What is money laundering?
In British law, money laundering is defined as the process of concealing, disguising, converting, transferring or removing criminal property.
It is an offence to launder your own ill-gotten gains, but you can also be prosecuted for knowingly helping manage another person’s dirty money. An offence only occurs if the cash can be identified as the proceeds of a crime; for example corruption, bribery, theft, drug dealing or even tax evasion.
In practice, laundering usually involves injecting cash gained through these kinds of activities into the legitimate financial system, in a way which disguises its origins, so that the money appears to come from a clean source.
In the UK, the offence carries a maximum prison term of 13 years. The main legislation governing money laundering is the Proceeds of Crime Act 2002.
The longest sentences are reserved for complex schemes, which involve abuse of trust and power, pressuring others into helping, and a long and close relationship between the money handler and the criminal.
Why is money laundered?
It is difficult to spend dark money without first hiding where it came from. A criminal may suddenly find themselves with large amounts of cash. Too much to keep under the mattress. Enough to arouse the suspicion of the bank manager when it is deposited. Paying for houses, cars, holidays and school fees with stacks of £50 notes is difficult to do without attracting the attention of the taxman.
Spending and safeguarding the money can be as complicated as acquiring it. The predicament is explained in the television series Breaking Bad, when corrupt lawyer Saul Goodman tries to persuade a drug dealer to hide the source of his earnings by investing in a nail salon.
“I’ve got three little letters for you: I-R-S,” Goodman warns. “If they can get Capone, they can get you.” Crime boss Al Capone’s control of the Chicago underworld was famously brought to an end not by the police, but by an 11-year sentence for tax evasion.
Gangster finance is something of a side issue. The cases that in recent years have made money laundering an international issue more typically involve helping the rich and powerful salt away gains from activities that are clearly illegal, but for which they are unlikely to be prosecuted at home.
Recent examples include the looting of Angola’s sovereign wealth fund, the sale of valuable mining concessions in the Democratic Republic of Congo in exchange for bribes paid to its president, the government-sanctioned theft of state assets by Russian oligarchs or, in what has become known as the Magnitsky case, the acquisition of wealth by public officials through a complex tax fraud.
How can criminal funds be concealed?
With the advent of universal banking, and therefore traceable money, gangsters began to look for ways to disguise their earnings. Traditionally, this was done through businesses where tax inspectors might struggle to determine the number of customers, or the quantity and value of what was sold. Businesses like restaurants, nightclubs, bakeries – or nail salons. Revenues from crime would be injected alongside genuine income from painting nails. They were then banked, taxed, and legitimised.
These methods belong increasingly to the analogue era. Since the 1980s, digital money has allowed the laundering business to move offshore, and the amount of being moved has ballooned into the hundreds of billions. An estimate by the United Nations Office on Drugs and Crime puts the annual sum at between 2 and 5% of global GDP, so between $800bn and $2tn. As the agency says, even the lower number underlines the seriousness of the problem governments are facing.
Meanwhile, the trickle of money into tax havens which began in the last century has become a flood. The total now held in offshore banks is estimated at 10% of global GDP and rising.
Britain alone launders £90bn each year, according to the National Crime Agency (NCA). The figure includes the proceeds of almost all serious and organised crime committed in the UK, but also a significant amount of the corruptly obtained assets of politicians and public officials from overseas. This loot finds its way mainly into the housing market. Companies incorporated in the UK’s network of tax havens own 57,000 properties in Britain. Of these, 16,000 are in just two London boroughs: Westminster and Kensington and Chelsea, according to research by Global Witness.
This is high-end money laundering, and it is a thriving British industry staffed by a network of what the NCA describes as “professional enablers”, who in exchange for a fee will turn a blind eye to how the cash was obtained and who really owns it. The key actors here are lawyers, bankers, accountants and a loosely regulated but vital part of the chain – fiduciary service providers.
The now-defunct Panamanian firm Mossack Fonseca provided fiduciary services. It was licensed by tax havens to incorporate offshore companies and its employees acted as nominee directors and shareholders, lending their signature to the paperwork and bank accounts of companies over which they had no real control and in this way hiding the real owners.
A typical offshore laundering scheme involves layers of anonymously held shell companies and unregistered trusts. Trusts are particularly controversial, because their existence is usually not recorded by any government. The money flows out of the country where it was acquired – say China – into a bank account controlled by a Jersey trust, for example, which in turn might control a company registered in the British Virgin Islands. That company may then be used to purchase real estate in a safe, law-abiding city like London.
Hedge funds and other collective investment schemes, many of which are also managed using offshore structures, are another favoured route. Offshore companies can be used to collect deposits from bribes or frauds and those deposits are then moved into legitimate investment schemes with a minimum of questions asked. Profits from the scheme emerge clean and can safely make their way into the ordinary retail banking system.
Why has money laundering become a talking point?
For years reporters and prosecutors working to trace unpaid taxes, oligarch fortunes and financial frauds have only been able to follow the money so far.
The roadblock created by offshore secrecy has limited understanding of what happens in, say, the British Virgin Islands or the Isle of Man.
Thanks to a series of massive data leaks from tax havens, the lid has been lifted. The files of HSBC’s Swiss bank, the Panama Papers and most recently the Paradise Papers have exposed in great factual detail the offshore machinations of the world’s wealthiest individuals and corporations.
What is the government doing to prevent financial crime?
The latest round of efforts to stem the flow of dark money into Britain began some years ago, during David Cameron’s premiership. He made it a central theme of Britain’s presidency of the G8 group of wealthy nations. Leaders attending the 2013 G8 summit in Northern Ireland were persuaded to sign declarations promising to make company ownership more transparent.
Cameron held up his end of the bargain. All those owning more than 25% of a company registered in England and Wales must now give their name and basic details including a contact address. But he did not extend this transparency to trusts – in fact he lobbied against it in Europe. And he left office before the same reforms could be introduced where they were most needed: Britain’s network of offshore tax havens.
The baton was picked up by the campaigning Labour MP Margaret Hodge. She formed a cross-party alliance with the help of the Liberal Democrats and the former conservative minister Andrew Mitchell. On 1 May, 20 Conservative MPs stood ready to defy the government and ministers capitulated. Hodge’s amendment to the sanctions and anti-money laundering bill means that if Britain’s 14 overseas territories do not introduce public registers of company owners by December 2020, they will be ordered to do so by the crown.
If passed undiluted, the reforms will lead to the unmasking of the owners of hundreds of thousands of screen companies within less than two years. The reform has been condemned as a colonial throwback by the overseas territories and it will be fiercely resisted, particularly by the British Virgin Islands (BVI).
Other havens have close relationships with certain industries to sustain them after transparency comes. Bermuda is an insurance hub; the Caymans Islands are a nexus for hedge funds.
Most of the UK havens service between 10,000 and 30,000 offshore companies. By comparison, the BVI is an incorporation factory – it was responsible for supervising 390,000 active entities at the end of 2017.
BVI Premier Orlando Smith has stopped short of calling for independence from Britain, but he has said the move “calls into question our very relationship with the UK”.
Cameron set the ball rolling on other important reforms. In January, legislation known as unexplained wealth orders came into force. The laws are designed to help prosecutors seize the UK assets of individuals who are suspected of corruption but are unlikely to be taken to court in their country of origin.
America now looks weak on transparency - states including Delaware, Wyoming and Nevada allow beneficial ownership to remain hidden. The US does tolerate these onshore havens, but its federal agencies have aggressively pursued Swiss and British banks.
Since 2010, any bank wishing to do business with America (most banks need to deal in dollars) must disclose all US account holders to the Internal Revenue Service, under the Foreign Account Tax Compliance Act. Unfortunately, the flow of information is one way because the US has not agreed to share information on foreign nationals holding accounts in America.
What next?
Government has promised to introduce transparency to the Land Registry by 2021. Any overseas company that purchases UK property should by then be required to declare its owners publicly. Campaigners are concerned about the three-year delay, and believe the measures should come into effect immediately.
They would also like transparency to be extended to trusts, with government registers recording who their beneficiaries are and what assets they control.
Reforms are still needed in the three crown dependencies: Jersey, Guernsey and the Isle of Man. They have more freedom to set their own rules and can in theory choose whether to introduce public registers of the beneficial owners of offshore companies.
Hodge and Mitchell believe they can be persuaded, and are planning a tour of the islands.
“What we plan to do now is to go to the Isle of Man for talks there and then possibly to Guernsey and Jersey,” says Mitchell. “The intention is that we will try and persuade them of the wisdom of copying what Britain and the Overseas Territories have done and what most of Europe is going to do.”
The latest anti money laundering legislation from Europe provides for public registers of company owners in all member states by 2019. If the crown dependencies resist, they will be outliers.
“All territories associated with Britain ought to be governed to the same standards and with the same transparency,” says Hodge. “The purpose of this measure is to tackle all dirty money entering through any British territories. You can’t leave a few out.”
Further reading
The BBC television series McMafia was adapted from a book of the same name written by the former Guardian and BBC journalist Misha Glenny. It tells of the rise of transnational crime since the fall of the Soviet Union.
Published in 2010, Nicholas Shaxson’s ground breaking Treasure Islands traces the roots of Britain’s network offshore network back to the postwar years.
The economist Gabriel Zucman uses statistics to uncover the sums hidden offshore in The Hidden Wealth of Nations
In Capital Without Borders: Wealth Managers and the One Percent, the sociologist Brooke Harrington observes the financial facilitators up close, as she trains for a year to become a money manager.
