Q&A with Thomas Mayne, kleptocracy researcher and Visiting Fellow at Chatham House
Thomas Mayne is an expert in corruption studies and Central Asian politics. A former senior campaigner for Global Witness, he is now a Visiting Fellow at Chatham House alongside his work as a Research Fellow at the University of Exeter. He is the recent co-author of the Chatham House report The UK's Kleptocracy Problem which explores how the use of UK professional services by post-Soviet elites weakens the rule of law. Financial Crime Digest sat down with him to discuss why the UK is still open to corrupt money from kleptocratic regimes.
Do we have a good sense of the scale of the problem of kleptocratic money?
There are various estimations - illicit financial flows range from hundreds of billions to trillions. In terms of Kazakhstan, the country I know best, there are estimates that $150 billion has been transferred out of the country in the last 30 years; most of that in the last 20 years. That's just one country, and a lot of that reached the UK in real estate, as we showed in the Chatham House report [The UK's Kleptocracy Problem, 2021].
Real estate is good in that it is something concrete to point to, but I think it is just the tip of the iceberg - there are only so many houses you can own. The vast majority of wealth will be sat in banks, or invested in companies, far exceeding anything we've seen in real estate. The Russian and Azerbaijani laundromat scandals showed the type of money and extent of the problem - it was sloshing through European banks, with seemingly no effort to stop it. You could stop the account - but banks don't tend to do that, they just file a suspicious activity report (SAR) and the money continues. We're left with the system that we have.
What are our defences against this corrupt money? And where are the weak spots in your view?
The SAR system has been shown to be ineffective, and is currently being overhauled by the UK. There were over half a million SARs filed in 2020/2021. The National Crime Agency (NCA) says that every single SAR counts, but it is quite obvious that if you have half a million SARs with only 120 or so staff analysing them, you're not going to be able to focus on the information in those SARs.
The ones you are going to focus on are going to be those that are really tied to organised crime. As we've shown in our reporting, kleptocratic flows are often ingeniously structured. If you're part of the National Crime Agency (NCA), are you going to spend your time going down a rabbit hole looking at some obscure Russian or Uzbek company when you could be having a more positive outcome looking at some local mafia guy who has messed up and decided to route some funds through a UK bank?
Certainly the SAR system with respect to banking is oversaturated and failing, but outside of banking, in the system of professional services oversight, we see the opposite of that. In the legal sector there are not enough SARs filed. There are "get out of jail free" cards you can play as a lawyer with respect to filing SARs. You don't have to file a SAR if the information came to you in privileged circumstances, and that's a very woolly term. It's not exactly clear what would constitute privileged circumstances, and I think there is an overreliance on privilege in cases where we don't think it should apply.
We have a system which basically relies on self-regulation - you're relying on lawyers to do the due diligence on a deal that they will benefit from financially. When for instance it's these complex flows from Kazakhstan that have been in effect legalised in their country of origin, can we really expect lawyers and real estate agents to become experts on these flows, do the right thing, and file SARs? Or even turn down business that they rely on?
Can't real estate agents and lawyers just file SARs defensively like financial institutions do? If there is an oversaturation issue with SARs, and kleptocratic flows are overlooked by the authorities, why would it make a difference?
I have a certain amount of sympathy for real estate agents. They say, which is right, "we don't see the sources of funds". There have been improvements in the system recently, it used to be that they only had to do due diligence on individuals selling property. Now it's changed in amendments in 2017, they have to do due diligence on buyers.
There's only so much they can do - they can google and do Politically Exposed Person (PEP) checks, but they aren't going to see the source of funds. That is on the lawyers and the conveyancing solicitors. But real estate agents currently file a low number of SARs. The famous documentary From Russia with Cash doesn't paint a particularly positive picture of what real estate agents do when confronted with obvious signs that money is being laundered. Obviously in the documentary it was fictitious - there wasn't really a Russian minister seeking to launder money. But all of the real estate agents were captured on film saying "I don't need to know this, let's just continue and do the deal." I think one of the agents in the documentary faced disciplinary hearings because of his conduct in that. The general impression, and having spoken to real estate agents during our research, was that AML is a box-ticking exercise. They are obligated to do it, they aren't focused on it.
But our system of regulation relies on them as the first line of defence. And when the penalties on them for messing up - either turning a blind eye or being complicit - the penalties aren't strong enough. Ok – there are some disciplinary hearings from regulators, but we're not seeing prosecutions. You can bring a prosecution for not adhering to the money laundering regulations, for example, for not identifying someone as a PEP. But we're not seeing prosecutions - I think there have only been three successful prosecutions for failing to submit a SAR, and one of those was a very clear example of a safety depositary box company turning a blind eye to proceeds of crime being put in the boxes.
These cases we're talking about involving kleptocracy we're not seeing investigations, let alone prosecutions.
Under section 330 of the Proceeds of Crime Act, a person may be prosecuted for failing to disclose their knowledge or suspicion of money laundering to their firm’s MLRO. But it seems there is some ambiguity around what it means to have a "suspicion" - could you explain what the problem is here?
There are two provisions you could be prosecuted under. Section 330, and also failure to adhere to the regulations [Regulation 86 of the Money Laundering regulations]. For instance if you know someone is a PEP and you fail to do enhanced due diligence, that is a potential offence.
The word suspicion has been referred to in case law as arising when a person thinks there is a possibility, which is more than fanciful, that the relevant facts existed. But what does that actually mean? We hear from those sectors - real estate and the legal sector - that there is a very wide range of opinion about what suspicion means. For one person I interviewed, it basically amounted to concrete evidence of criminality. I don't think it should be pitched that high. And once you have it set up on suspicion, you create a system whereby if someone prevents knowledge of suspicion, they don't break the law.
That's why it was fascinating in the recent case of a solicitor who failed to identify Leyla Aliyeva as the daughter of the president of Azerbaijan. You could see what he was arguing - and the reason he wasn't prosecuted, although he was fined via the disciplinary tribunal - it was on a point of ignorance. It was "Sorry, I didn't ask, I didn't google this person" i.e., thereby I didn't do the research that would have created a suspicion of this person.
Now, my opinion is that it's very hard to believe that he didn't know that his client was the daughter of the president of Azerbaijan but of course, if he'd have admitted that, he'd have had to admit a criminal offence of not ticking the Politically Exposed Person box on the form. So it's very easy to avoid suspicions of money laundering by just not asking the right questions. The system is set up wrongly - and we only found out about that Azerbaijan case because a data leak - the Panama Papers - revealed it, which goes to show these regulatory failures are happening behind the scenes.
Is it fair to say the case of former Uzbek president's daughter Gulnara Karimova, who bought expensive properties in the UK, mirrors this?
Absolutely. In all these cases when something happens and you write to the lawyer or real estate agent, they just say "we can't say anything about it because it is confidential, but rest assured we complied with all the relevant regulations and UK law." That's their own assessment of course - but it might be true, and perhaps everyone who dealt with Karimova's money did adequate due diligence and filed a SAR, and it was just the NCA's fault for not blocking that transaction once a SAR had been filed. Of course it could have been the other way and the firm was at fault, but we have no idea which of the two poles it was.
Karimova was using proxies - I think there are instances where anyone googling particular people and companies would have found allegations that she stood behind the proxies, and yet the deal still went through. Again, maybe they filed a SAR, but my suspicion is that they didn't do their due diligence, and as a result money flowed, houses were sold - and it was a failure. It would be up to law enforcement to investigate whether that failure represented in a breach of regulations.
Recommended by LinkedIn
Can you explain how legal privilege presents a problem for anti-kleptocracy efforts?
You need legal privilege because individuals need to be able to have full and frank conversations with their lawyer about allegations of financial crime. That is eminently sensible. But where it is more of a grey area is when I'm a Kazakh businessman buying property in the UK, and I let slip that "I've got enemies in Kazakhstan who are accusing me of laundering my money, but it's all nonsense, they are just political enemies" - does that constitute privileged information?
Some lawyers say it shouldn't - you're helping someone buy a house, this is extraneous information that does have an effect on the purchase, and might constitute a suspicion of money laundering and should be reported through a SAR. But other people's interpretation of the legal privilege is that "I can't report this therefore I'm not going file a SAR, and if that ever comes out I will just say I acquired that knowledge under privileged circumstances." So I think we need to have very concrete definitions of what legal privilege constitutes. I think it's being overused.
Could you talk about the relative success of Unexplained Wealth Orders (UWOs) and Account Freezing Orders (AFOs)? It seems that law enforcement have applied AFOs with greater success, but they aren't as well-known.
The AFO is more of a blunt instrument which seems to have proven more useful than the UWO as it targets a bank account rather than property. With an AFO, all you need is a suspicion that some of the money in the account is either the proceeds of crime or will be used to further the proceeds of crime. A key difference is that AFOs go through the Magistrates' court. Magistrates are basically volunteers, so you have maybe complex cases going to a magistrate. You're not going to have a Magistrate arguing against the NCA saying "this money is tainted". We've not seen cases where AFOs have been contested. The case with the nephew of the Azerbaijani president very quickly reached a settlement to give up some of the cash in the account.
This is in contrast with the UWO which has involved lengthy High Court battles and has all these other provisions attached, such as 'purported compliance' and the known sources of wealth - are those reasonably ascertainable at the time the order was made, income is legal if it's legally obtained in the country of origin at the time the order was made... You have all these provisions that play more into the hands of the defence. They are more easily contested by those holding political office and remain in favour in their home country.
Can we speculate that success with the AFO will continue?
I think so, I've heard of one or two interesting cases involving AFOs recently, and of course we haven't had an Unexplained Wealth Order since July 2019. With UWOs, they are waiting for the Economic Crime Bill to be re-examined, which is set to happen this year, and will make improvements to the UWO legislation to make them more viable. But until then, there has been success with AFOs leading to settlements, leading to money frozen, so I can't see that changing until we improve the UWO legislation.
There are clear things we can fix about the UWO, and some which are harder to fix. At the moment, when the NCA loses a case it is liable for the costs of the other party. When they lost NCA v Baker, the Kazakh UWO, they were landed with a £1.5 million in legal costs of Dariga Nazarbayeva and Nurali Aliyev, wiping out not just the UWO budget but the entirety of the NCA's budget, seeing as they said at the beginning of UWOs that each UWO investigation would only cost £10,000.
I think it's in civil recovery proceedings where if the NCA loses it is not responsible for the costs of the other side, unless the case has been brought in negligent circumstances.
And then you can file a UWO against a nominee or lawyer - someone who isn't the beneficial owner of the property - and yet the respondent to the UWO must be a PEP, or someone involved in serious crime, or is associated with someone involved in serious crime. I suspect they thought it would cover everything, but in the Aliyev case it didn't work. They could tweak that to make it clear that if you are a nominee, you don't have to be directly linked to organised crime, you can be representing a PEP.
It is harder to deal with the provisions about income being obtained lawfully in the country of origin - it just means that people from, say, Kazakhstan will get a document to say "all this wealth is legal".
There's also a strange thing about the justification of the source of wealth - you can't really use the UWO against any politician if they say they are rich. With Dariga Nazarbayeva, she was quoting Forbes saying she has $500 million. The judge even quoted it in her judgment, saying "why is the NCA going after this woman, she was saying in Forbes she has half a billion dollars". We need to move away from this. "Unexplained" wealth orders are just that - at the moment they only work when there is literally no explanation for the wealth. They need to be tweaked to question "explained" wealth a bit more. I'm not sure how you do that, but it is interesting that UWOs fail at the first hurdle due to these provisions. You can basically point to anything on the internet that says you are rich - there's no consideration of the legitimacy of claims to sources of wealth.
Is the UWO salvageable with legislative changes?
They will remain on the books, and will be used in cases of organised crime. Someone involved in organised crime won't want to reveal that they have committed a crime to buy property. Whereas a PEP is going to justify their wealth with all kinds of business dealings which have been ruled legitimate in their home country.
Can UWOs really target incumbent officials? I'm really not sure how you get over how you assess legality of the wealth. We do this a bit in the UK Bribery Act - we say "it doesn't matter if in country X that behaviour is legal", you can be prosecuted here. Do we need something like that for the UWO? Maybe it can be. UWOs certainly need to be reformed to have any chance of success against incumbent officials.
What are you anticipating in 2022 in terms of key UK policy, regulatory or legislative changes?
After trying to kick reform of the Economic Crime Bill into the long grass, the government has agreed to look at it this year. This provides an excellent opportunity to examine the UWO legislation. We also need to pass the Registration of Overseas Entities Bill which aims to set up a register of beneficial owners of companies that own property in the UK. It was meant to be in operation by now but has been delayed by this government for whatever reason. With so much talk about Russian money in London and the affect it is having, this would be a good first step to try and address this problem.
Roger Hamilton-Martin, Financial Services Journalist
This feature was published in the January issue of the Financial Crime Digest. Read the full issue here for free.
You can sign up here to receive Aperio Intelligence's free publication direct to your inbox every month.