Rivers of dodgy money flow through the UK and there is little prospect of any effective controls or check

Rivers of dodgy money flow through the UK and there is little prospect of any effective controls or check.

The latest evidence of the UK’s complicity comes from the €200bn money-laundering scandal at Danske Bank’s, Denmark’s biggest, Estonian branch. Danish investigators say that between 2007 and 2015 €200bn, mostly dodgy money, from Russia, Ukraine, Azerbaijan, Moldova and other former Soviet states passed though the Estonian bank branch.

Danish Investigators say that UK-based shell companies were involved. One of these, Lantana Trade LLP, had no staff and was controlled by companies in secretive tax havens of Marshall Islands and Seychelles. Companies House records show that Lantana described itself as “consultant for forex and securities market”. It hardly ever traded and always filed less than full accounts, as permitted by the Companies Act 2006. However, the Danish investigators say that millions of pounds a day were being transferred through Lantana’s bank account, a classic sign of money laundering.

The US authorities have begun an investigation and a whistleblower report filed with the regulators claims that Deutsche Bank and Citigroup were involved. The trail may yet expand. The UK’s National Crime Agency has also opened an initial investigation.

Why are UK-based entities involved in flow of dirty money? A joint report by HM Treasury and Home Office noted that “Company formation continues to be exploited by criminals to mask the ownership of assets or transfer these assets between persons”. The use of UK-based shell companies to conceal identity of beneficiaries is also evident from Panama Papers, Swiss leaks, Luxembourg leaks and Paradise Papers, but has not resulted in any reforms.

Anyone from anywhere in the world can form a company in the UK and become a shareholder and/or company director. The Business Secretary informed parliament that “Companies House does not have powers to verify the authenticity of company directors, secretaries and registered office addresses”. Of course, government can change the law but won’t.

Individuals can use nominee shareholders to conceal the identity of the ultimate company owners and controllers. The government has no plans to prohibit nominee shareholdings. The UK law requires each company to identify beneficial owners known as persons of significant control (PSC) i.e. individuals who own 25% or more of the company, but reality is murky.

The BBC’s File on Four radio programme reported that 4,000 company beneficial owners are listed as under the age of 2; Over 40% of the beneficial owners of Scottish Limited Partnerships are either a national of a former-Soviet country or a company incorporated there, and 5 beneficial owners control more than 6,000 companies

Global Witness reported that 7,848 UK-registered companies share a beneficial owner, officer or registered postcode with a company suspected of having been involved in money laundering. More than 208,000 companies are registered at a company factory i.e. a physical address that is the registered address of more than 1,000 companies. More than 175,000 UK-registered companies have provided directors addresses which are secretive offshore jurisdictions.

The National Crime Agency says that accountants and lawyers facilitate money laundering. They are regulated by their professional bodies and face little regulatory action. Much of the hot money finds its way into the property market. Estates agents are required to report suspicious activity to regulators, but are very economical. An undercover investigation found that despite being made aware of the use of hot money, the estate agents agreed to continue with the property purchase and in several instances recommend law firms to help a buyer hide his identity.

Dirty money can’t easily be laundered without the involvement of banks. Banks are required to comply with the “Know Your Customer” (KYC) guidelines and perform checks on the opening and operating of bank accounts. Yet too many have failed to implement even the basic internal controls. Regulators at home and abroad have imposed fines on Barclays, Coutts, Deutsche Bank , Lloyds, RBS, Natwest, Standard Bank, Standard Chartered, Ulster Bank and others for money laundering failures. HSBC paid a US fine of $1.9 billion for violation of the sanctions regime and for permitting money laundering and was also put of probation. Rather than investigating the bank’s UK operations, the then Chancellor George Osborne secretly wrote to the US regulators and urged them to go easy on HSBC.

Bank failures on money laundering also pose serious questions about auditors who are required to evaluate the effectiveness of internal controls. None have ever flagged any concerns. Auditor failures have been noted by the Financial Conduct Authority, but have not been followed by investigations or prosecutions. The regulatory failures are not helped by the existence of at least 25 overlapping anti-money laundering regulators who obfuscate matters and pass the buck. Most of these are not even subject to the freedom of information laws and thus the public is not in a position to ask questions or exert any pressure on them.

The UK will not win the war against dirty money without major reforms and there is little sign of that.

Prem Sikka is Professor of Accounting at University of Sheffield and Emeritus Professor of Accounting at University of Essex. He tweets here.

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