G8: It's Time for Action on Money Laundering

June 11th, 2013

Cross posted from Transparency International’s Space for Transparency blog.

The UK Government has announced that transparency and anti-corruption will be key elements at the G8 summit this year. Much needed action on money laundering provides an opportunity to live up to that promise.

Corrupt money flows through the UK – in particular through our financial services industry. Nobody knows how much, but it is almost certainly many billions of pounds each year.

Some, perhaps a great deal, of those funds are then hidden in the UK’s Crown Dependencies and Overseas Territories.

Why don’t we know how much money is laundered, or who owns it? There are three reasons. First, those who hope to benefit from the proceeds of corruption try very hard to hide their money. Secondly, some financial institutions and their host governments welcome rich customers, and don’t try very hard to find out where the money comes from. Thirdly, the system is shrouded in secrecy.

Developing countries lost $5.86 trillion in illicit financial flows in the decade spanning 2001-2010. That’s almost $6 trillion which could have been ploughed into healthcare, education, and water sanitation. We know from the cases that have come to light that some of it ended up funding the mansions and fast cars of the people who stole it. The UK and its fellow G8 members are not unsullied by this tragic statistic.

To slow down the flow of corrupt funds, host governments and financial institutions at least need to be able to know who owns the money sloshing through the system. They need to be able to run sufficient checks on its legitimacy. That relies in part on being able to find accurate information on who the customers really are. However, the current system can make it almost impossible for a bank to find accurate information on who ultimately runs, owns, and profits from the company – the ‘beneficial owner’. If banks and governments do not know, then it is highly unlikely that ordinary citizens will.

Who owns a mansion in a street in Kensington? The chances are it is owned by a shell company with secret beneficial owners. The neighbours don’t know who owns it. The UK authorities don’t know. The estate agent doesn’t know. If it was bought with funds stolen from the health budget of an African nation, we would not know.

With an internet connection, a credit card, and as little as £590, it can take under 10 minutes to set up a shell company, perhaps using the services of professionals such as lawyers and accountants who will ask no awkward questions. Shell companies often only exist on paper and have no real employees or offices, hence are very difficult to trace. Identifying the beneficial owners of those companies is even more difficult. As a result, such shell companies have become prime vehicles for money laundering of corrupt funds.

British Overseas Territories and Crown Dependencies are often used as “secrecy jurisdictions” for those wanting to avoid tax or hide corrupt money. The recent British Virgin Island leaks give us more evidence than ever before that such secrecy has long departed from its ostensible purpose of protecting privacy – it has become a framework through which illegitimate funds can be laundered and hidden with consummate ease.

In order to take a strong international lead on transparency, the UK must put its own house in order. The Government must ensure that the beneficial owners of UK registered companies are declared in a register accessible to regulators, financial institutions, and the public. This would assist financial institutions in their checks on prospective clients, and give citizens around the world (whose funds end up London) the opportunity to hold their governments to account.

We need to make it harder to set up shell companies, and crack down on those who are abusing the system – not just the corrupt customers, but on any lawyers, accountants, bankers or other professionals who are deliberately allowing it to happen.

The Prime Minister has declared that transparency will be one of the three key themes of his G8 Presidency. This is a chance for him to live up to this promise. His government needs to make sure that neither the UK’s Overseas Dependent Territories or Crown Dependencies, nor the City of London, is able to be a safe haven for corrupt money. Transparency, including over beneficial ownership, is a key part of the solution.

Written by Robert Barrington

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