The disclosure by the OCCRP and investigative journalists around the world of another massive laundromat (Troika) along with the news that UK entities are once more central to their effectiveness, has brought with it the somewhat predictable cries about the failure of UK regulations, the inappropriateness of the recent FATF Mutual Evaluation and other generally condemnatory comments about the UK’s AML regime.
Whilst not disagreeing with much of the criticism, there is a worrying lack of understanding, particularly when the criticism comes from financial crime professionals, of the role that UK entities play within Laundromat schemes.
And the reason that it is worrying is that the UK regulatory environment (at least as it is generally understood) does not, and cannot, have any impact.
Why, you ask?
Because the one place that UK entities created specifically for use in laundromats, are not actually put to use is within the UK banking system and so they are out of the reach of UK regulators.
Let me explain.
The attractiveness of UK entities is manifold but in short, they are utilised by designers of laundromats for the following reasons:
- The UK has a mature online creation and filing service so remote access is easy and encouraged
- The costs are low in order to encourage entrepreneurial activity in the UK economy
- The UK is seen as a safe and prestigious location which provides a sense of security and assurance to banks who create bank accounts on their behalf.
The point here is that the banks that open accounts for these entities are not UK banks. Witness what happened in Danske, Estonia, or Ukio Bankas, Lithuania, or Trasta Komercbanka in Latvia. They all had dozens of LLPs and SLPs as customers. But all the UK did was provide the legal entity.
And those entities would have had members or partners which were themselves legal entities in secrecy locations like Nevis, the Marshall islands or the Seychelles (no transparency registers there).
It would have a PSC (if indeed one had been named) in some outpost of Europe or beyond and of such anonymity that tracing them could be all but impossible.
It would mostly trade out of Russia or some other Central or European country.
So you tell me how UK regulation would help in that situation?
Now, tightening up the rules around company formation and insisting on much more stringent due diligence by Companies House or some agency acting on its behalf prior to a company going live?
Yes, I would support that 100%. But Companies House does not fall within the remit of the UK MLRegs 2017.
So the UK Regulatory regime, whilst not in any way perfect, has no impact on laundromat activity unless and until the money enters the UK financial system. And the reality is that this tends to happen right at the very end of the process when it is at its hardest to detect.
If I take a typical case from the Danske affair, the money will leave, say, Russia as the ostensible payment of an invoice for, let’s say, building materials. It will be paid in to an account with a small regional bank in the Balkans where it will be rapidly transferred between two, three or more other legal entities (often LLPs or SLPs but almost as likely to be Hong Kong, Cypriot or New Zealand entities) before eventually finding its way to an entity located in an offshore location (say, BVI or Belize).
At which point it disappears from view. Because it’s called a secrecy location for a reason.
And, at that point, it might re-emerge en route to London, or New York, or Monaco, where it will be used to buy some lovely property in the name of the offshore entity, on behalf of who knows who. Because they don’t have transparent registers.
Rinse and spin. Laundromats. There’s a reason that’s why they are called that.
Throw all the dirty washing into a great big washing machine. Add nice clean water and detergent along the way. Mix with all the dirt and flush it away. Out comes nice clean laundry.
And, yes. London is a home to dirty money and UK entities are one of the lubricants of the machine.
But it’s not as simple as just telling the UK to tighten up its regulatory environment.
If all the other banks throughout Europe (and I include the UK here) and beyond started taking seriously the requirement to understand “the nature and purpose” of their customer’s accounts, and then monitor them properly to see if that’s really what they are doing (as their regulator requires them to do) a lot of this problem would disappear overnight.
Simples!
Hiding in plain sight - my search for money launderers 