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Money Laundering

Economic Secretary to the Treasury Simon Kirby was brought before the House of Commons in March to

answer urgent questions on the ‘Global Laundromat’ case. He announced that investigators from the Financial Conduct Authority (FCA) and the National Crime Agency (NCA) had launched a review of the activities of Britain’s high street banks following revelations in The Guardian about a multi-billion dollar money laundering scam that MPs described as a national disgrace and scandal.

The case follows a three-year probe by Latvian and Moldovan law enforcement agencies investigating the suspected laundering and transfer of at least $20 billion out of Russia between 2010 and 2014. The investigation is ongoing, but the investigative reporting platform Organized Crime and Corruption Reporting Project (OCCRP) has written that the funds could be linked with corrupt state contracts, tax evasion or embezzlement of state funds. However, this has not been confirmed. Anonymous sources allegedly shared data with the OCCRP suggesting that almost $740 million of the suspected criminal money passed through banks with a presence in the UK.

The complexity of the case shows that money laundering is not as easy to identify and combat as many, particularly MPs from all sides of the House questioning Kirby, assume. The UK’s role in the Global Laundromat was just a snapshot of the full picture, given the transnational nature of the scheme. Moreover, it is worth noting that the UK has taken, or is in the process of taking,

some concrete steps to try to address some of the vulnerabilities in the system that money launderers exploit. There is still certainly more that could be done, and attempts to address the issue will require a coordinated public–private approach.

Almost $740 million of the suspected criminal money allegedly passed through banks with a presence in the UK

Shadow Chancellor John McDonnell said the Laundromat case ‘appears to point to an overwhelming failure of basic management on the part of the banks themselves’. The accusations were levelled at HSBC, the Royal Bank of Scotland – in which the UK government has a 73% stake – Lloyds, Barclays and Coutts. The Guardian said the banks were facing questions over what they knew about the scheme and ‘why they did not turn away suspicious money transfers’. However, the exact context is not yet clear. The Guardian’s accusation indicates an assumption that the transfers themselves looked suspicious at the time to the banks, and yet they waved them through anyway. Systems and controls may have failed, negligence could have occurred, but The Guardian acknowledged itself that the banks ‘processed money that had already been laundered’. Therefore, it may have looked legitimate at the time. Concern may even have been

raised by the bank through a Suspicious Activity Report (SAR), submitted to the UK Financial Intelligence Unit, although there may not have been enough grounds or resources at the time to do anything about it. SARs are not publicly available.

Among the actions taken by the UK government have been efforts towards transparency through the Persons of Significant Control (PSC) register. The main requirements are that UK companies, Societates Europaeae – a type of public limited-liability company regulated under EU law – and Limited Liability Partnerships identify and report to Companies House those with shareholdings of above 25% in a company, an individual who holds more than 25% of voting rights in a company or an individual who holds the right to appoint or remove the majority of the board of directors of the company.

The Criminal Finances Bill 2016 will help to tackle proceeds of crime in the UK through Unexplained Wealth Orders (UWOs). These will allow high court judges, after an application from a UK enforcement authority, to give notice of a UWO on property where the respondent is a politically exposed person entrusted with prominent public functions by an international organisation or a country outside the European Economic Area, or there are reasonable grounds for suspecting involvement in serious crime. The respondent must then explain how they acquired these assets. Any failure to respond adequately will mean the property is presumed to be recoverable. Interim freezing orders can also apply to avoid the respondent disposing

Lessons Learned so far from the ‘Global Laundromat’ SchemeSarah Lain

The UK Economic Secretary to the Treasury and banks have been criticised by MPs over Britain’s alleged role in a transnational money laundering scheme. However, closer examination shows that combating money laundering may not be as simple as MPs and other critics think.

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Money Laundering

of assets while source of wealth is ascertained.

The EU’s soon–to-be-transposed Fourth Money Laundering Directive seeks to tighten some of the perceived weaknesses around due diligence requirements for potential money laundering ‘enablers’, particularly Trust or Company Service Providers (TCSPs), entities used to form companies or other legal persons. They may also act, or arrange for another person to act, as the director, company secretary or nominee shareholder for another person or to provide addresses for firms. A TCSP in Edinburgh helped to set up a Scottish Limited Partnership, made up of two companies based in the Seychelles, believed to be the beneficiary of $1 billion fraudulently moved out of the Moldovan banking system.

The UK government plans to create a register of beneficial ownership information of overseas companies that own or buy UK property or participate in UK central government procurement

A particular vulnerability has been the previous vagueness around whether customer due diligence should be required when TCSPs register a company on behalf of someone else. Given that this may be a ‘one-off transaction’ and there may be no further oversight of the business once it is established, this does not necessarily trigger customer due diligence as it is not seen as initiating a ‘business relationship’. The recent UK government consultation on the Fourth Money Laundering Directive suggests this will be clarified explicitly as a business relationship in future, thus requiring TCSPs to know more about the companies they are registering.

The UK government also plans to create a register of beneficial ownership information of overseas companies or

other legal entities that own or buy UK property or participate in UK central government procurement. Property was another outlet for some of the Global Laundromat money allegedly laundered through UK banks.

It is important to note that transparency initiatives such as the PSC register and measures to enhance due diligence requirements for TCSPs when registering new businesses were not in force when the UK-related Laundromat activity took place. The initiatives will help to tighten some of the responsibilities of certain ‘gateway’ sectors for money laundering. However, transparency and due diligence alone will not necessarily detect or prevent some of the methods used by the money launderers.

This is highlighted through one of the methods used in the Global Laundromat, involving UK companies, fictitious loans, guarantors based in Russia and Moldovan courts. Although numerous companies were involved, and not just in the UK, one example demonstrates the scheme well. In 2011, UK-registered Goldbridge Trading Ltd took a $400m loan from UK-registered Valemont Properties Ltd. The loan agreement was fictitious, but provided the legal basis to move the funds out of Russia.

The loan guarantors were a group of companies registered in Russia and a Moldovan citizen. One of these Russian companies acting as a guarantor was called Legat LLC. Nikolai Gorokhov, a Russian resident, had registered this company and was its director. He was not the true initiator of the business, however. He became associated with the company after applying to a newspaper advert when looking for work, and he was subsequently employed to register a number of different companies in his name, open bank accounts abroad for those companies and then shut them down a few months later. In the time that these companies operated, billions of roubles passed through their bank accounts and out of the country. In an interview, Gorokhov seemed to know what he was doing, describing himself as a pomoechnik, or someone hired to register one-day firms. These have been

used in Russia as conduits for money transfers and then vanish before they are detected for tax obligations. This highlights how some of the more suspicious activities linked to the UK’s role in money laundering took place in other jurisdictions, which are beyond the remit of the UK law enforcement alone.

Things are particularly difficult if the source jurisdiction is not cooperative. The Moldovans themselves, who recently elected a pro-Russian president, have complained that they have not received assistance from Moscow. Some Moldovan officials suspect the Russian Federal Security Service of being involved in the scheme and in hindering the investigation.

Returning to the scheme, Goldbridge defaulted on the $400m loan, so Valemont took the company to court in Moldova. As mentioned, a Moldovan national was also a guarantor of the loans alongside the Russian companies. This provided the jurisdictional justification for Valemont to file the suit in Moldovan courts. Complicit judges there then allegedly legitimised the case.

The Valemont case highlights the role of TCSPs in knowingly or unknowingly registering shell companies in the UK for the purposes of money laundering

One such judge, Valeriu Gâscă, who is being prosecuted in connection with the alleged scam, ruled in favour of Valemont for claims of $400 million. The money was transferred from Russian banks to Moldovan bank Moldindconbank, and then on to Valemont’s account with the now defunct Latvian Trasta Komercbanka, which lost its licence in 2016. The Latvian financial regulator Finanšu un kapitāla tirgus komisija said it had identified ongoing shortcomings with

PREVIOUS PAGE: The commercial district in central Moscow. The ‘Global Laundromat’ case follows a three-year probe by Latvian and Moldovan law enforcement agencies into the suspected laundering and transfer of at least $20 billion out of Russia between 2010 and 2014. Courtesy of Wikimedia.

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Trasta Komercbanka’s operations regarding prevention of money laundering and terrorist financing.

The formation of the original Valemont corporate vehicle on 14 August 2006 highlights the role of TCSPs in knowingly or unknowingly registering shell companies in the UK for the purposes of money laundering.

Valemont was formed in 2006 by a London TCSP, with Cornhill Directors Limited as the director, Cornhill Services Limited as the secretary and Cornhill Shareholders Limited as shareholder. Then, shortly after its incorporation, the structure became more opaque. Bahamas-registered companies became the secretary and shareholder of Valemont, with a Dubai-based UK national acting as director. This individual was replaced in 2013 by a South African national. She, in turn, was replaced by another individual. It is impossible to know if they were acting as nominee directors.

Under the new PSC rules, more information would need to be disclosed, given that Valemont was registered as a plc. Valemont was dissolved in December 2015 before PSC rules came into place. A disclosure should have helped to identify the beneficial owner of the Bahamas-registered shareholder. Still, it would not necessarily have raised the red flag to money laundering.

It was not until the annual return of August 2014 that links to the former Soviet Union became clear. This showed that Ukrainian national Bogdan Kuchay had become director and shareholder of the company. Therefore, even without PSC requirements at the time, given an individual was eventually named as a shareholder, this represented a degree of transparency on the owner of the company in 2014.

Based on these documents, Kuchay was not involved in the company at the time the alleged ‘loan’ took place in 2011. Those in charge of Valemont in 2011 were the Bahamas-based shareholder and the Dubai-based director. Looking elsewhere, however, Kuchay had already been granted power of attorney for Valemont in June 2010, just before the fictitious loan deal, giving him the power to enact financial transactions and open and close bank accounts for the company. This highlights that in UK corporate documents, Kuchay’s

involvement in a UK company was not clear in 2010. Once again, however, revealing this information in itself at the time would not have necessarily highlighted suspicious activity.

Detecting and preventing money laundering in the UK is not always that simple

Kuchay as an individual was unlikely to be the true beneficiary, given the manner in which the shell companies in the broader scheme worked. As noted, Gorakhov was employed as a nominee to register companies to funnel funds out of Russia. Examining Kuchay’s other corporate interests in other jurisdictions may have added to the picture, given that he was also a director of Russian company OOO Prime, created in 2012. Its sole shareholder was Belize-based Denison Limited, and the company, like Valemont, was also used to make claims against ‘debtors’ in the scheme. However, there was no trigger for UK due diligence on Kuchay. Valemont used a Latvian bank account, so UK banks did not screen the company. Companies House does not investigate companies as they register in the UK.

Thus, detecting and preventing money laundering in the UK is not always that simple. There are also limitations of transparency measures alone. A PSC register is certainly useful, but verification and further investigation is necessary to understand the risks. However, it would be virtually impossible to investigate every company registered in the UK. Moreover, as the Valemont case shows even if the declared beneficial owner is publicised, they may not in reality be the real beneficiary. It took the leak of the Panama Papers for some of the information on true beneficiaries of the scheme to come to light.

Moreover, transparency requirements themselves can be circumvented if not monitored properly. Global Witness has investigated this. In November 2016, it assessed the information in the PSC register, which came into force in June 2016. Almost 3,000 companies listed their beneficial owner as a company with an address in jurisdictions with low public

disclosure requirements, which is illegal under PSC rules. There were clearly errors in some of the reporting, with a number giving the beneficial owner’s birth date as 2016. Highlighting these issues takes investigative power. More tools are required within Companies House to ensure that the information is not misleading or incorrect.

Intelligence gaps also continue to need filling. The UK’s 2015 National Risk Assessment of Money Laundering and Terrorist Financing highlighted law enforcement’s concern that TCSPs might be enabling money laundering through their role of creating complex corporate structures. Customer due diligence must become a requirement for TCSPs registering companies, even if they are offering pre-registered or ‘off the shelf ’ companies. Efforts are likely to be made to tighten up the supervisory regime of TCSPs, but law enforcement and supervisory bodies HM Revenue & Customs and FCA need more expertise on the TCSP industry and the risks posed to better understand their duties rather than simply relying on TCSPs.

It would also be beneficial to have expertise on evolving practices in high-risk jurisdictions within UK law enforcement. Russian business daily Kommersant recently reported that a ‘modified Laundromat scheme’ had emerged in Russia, cutting out the need for a second country. Instead, a resident and non-resident of Russia agree a fictitious loan through an arbitration court in Russia. The resident claims they cannot repay the loan. Having won the case, the non-resident applies to the Federal Bailiff Service (FBS) to enforce proceedings. The FBS recovers the funds and transfers them to the non-resident through a foreign bank account. The UK could still be used for shell companies in such a scheme.

The UK will continue to be vulnerable to money laundering, and the government is aware of some of the vulnerabilities it faces and has initiated measures to combat them. However, these will only be as good as their implementation, as well as the level of knowledge held by supervisory regimes and law enforcement on how the vulnerabilities work.

Sarah LainResearch Fellow, Russia and Eurasia Studies, RUSI.