because we recognise that the scale of assets currently frozen is very significant. I am sure we would all be pleased if there was a route through good legal policy to ensure that that money could be used to make a positive difference.

On overall funding, combatting illicit finance requires the necessary resources to enforce our anti-money laundering laws and bring kleptocrats to justice, which is why the Government have developed a sustainable funding model that demonstrates our commitment to tackling economic crime. We are investing in the National Crime Agency and have increased its budget year on year since 2019. Since February, we have also created a new unit in the NCA, the combating kleptocracy cell, which is focused on targeting corrupt elites and their wealth in the UK. The combination of last year’s spending review settlement and private sector contributions through the new economic crime levy will provide funding of £400 million over the spending review period. That includes £63 million for Companies House to implement its transformation programme, which I already mentioned.

On the speed and scale of our response, we have taken robust action over the past decade. We published a landmark economic crime plan in 2019; we increased the number of investigations into corrupt elites; we established the National Economic Crime Centre; we passed the Criminal Finances Act 2017; and we became the first major economy in the world to implement a public register of beneficial ownership of domestic companies.

Earlier this year, the Government took swift action by passing the expedited Economic Crime (Transparency and Enforcement) Act 2022. The Act is already helping us to crack down on dirty Russian money in the UK. The Economic Crime and Corporate Transparency Bill, which builds on that Act, is currently in Committee. The Bill will help us to bear down on kleptocrats, criminals and terrorists who abuse our open economy, thus strengthening the UK’s reputation as a place where legitimate business can thrive while driving dirty money out of the UK.

A number of colleagues, particularly the hon. Member for Stirling, mentioned the role of Crown dependencies and overseas territories. Of course, all Crown dependencies and overseas territories with financial centres are committed to meeting international standards on illicit finance, tax transparency and anti-money laundering, including those set by the OECD and the Financial Action Task Force. All Crown dependencies and inhabited overseas territories have committed to introducing publicly accessible registers of company beneficial ownership. That is a major shift that puts them ahead of most jurisdictions.

I am pleased that significant progress has been made by several of the jurisdictions, including Gibraltar, which I visited recently. Gibraltar’s register is already operational. The Cayman Islands is working at pace and is completing a consultation on the details of its register. The British Virgin Islands also recently passed legislation that will enable the framework for regulations to be made for a register, in preparation for 2023. Smaller overseas territories, such as Montserrat and Anguilla, are working with the FCDO to update their systems to enable public access. We have funded Open Ownership, a specialist NGO, to provide technical assistance to each overseas territory.

I reiterate our gratitude to the Foreign Affairs Committee for its detailed and useful report. We hope that the Government’s response will assure colleagues that we are gripping the issue at the policy and technical levels. We also hope that it sends the message that London and the UK are no place for dirty Russian money and that our legal framework and institutional strength will deter anyone who thinks that is not true. I also hope it will provide reassurance to our friends and allies, especially Ukraine. We are determined to ensure that we are able to help Ukraine to rebuild its country and defend its sovereignty against outrageous Russian aggression, which all too often has been connected to Kremlin-linked international assets. I hope the Government’s response reassures people that we are getting after it.