July 30 2020

Last week Parliament’s Intelligence and Security Committee wrote about how Russian oligarchs and their money had been welcomed by the UK from the mid-1990’s onwards, with Britain’s “light touch … regulation” (where have we heard that before?). The UK’s rule of law and judicial system were seen as a particular draw. But, as the report says: “few questions – if any – were asked about the provenance of this considerable wealth.” Oh dear.

The report says that, rather than the encouragement of ethical practices and transparency amongst the Russian investors as hoped, Britain’s institutions provided “ideal mechanisms by which illicit finance could be recycled through what has been referred to as the London ‘laundromat’”. The patronage and influence this money brought to “willing beneficiaries” helped the reputation laundering process. And then there are the enablers, described with some asperity, as those who “on occasion help launder money through offshore shell companies and fabricate ‘due diligence’ reports”. Dear oh dear.

The authorities do have some ways of countering this: Unexplained Wealth Orders, for instance and seizure of assets. How well these work is another matter, of course. The Court of Appeal recently overturned three UWO’s obtained against the family of the former president of  Kazakhstan, now subject to appeal by the National Crime Agency. The NCA may win its appeal but, as stated in the report, there is an imbalance of resources between the NCA and those with the wealth to fight back. And the longer the money is around and channelled through companies, property, trusts, charities and the rest, the easier it is to disguise its original smell and explain it away – enough to fight off the UWO, anyway.

There have been some successes: in relation to the spending (£11 million on a townhouse, £16 million spent in Harrods over a decade) by the wife of a former chairman (and convicted fraudster) of a state-owned bank in Azerbaijan, for instance. Or the seizure by the City of London police of £2 million in cash held in British banks by a professional money launderer acting for the Calabrian mafia, the ‘Ndrangheta, after a two-year investigation.

Three points are worth noting:

• One of the weakest points of any system is the point of entry. Much easier to keep “dirty” money out than to try and get rid of it once it is in and, over time, made to appear respectable or, at least, explained. Ditto re dodgy individuals.
• Once in, getting rid of the dodgy individuals and money risks becoming a game of Whack-a-Mole, one which tests the patience and resources of the authorities and requires their relentless and sustained focus.
• Be wary of those seeking to use the credit and reputation you have built up over years. That applies to professionals as much as it does to countries. It is flattering to think you will teach and improve them. The grubby reality may be that it is your reputation which is tarnished. It’s an old problem: some well-established banks and professionals learnt this the hard way – with one Robert Maxwell back in the early 1990’s. It’s a lesson worth remembering rather than relearning.

One thing is puzzling though. For years – since at least 1994 – there have been money laundering regulations, with the latest iteration brought in last year. The level of information needed is onerous and extensive. The principle underlying all these rules and regulations and the concept of due diligence is that banks and lawyers and estate agents and the myriad of intermediaries should really know and understand their customers and where their money comes from. So how is it that, even now, a couple of Calabrian Mafiosi are able to set up a company that does nothing, give an address where they do not live and deposit £2 million in an English bank account?

Surely it is not because, as reportedly attributed to Anarchasis, a Scythian visitor to 6^th century Athens: “Written laws are like spiders’ webs; they catch the weak and poor but are torn in pieces by the rich and powerful.”

Photo by Bence Balla-Schottner on Unsplash

June 2 2018

As this fascinating programme shows, the art market and finance have much in common, well illustrated by the story of Salvator Mundi, painted by Leonardo and sold for an eye watering $400 million last year.

This painting disappeared from view after Charles 1’s collection was dispersed following his execution.  No-one knows what happened to it.   It reappears out of obscurity in 1958 described as a painting by a follower of Leonardo and is sold – for the not very princely sum of £45.  It is only when it was eventually acquired by some art dealers and attributed to Leonardo himself that its value shot up.  How clever of those dealers to spot that it was by the master himself and not some unknown follower.

And even cleverer of yet another dealer to acquire it for $80 million and almost immediately resell it to a  Russian for $120 million.  (Though perhaps that part of the story has not had a happy ending, the Russian client now suing the dealer for the difference between what he paid for his art collection and the price the dealer acquired the paintings for.  How very remiss of them not to agree whether the dealer was acting as agent for the buyer or as principal.)

Still, it is amazing what an attribution to a well-known artist, one moreover who did not produce very many paintings, can do.  Much like a AAA-rated credit rating applied to an obscure credit product.  Still, unlike CDOs, Leonardo paintings cannot be reproduced.  And so its price went on its merry way into the stratosphere.  It is now in storage, unseen by anyone other than its guards one imagines, until it reappears as the star exhibit at a Middle East museum to bestow its blessings on its owners and mesmerised visitors.

At least it will be seen.  It has been estimated that 80% of the world’s art is in storage, much of it in freeports, from where it is both untaxed and can easily be transported from country to country with no-one, let alone the authorities, knowing anything. It is art as a store of value, a prettier version of bitcoin.  And like all these alternatives to ordinary money, the authorities are now taking an interest in who is buying, who is selling, how they are paying and where the money to pay comes from.  As the representative from the US Attorney’s office points out, the secrecy surrounding the players in the art market, the ease with which art can move from country to country and the inexact or even irrational science of art valuation and pricing shows “how easy it is to use art to launder money”.

At around the time when banks were becoming ever more heavily regulated in response to their own difficulties, key art market players did consider adopting guidelines to manage the reputational and legal risks of their industry, guidelines drawn up by the Basel Institute on Governance.  They did not do so.  Why?  As the appropriately named Dr Thomas Christ has pointed out, the art market was perhaps more afraid of losing sales than of losing its reputation.

Unlike banks.  For now.

May 14 2018

Delighted to have contributed to – and be quoted in – this interesting feature article in this week’s Law Gazette on the various new ways in which law enforcement, regulators and government agencies are trying to crack down on the UK’s most common crime – fraud.