Oligarchy

ECONOMIC CRIME BILL

Britain has had a shell company problem for years. Although we tend to think of shell companies as registered in somewhere tropical — Nevis, the Seychelles, etc. — the big scandals have tended to track back to places that are damper and more temperate, and few places are as damp as the United Kingdom, or as scandal-prone as its corporate registry, Companies House.

Then last week we got — drum roll, please — the “biggest proposed reform to the role of Companies House in 170 years.” This has not gained as much attention as it might have done, probably thanks to the new government’s remarkable straight-out-the-gate achievement of driving the pound down to its lowest level in 1,200 years, since the days when one of its kings was Offa of Mercia.

But the reforms are potentially a big deal, so what’s in the new Economic Crime and Corporate Transparency Bill (and apologies to American readers: British bills have really boring names and ugly acronyms)? The most important measure is that Companies House will be transformed from a library, which just accepts information and publishes it, to an active verifier of information.

I sat with a friend a couple of weeks ago to show her how easy it was to register a company in the U.K., since she didn’t believe it was indeed as easy as creating an account on a badly regulated social media site. In her case, there was no option for “tax consultant” in the drop-down menu, so we called her a “taxidermist” but still got the registration finished in 10 minutes or so. If this bill is passed, that won’t be possible anymore, and nor will — supposedly — the kind of dodgy limited partnerships registered anonymously in tax havens that moved billions out of Russia.

Britain’s role as a launderer and a safe haven for dodgy Russian cash has been a key factor in the rise of the kleptocratic Kremlin elite, in the same way Florida helped Chicago mobsters enjoy their hard-stolen wealth in the 1920s, so this question gained fresh urgency after the assault on Kyiv in February. Although heaven knows, it was hardly a secret before that.

•  “We welcome the priority the Government is giving to much-needed reform of the U.K.’s company incorporation system. Over the years, lax controls on company incorporation has seen thousands of UK firms and partnerships being used to launder the proceeds of corruption – hundreds of billions of pounds lost all around the world,” said Duncan Hames, director of policy at Transparency International UK.

Regular readers of this newsletter will know that, at such times as this, I always ask the same question: but is there any money? Creating powers without employing people to use those powers, is like providing weapons to an army with no soldiers. So, the crucial question is how will this be funded? More than half a million new companies are created in the U.K. every year, which is more than one a minute. Checking that information as well as all the filings of the four million companies that already exist will take quite a sizable army if you want to do it well.

Companies House is funded on a “cost recovery” basis, and the fees it charges are designed to pay for the work it does to maintain the registry. Right now, it costs 12 pounds to set up a company (a fee that is already cheap, and which looks cheaper for people outside the U.K. by the minute).

• “When setting the level of fees the government will consider the burden that higher fees will place on businesses and the need to keep the U.K. competitive in the global business environment, balanced against the need to raise fees in order to fund investigative, intelligence and enforcement work that helps combat economic crime and money laundering,” a government fact sheet stated.

Ministers for years have been obsessed with keeping company formation simple and cheap to maintain “British competitiveness,” with no recognition at all that selling disposable companies for criminals to wash their money through has helped create an epidemic of fraud which is undermining that same competitiveness. After a specific kind of shell structure — the Scottish Limited Partnership — became notorious for enabling gigantic money laundering after the Moldovan Laundromat was exposed, ministers created an even-less regulated structure because they worried wealthy people would head off to Luxembourg if they didn’t.

To the surprise of no one, the structures created in that spasm are as wildly opaque as their predecessors, as this remarkable example (thanks Richard Smith!) shows. We know nothing about the companies that own it, not even what jurisdictions they’re registered in.

So, I am not optimistic that this British government will prioritize fighting kleptocracy at all, but at least it is providing a tool that a successor government could actually use. I am also aware that I’m focusing on flaws in one tiny pebble of Britain’s failure to tackle corruption, when there’s a whole avalanche to describe. Veteran Labour politician Margaret Hodge, who has focused on financial crime for longer than any other British public figure, had a lot to say about what was not in the bill.

•  “Nothing on the abuse of our courts by the criminal and the corrupt to muzzle criticism; nothing on using frozen Russian assets to pay for the rebuilding of Ukraine; nothing on protecting the brave individuals who blow the whistle on corporate malfeasance; nothing on holding the enablers that facilitate economic crimes to proper account; and nothing on re-investing cash from fines and prosecutions back into our struggling law enforcement agencies. Until Government sees sense and fixes this Bill, we are effectively arming our first line of defense with toy swords and shields.” Preach.

On that point about the courts being used to muzzle criticism, read this twitter thread from Bellingcat’s Eliot Higgins. Sadly the politician who thought Britain should do something about this misuse of our defamation laws to terrify journalists lost his job for supporting the wrong candidate to be prime minister, so perhaps we’re stuck with it.

JUST GIVE UP

I had fun at a conference in Brussels last week (mainly because of the interesting money laundering chat, but also because Wales were playing Belgium at football that evening so the city was full of our very polite football fans), and enjoyed catching up with Professor Jason Sharman, one of the world’s most interesting researchers into financial crime. If you don’t know his work, he specializes in a “secret shopper” approach to assessing whether people that create shell companies always abide by compliance rules. Spoiler: they don’t.

•  “Because your clients are russian citizen and the banks do not accept russian clients, we suggest to use full nominee service to set up the company and open the bank accounts. This is the best solution for you to be safe and confidental… If you buy any of these company + bank accounts you will receive all company documents, bank account details, internet login details, username, password, tokens. So, everything you need to start immediately,” was the poorly-spelled response from one American corporate services provider when he impersonated someone on the Magnitsky List and approached it about doing business.

At the conference, he gave a broad survey of the world’s failure to stop, or even limit, money laundering in the last few decades and came up with the two suggestions for how to go forward from here. The first suggestion was that we should just give up; since our current system is failing to stop money laundering, we may as well cut our losses, save ourselves the expense, and just let it rip. His second suggestion was that we bring in private sector companies and empower them to do the work if we’re not prepared to adequately resources law enforcement agencies.

•  “I think we need a bounty-hunter model, and the way we motivate the for-profit sector — the hint is in the name — is profit,” he said.

The question is an urgent one: money laundering is the blood supply for financial crime. By failing to stop it, we are spreading misery around the world. If we are to limit what the Kremlin is up to, we need to find its money, and destroy its kleptocratic networks. Clearly, Sharman’s provocative first solution to the problem is unacceptable, which means it’s time to consider his second.

How can we unleash the private sector’s potent lawyers on financial crime? Answers in response to this email please, and I’ll publish the best one in the next few weeks.

TAX HAVEN BLACKLIST

I haven’t written in this newsletter about the EU’s list of non-cooperative jurisdictions for tax purposes, otherwise known as its “tax haven” “blacklist” for a while, mainly because I found that repeated references to it were undermining my will to continue. Anyway, let’s take a look at which countries have behaved particularly egregiously this time, according to the ineffable wisdom of Brussels.

Here they are: American Samoa, Anguilla, The Bahamas, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, Turks and Caicos Islands, U.S. Virgin Islands, Vanuatu. That’s the lot. I can’t even be bothered to add an ironic exclamation mark.

The EU has also presented the information in map form, with the baddie jurisdictions marked by red squares so you can how scary they are. That did make me wonder how I would visually present it, if given the opportunity, and I’ve settled for a Venn diagram. One circle would be labelled “random Caribbean jurisdictions”, which would overlap with another circle “random British jurisdictions”, and a third labeled “random U.S. jurisdictions”. That last one would also overlap with a fourth circle called “random Pacific jurisdictions” so Guam and American Samoa could be in both. All of those would be in a much bigger circle called “WTF?”.

Then I would have another entirely separate circle labeled “not unharmful jurisdictions but not really a big deal either,” which would have Panama in it.

The EU’s list has not been formally adopted yet, so Oxfam hasn’t issued its ritual press release explaining all the ways that it’s rubbish, but here’s a quote from last time, which seems as relevant as ever.

• “How many more tax scandals must happen before the EU commits to a real reform? The current process is full of holes, lacks credibility and fails to put an end to tax avoidance. It is time for the EU to automatically blacklist zero and low tax rate countries, and to hold EU countries up to the same level of scrutiny as non-EU countries.”

Imagine being the EU bureaucrat whose job it is to produce this drivel and trying to come up with some coherent explanation for why the full weight of the European Union needs to be brought to bear on a list of 12 haphazardly selected tropical islands. It’s not just that the last doesn’t include Luxembourg, Cyprus, Ireland, the Netherlands and the various other EU states all individually doing far more harm than this dirty dozen does when added together (although that is bad), it’s also that they’ve crept up to criticizing the U.S. and the U.K., then run away again without actually doing it.

Singling out Guam, the U.S. Virgin Islands, American Samoa, the Turks and Caicos, and Anguilla without doing the same for the United States and United Kingdom is like kicking someone’s cat because you’re too scared to take them on. Pick on someone your own size, Brussels, or don’t pick on anyone at all. Pffff, now I’ll go back to ignoring this for another year.

Gah, I’ve run out of room and I had so many other things to talk about.

WHAT I’VE BEEN READING

I read Helgoland: the strange and beautiful world of quantum physics by Carlo Rovelli on the train to Brussels (and back), and thought it was rather magical. I didn’t understand all of it, but I did come away with a better appreciation of what exactly I don’t understand. If you’re looking for something to stretch your brain in new and unexpected directions, give it a try.