Eurasian Kleptocracy and the UK: What’s the Problem?

Eurasian Kleptocracy and the UK: What’s the Problem?

Does Chatham House see all lawyers as enablers of kleptocracy? A new report seems to suggest as much, but its recommendations are more conventional.

Kleptocrats and enablers

The recent Chatham House report, ‘The UK’s Kleptocracy Problem’, seems almost designed to bait both the UK government and whole swathes of UK professional services providers, which it seems to label collectively as ‘enablers’. On closer examination, its criticisms and proposals are more nuanced, subject to some careful untangling of its terms, and their overlap with legal concepts in the Proceeds of Crime Act 2002 (POCA) and money laundering regulations (MLRs).

The focus of the report is on a set of people who hold the proceeds of a type of ‘criminal conduct’ (as defined in POCA – broadly, conduct that would be unlawful if it happened in the UK), which it calls ‘kleptocracy’, involving the abuse of positions of influence to misappropriate state assets. Its particular interest is where such conduct occurred in one of 12 post-Soviet states (not including the Baltic states, now EU members), which it calls ‘Eurasia’. The report subdivides this set of people into ‘kleptocrats’ (who currently hold state positions), ‘oligarchs’ (current business elites), and ‘exiles’ (former kleptocrats or oligarchs, who have since fallen from favour).

Services for kleptocrats?

The first problem the report identifies is the things done in the UK to help these people, including by the government (granting investor visas), political parties, universities and charities (accepting donations), public relations firms (managing reputations), financial institutions (FIs), and various other professionals, such as estate agents (effecting property purchases), trust and company service providers (TCSPs) (incorporating and managing trusts and UK companies), and lawyers (effecting transactions, and helping with advice and litigation). At various points it labels all such activity, at least when done knowingly or negligently, as ‘enabling’ kleptocracy.

As the report (only) briefly acknowledges, many of these things do not breach UK law. There are three significant exceptions, which it is a little less clear about, and are worth summarising here. The first is where someone handles (or is concerned in arrangements about) the proceeds of such ‘criminal conduct’, and either knows or suspects that this is so (which is classed as money laundering under POCA). Significantly, there is a defence where funds are received for adequate consideration, unless the provider knows or suspects that their goods or services ‘may help’ criminal conduct. This would cover, for instance, private schools receiving fees, and (in most cases) PR firms, though not political parties, or charities (because nothing is given in return for the donation – or at least, one would hope not).

The importance of being regulated

The second exception is where someone in the ‘regulated sector’ has reasonable grounds to suspect that someone is money laundering and fails to report it (also an offence under POCA). The regulated sector includes FIs, TCSPs, and lawyers where they effect transactions, but not charities, PR firms, or lawyers when helping with advice or litigation. The reports are made to the UK’s Financial Intelligence Unit (FIU), part of the National Crime Agency (NCA).

The third exception is where business regulated under the MLRs fails to complete procedures such as risk assessment, due diligence, and ongoing monitoring (also an offence, though usually enforced by regulatory means rather than prosecution). Enhanced versions of these processes are required when dealing with Politically Exposed Persons (PEPs) or those related to or associated with them, or where the matter involves a ‘high-risk country’, by reference to a list in the MLRs. As the report points out, an overly formalistic approach to these concepts may catch kleptocrats (who will usually be PEPs), but not oligarchs or exiles, and lend a misleading legitimacy to Eurasian states that are not on the MLRs list (which focuses on the state’s money laundering controls, rather than its record on corruption).

Prosecutions: could there be more?

The second problem the report identifies is the failure of UK law to tackle these people’s conduct, and the proceeds of it, in both criminal and civil proceedings (both of which, it suggests, are insufficiently even-handed, giving a ‘free ride’ to kleptocrats in favour with the UK government). With respect to criminal proceedings, though the report does not cover the point, in most cases UK law will not have jurisdiction to try people for the original (‘predicate’) conduct overseas. Instead, POCA would provide a route to convict them and others for dealing with the proceeds, and both it and the MLRs would provide routes to prosecute some ‘enablers’ (if, of course, the evidence reached the criminal standard, which is broadly ‘beyond reasonable doubt’).

The report implicitly acknowledges that prosecutions of kleptocrats will often not be possible, but it calls for enablers to be dealt with by the criminal process, rather than by their supervising agencies under the MLRs. Notoriously, despite decades of operation, the first prosecution under the MLRs has only just been brought – of NatWest, which failed to conduct ongoing monitoring on a business. But the report’s main criticism of FIs is for reporting too much, rather than too little, and its calls for tougher enforcement are reserved for the service providers that are regulated by their professional bodies (characterised, in a surely deliberate sleight of hand, as ‘enablers regulating themselves’). 

Civil recovery: AFOs success, UWOs failure?

With respect to civil proceedings, the report discusses the schemes to recover property in the High Court, and funds in certain accounts in the magistrates’ courts, the latter referred to as Account Freezing Orders (AFOs). It praises the effectiveness of AFOs, which were added in to POCA by the Criminal Finances Act 2017 (CFA), citing examples of their use in a Eurasian kleptocracy context. But it criticises the (lack of) use, and the High Court’s interpretation, of the CFA’s other innovation, Unexplained Wealth Orders (UWOs).

The report criticises the NCA and the High Court for their approach to evidence in UWO cases, but also queries a clause in POCA itself that asks whether the respondent’s interest in property can be explained by reference to their ‘lawfully obtained’ income, and defines that by reference to local, rather than UK, law. But this is consistent with the role of UWOs in serving the civil recovery process, which in turn targets the proceeds of ‘unlawful conduct’. This is a different concept to ‘criminal conduct’ under POCA’s money laundering provisions, in that it must have breached the law where it occurred (as well as being conduct that would breach UK law if it happened here).

An anti-kleptocracy strategy?

The report ends by recommending an anti-kleptocracy strategy and proposing various discrete reforms. Despite its prior content, it recommends nothing specific to the Eurasian states it is concerned with, nor the criminalisation of behaviour it characterises as ‘enabling’ (insofar as it is not already criminal), nor a change to investor visas, nor redefinitions of ‘unlawful conduct’ or ‘legitimate income’ in POCA, nor a recognition in the MLRs of the risks associated with oligarchs or exiles, nor a more independent FIU. Instead, it suggests:

  1. mandatory reporting to a state agency of PEP transactions over a certain value (likely to be controversial, as many PEPs, ‘Eurasian’ or otherwise, are in practice low risk);
  2. a requirement for UK companies to have at least one UK citizen or resident as an officer, ‘with this person, as well as the company’s ultimate owner, bearing liability for impropriety’ (the first part of which is common in other jurisdictions, while the latter part would be an unprecedented extension of liability for officers and shareholders, which it is hard to see having much support from lawmakers);
  3. investigation of, and penalties for, those who submit fraudulent information to Companies House (offences already, by definition – but who will fund this enforcement action?);
  4. a clear mandate, and better funding, for the NCA to investigate enablers of money laundering (a reform that would require a high degree of coordination between the NCA and the supervising agencies under the MLRs, and again begs questions as to funding);
  5. re-examination of the MLRs in relation to PEPs (requiring them to be listed on Companies House – again, controversial) and high-risk countries (using a new definition, which the report says would cover almost all post-Soviet states, and presumably many more);
  6. a ‘revival’ in the use of UWOs (including by better resourcing at the NCA – again, begging the question of funding);
  7. use of the new Global Anti-Corruption Sanctions regime against kleptocrats and their associates residing in the UK (possible in theory, though the risk of injustice to targets from such measures, based on ‘reasonable suspicion’, can be high);
  8. a new requirement for universities to report on donations (might this prompt donors to go elsewhere, affecting universities’ bottom line?); and
  9. a requirement on charities to publish a list of significant donors (similarly).

The elephant in the room

It is unclear why the authors of the report felt it appropriate, on their journey towards making these recommendations, to appear to brand so many legitimate businesses and professionals as ‘enablers of kleptocracy’. Though it is undoubtedly true that many breaches of POCA and the MLRs go unpunished, the expertise and (for the most part) goodwill of compliance personnel in the regulated sector are, and should be seen as, part of the solution to many of the problems identified.

The UK government, meanwhile, appears to be let off relatively lightly, not so much because of it is showered in glory, but because the blunderbuss of criticism seems to target it less than most (a few barbed criticisms of the prime minister notwithstanding). In truth, the chronic under-resourcing of the NCA (and the Serious Fraud Office, which, oddly and not for the first time, seems conspicuous by its absence, in a report about one of its core functions) by recent governments is the elephant in the room of this analysis. Piling more regulation on the private sector, or diluting the rights of unpopular people, may well be the preferred option for a government that seems to set its face against simply funding law enforcement properly through general taxation. It is unfortunate that this report seems to play into that tired agenda.

John Binns is a specialist in proceeds of crime laws, cannabis regulation, sanctions, and tax investigations. He has extensive experience in financial crime, which also involves bribery and corruption, extradition, Interpol, fraud, market abuse, and the conduct of related civil proceedings. He is a prolific writer and speaker on a variety of topics.

Suzanne Gallagher is a solicitor specialising in corporate crime. Since qualifying in 2017, she has gained experience in a variety of regulatory and criminal investigations including health and safety, environmental protection, fire safety, fraud and money laundering. Prior to joining private practice, Suzanne worked in facilitating regulatory harmonisation in the European Union and in promoting international legal standards at the United Nations.

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