Russian corruption: growing calls for tougher sanctions to combat ‘dirty’ money

Ruth Green, IBA Multimedia Journalist

The UK has long been recognised as a favoured destination for wealthy Russian investors, but this flow of ‘dirty money’ has tainted the country’s reputation. It is increasingly viewed as a safe haven for the Kremlin’s coffers, according to a recent report by the UK House of Commons’ Foreign Affairs Committee.

The report, entitled Moscow’s Gold: Russian Corruption in the UK, highlights the contrast between the UK government’s response to the nerve agent attack on former Russian double agent Sergei Skripal and his daughter in Salisbury in March 2018 and its willingness to turn ‘a blind eye to London’s role in hiding the proceeds of Kremlin-connected corruption’. The report also calls on the UK government to ‘sanction more Kremlin-connected individuals’ and work together with EU partners and the US to create a more effective sanctions regime.

Above: Bill Browder on Russian sanctions

Bill Browder, the CEO of Hermitage Capital Management and a vehement critic of Russian President Vladimir Putin, commends the latest US sanctions imposed by President Donald Trump following Russia’s alleged meddling in the 2016 US presidential election.

Browder, who was recently detained in Spain under a Russian Interpol arrest warrant, told Global Insight that the UK has not been tough enough on Russia to date. ‘What everybody has to understand – and nobody does, even the governments that do these things, is that there are sanctions lists and there are sanctions lists,’ he says. ‘If you really want to touch the Putin regime, you sanction the people with money because those sanctions are absolutely devastating for those people with money.’

Currently the UK cannot issue sanctions without the consent of the other 27 EU member states. Matthew Getz, a partner at Boies Schiller Flexner in London, says the US, which is able to impose sanctions more liberally on Russia than the EU, may have had more reason to do so to date.

‘On the one hand, there’s a lot more latitude in the US,’ he says. ‘For the individuals that were recently sanctioned, I think the EU would have to find specific, individual justifications that they were somehow involved or helped facilitate, coordinate or support the activity that we don’t like. There is also a bit more reason for the US to place sanctions on Russia than Europe because Russia does appear to have significantly engaged in the 2016 US election.’

The underlying problem is that London, as a very big financial centre, is a very attractive place for people who want to invest money and therefore also for those intent on laundering money

Bruno Cova, Co-Chair, IBA Anti-Corruption Committee

Although a large number of London’s top law firms have Russian clients on their books, the report singles out magic circle firm Linklaters for its role in ‘facilitating’ the flotation of En+ Group on the London Stock Exchange in November 2017. The Russian aluminium and hydropower business and its owner, Oleg Deripaska, are among more than two dozen Russian companies and individuals targeted on the most recent US sanctions list. Shares in En+ fell around 20 per cent in the wake of the sanctions announcement. Deripaska has since resigned from the company’s board in a bid to persuade the US government to lift the sanctions.

In a statement, Linklaters said: ‘We’re very surprised and concerned at the passing criticism of Linklaters in the report. We reject any suggestion based solely on the fact that we – like dozens of other international firms – operate in a particular market that our services may somehow involve the firm in corruption, state-related or otherwise. As a leading global law firm, Linklaters adheres to the highest standards of business conduct, ensuring we comply with applicable laws and professional rules, including with respect to anti-bribery and corruption, anti-money laundering and sanctions.’

The National Crime Agency estimates that up to £90 billion of illicit funds are laundered through the UK each year. There are no firm figures on exactly how much of this is Russian money, but research by Transparency International indicates some £4.4 billion worth of UK property is linked to suspicious wealth and a fifth of this is by Russian individuals. A recent report by Global Witness also revealed that around £68 billion from Russia has been invested in the UK’s overseas territories over the past decade.

Bruno Cova, Chair of Paul Hastings’ Milan office and Co-Chair of the IBA’s Anti-Corruption Committee, says the Foreign Affairs Committee’s report highlights the inherent risks facing entities operating in the world’s largest financial centres. ‘The underlying problem is that London, as a very big financial centre, is a very attractive place for people who want to invest money and therefore also for those intent on laundering money,’ he says. ‘The report indicates that something more could be done – that I think is true, just as it is true for the United States and several other jurisdictions. There is a lot of ill-gotten money around the world and that money tries to go to the big financial centres. The level of tolerance for these kinds of transactions has historically been a bit too high in certain countries. Perhaps the UK has also been a bit slow in terms of taking corrective measures.’

Cova believes this creates a particular challenge for the legal profession and other advisers. ‘Law firms and other consultants have an obligation to know their customer; they should also be mindful of the reputational angle,’ he says. ‘Any law firm has to make sure – either because there is a legal obligation or because there’s a potential reputational risk – that they know with whom they’re dealing and they know the context of the transaction and take the necessary measures to manage the risk, including, in some circumstances, declining to represent that client.’

The report, published on 21 May, also points to an important amendment to the new Sanctions and Anti-Money Laundering Bill, which was signed into law just two days later on 23 May and will enable the UK government to impose sanctions on people who commit gross human rights violations. It follows in the footsteps of the US Magnitsky Act, a law originally adopted by President Barack Obama in 2012, and named after Russian lawyer Sergei Magnitsky, who died in pre-trial detention in a Moscow prison cell in 2009 after exposing a large-scale tax fraud.

On 30 May, Browder, who was Magnitsky’s client, was detained briefly in Madrid before the Interpol General Secretary in Lyon advised Spanish police not to honour the Russian arrest warrant. This is the sixth time Russia has ‘abused’ Interpol in his case and the timing of the arrest couldn’t be more significant, Browder told Global Insight shortly after his release. ‘The main takeaway from this morning is that it’s a clear sign of how angry Putin is at me for getting the UK Magnitsky Act passed,’ he says. ‘The last Interpol notice Russia issued was directly following the Canadian Magnitsky Act last October.’

As Getz notes, there are indications of a growing trend towards stronger anti-money laundering laws and enforcement in the UK. In April, the government announced plans to reform century-old legislation governing the use of Scottish limited partnerships (SLPs) following growing evidence that they are being exploited in money-laundering schemes, including one instance where 100 SLPs were used to move as much as US$80 billion out of Russia over four years.