Poor tech implementation and bad communication means mafiosi and oligarchs use London as a money laundering haven
Why do the world’s criminals come to London to launder their dirty money?
“It’s a great place for people to settle. You’ve got people who want stable investments in real estate, and want to bring their families and children to a more stable regime. You’ve messed up Russia, right? So where do you want your kids to grow up? Not Russia,” says Friedrich Lindenberg of the Organised Crime and Corruption Reporting Project (OCCRP).
And there’s a lot of work to do. “You can walk into the right office in London and set up your British Virgin Islands company, your Panama company, your Guernsey trust,” says Lindenberg. “It’s all handled for you.”
Those complex structures mean it’s nigh-on impossible to put an exact number on the scale of illicit money flowing through the UK. “You can basically write any number and nobody can really do you in for it,” Lindenberg adds. “You can say it’s £2 trillion, or £1 trillion. I think it has to be in the trillions. But it’s really hard to estimate, because I worry we have blind spots.”
“The question to ask ourselves is: are we getting any better at identifying the dirty money, and therefore are we perhaps being more successful?” says Tom Keatinge, director of the Centre for Financial Crime & Security Studies at RUSI, an international security think tank. “I think the answer right now is no we’re not. The advancements we’re implementing are very manual.”
The current provisions for fraud monitoring in the UK financial system are ineffectual, says Keating. There is the Joint Money Laundering Intelligence Task Force, a partnership between government and private industry, including international banks such as Citigroup and HSBC (who were approached for this story, but declined to provide anyone for interview or offer a comment). However, this work is a best a minor move against a massive problem.
“A lot of the work the banks feel obliged to do is of no value other than to placate the regulator,” he says. “Everybody in government and the banks knows full well that much of the compliance work they do is entirely pointless, but that’s what the rules say, and no one has got round to making the rules more sensible.”
Many transactions across Europe are monitored, and all banking systems across the world have methods of reporting suspicious activities. Every transaction above €10,000 should be checked for nefarious activity, and reported to the authorities if it smacks of criminal activity. In the UK, banks every year produce huge numbers of these suspicious activity reports (SARs), which then go to the National Crime Agency (NCA). “But the question is, what happens with the SARs?” says Lindenberg. “The answer most of the time is: not very much.”
In all, 634,113 SARs were received by the NCA in the 18 months to March 2017, nearly 18,000 of which were defence against money laundering (DAML) SARs. In all, £56 million of cash was blocked from being transferred to criminals as a result – only a small fraction of the “trillions” of pounds of supposedly illicit money washing through London. “There’s a lot of data, but it may well be total garbage,” says Keatinge, who lambasts the fact that data privacy means banks that operate around the world can only give a small fraction of what they know to UK regulators.
Anti-money laundering is big business: some banks employ thousands of people to monitor accounts looking for potential fraud. In total, British financial institutions are estimated to spend £5 billion every year fighting financial crime; that’s more than what the government spends to run its prisons.
Take Standard Chartered: Financial Magazine understands that the bank increased its annual spending on financial crime compliance tenfold, and boosted staffing levels more than sevenfold. But will it make a difference?
So far, most technology investments seem to have brought little success. In 2017, Rob Gruppetta, the head of the Financial Conduct Authority’s financial crime department, warned that “any bank hoping for a black box in the corner that will sniff out the launderers will be disappointed”. It’s not for want of trying. HSBC has integrated AI developed by British company Quantexa into its anti-fraud systems. The software will cross-check HSBC customers’ transactions against publicly available data to spot and stop any fraudulent activity. (HSBC did not respond to a request for comment for this story.)
The demand for a silver bullet to solve the money-laundering problem has resulted in a huge numbers of startups entering the so-called “regtech” space. More than 700 people visited the RegTech Expo in London on 20 November, with plenty of startups trying to sell their wares to banks. “I struggle to say whether any of them are doing anything truly groundbreaking or innovative,” says Lindenberg. “I think most of them do fancy string matching.”
Experts are uncertain about how effective that’ll be. “You can be loaded with technology to analyse data, but the real problem is we have 25 anti-money laundering regulators in the UK, and altogether 41 regulators dealing with the financial sector,” says Prem Sikka, professor of accounting at Sheffield University, who wrote a book, The Accountants’ Laundromat, warning about the scale of money laundering in the UK. It was published in 1998.
Those regulators are also not very good. Companies House is the main repository for anyone looking to set up a business in the UK. Forming a company here? You have to supply information about who you are – but it doesn’t need to be correct. “No check is made that your name is genuine, your address is genuine, or that you exist,” says Sikka, who points to an alleged member of the Italian mafia who has registered ownerships in British companies as “The Chicken Thief”, living at “Street of the 40 Thieves” in the city of “Ali Babba” [sic], whose occupation is “fraudster”.
“All the problems we have are due, in a sense, to inappropriate institutional structures,” says Sikka. “All this money goes through the financial system,” he explains. “There’s a trail somewhere. But it’s just not really acted upon.”
Graduating from Aarhus University with a degree in communication and media studies, Kristina has been an avid writer and follower of the finacial news and cybercrymes space since 2011. A well-traveled journalist within the industry, Aubrey has written for many well-known outlets, and can often be found poring over white papers when she isn’t writing for Financial Magazine