Britain is at the forefront of efforts to recover assets allegedly looted by Ukraine's former regime. London is popular with investors from ex-Soviet states, attracting both legitimate and corrupt capital.
Ukraine's stolen assets total at least $3 billion (2.1 billion euros), according to Ukraine's general prosecutor, Oleh Makhnitskyi, and that is just the amount that has been identified so far. Makhnitskyi told an international conference in London this week thatthe regime of former Prime Minister Viktor Yanukovych was an "organized criminal group."
And a large part of that corrupt capital is believed to have found its way to London. Britain's Serious Fraud Office (SFO), a financial regulator, on Monday (28.04.2014) opened an investigation into possible money laundering "arising from suspicions of corruption in Ukraine," according to an SFO press release. It also said it will freeze $23 million of assets in the UK in connection with the case.
Beyond this case, there are no concrete numbers, "but we have started to see that a lot of the stolen assets are either in the UK, Middle Eastern regions or Singapore," Gretta Fenner, managing director at the Basel Institute on Governance, who also oversees the work of the International Centre for Asset Recovery (ICAR), a division of the Institute assisting developing and transition countries in recovering stolen assets, told DW after a trip to Ukraine.
London is home to 251 foreign banks, that's more than in any other financial center. Its share of cross-border bank lending is the highest in the world, according to data from TheCityUK, a lobby group. It is also the world's largest currency trading center, according to the Bank of England.
Add to that a thriving property market, good private schools and its physical proximity to Russia, and it is not hard to see why investors from ex-Soviet states are bringing their cash to London. Fenner also points out that, along with Geneva, London is a hub for commodity trading, which attracts investors from countries like Russia and Ukraine, who are rich in natural resources.
However, given that, Transparency International says the system the UK has in place to fight corrupt capital and its effects on the financial system is "not fit for purpose."
"When the Arab Spring happened, things were pretty slow to get off the ground. While Switzerland has a law that means you can freeze assets within a few minutes, in the UK it takes weeks, sometimes months," Robert Barrington, executive director at Transparency International UK, told DW.
The government seems to have learnt some lessons, though, Barrington says. "With Ukraine, things happened much quicker than they did after the Arab Spring...for example, an investigative team was sent from the UK, made up of several law enforcement arms of the UK government to Ukraine within about 10 days to do some fact finding."
The recent two-day conference in London, jointly organized by the UK and the US, was also designed to show the government is on top of the situation.
"During our G8 presidency, we led international efforts to establish new standards on corporate transparency and to stop shell companies being used to launder the proceeds of crime and evade taxes," Britain's Interior Minister, Theresa May, told the forum.
Who's really behind the money?
May was referring to a planned central registry that would reveal who really owns and controls a company - what's known as beneficial ownership. The UK announced the measure at the G8 summit in Northern Ireland last June.
Britain's G8 initiative is partly the result of international and domestic pressure on the UK to do more to prevent financial crime, but Fenner says "I'm not sure that the primary motivation is to clean up the financial center in London or to fight tax evasion, but if you do one, the other follows," she told DW.
The banking industry welcomes Britain's G8 initiative as it "will provide the tools to enable institutions to find out who's behind companies…it will bring greater transparency," Brian Dilley, Global Head of Anti-Money Laundering Services at KPMG, who has also worked as a financial services regulator, told DW.
Compliance a tall order for banks
If signed into law, it will also be "one of the few pieces of legislation that will require investment from government, rather than the financial services industry," who Dilley says, have put a lot more money and effort into fighting financial crime than UK regulators.
"It's an area where there's been a huge amount of investment by the banks," Dilley told DW. "We've estimated that the global expenditure on anti-money laundering procedures in the next two years will exceed $10 billion a year," Dilley says which, considering that the vast majority of clients is not on sanctions lists, is no small beer.
But banks are prepared to put the effort in, not least because of the huge fines levied by authorities - mainly in the US - if they don't.
"The US enforces their sanctions much more aggressively than the UK," Dilley says. The US has jurisdiction over any transactions done in US dollars, which means its regulators can fine non-US banks anywhere in the world.
Dilley admits that the current system in the UK is inefficient, as "many of the banks are doing the same things on the same customers," rather than coordinating their efforts.
In order for the banks to obtain information on a client's reputation, research teams use "corporate registries, newspaper articles, local research" as the banks are required to "know who the beneficial owners are."
If the capital comes in from a high-risk country, such as Ukraine, where the real beneficial owners are suspected to be hiding behind shell companies or similar structures, banks are required to step up their research and conduct what's called "enhanced due diligence."
In those cases, banks often get an external report from the likes of KPMG, "and that comes from enquiries of local sources, what are people saying in the market about whether they're corrupt or not, looking at litigation records or allegations in the press."
Transparency International says the UK needs to do even more to tackle corrupt capital. "The US has set up a cleptocracy unit specifically to try and trace and freeze corrupt assets. We think there should be an equivalent in the UK." Barrington told DW. "The UK currently responds to corrupt capital inflows on a case-by-case basis, based on revolutionary events or conflict situations. It has yet to come up with a "permanent task force joining up all the bits of government."