The Dirty Money Capital of The World?

One Hyde Park is a luxury apartment building
in Knightsbridge London. It was developed by the Candy Brothers, designed
by Richard Rogers, and completed in 2009. The luxury apartments come with panic rooms,
bullet proof glass, and bowler hatted security guards that were trained by the British Special
Forces. One of the apartments in the building was
recently listed for sale at $242 million dollars. The building itself is best appreciated at
night – as it is black dark, with not a light on in the building. It would appear that no one is home. It is not that the apartments haven’t been
sold, they have all been sold, it is just that not that many of them are lived in.

Out of the 86 apartments in the building,
only 12 are registered in actual people’s names, the rest are held in the names of corporations
registered in places like Cyprus, Thailand, the Cayman Islands, the British Virgin Islands,
Liechtenstein, and the Isle of Man. The owners are wealthy, and most of them don’t
want you to know who they are or how they got their money. Ukraine’s richest man is reported to have
bought two apartments in the building and merged them into one very large apartment. Another is owned by Kazakhstan's richest man,
a politician who made his money in the countries notoriously corrupt natural resources sector. Apartments are allegedly owned by Russian
Oligarchs, Malaysian, Thai, Nigerian, Qatari and Taiwanese billionaires, but their names
are not on the titles. One of the Nigerian First Lady’s favorite
dress designers, who was awarded 600,000 barrels of oil per month from the Nigerian oil company,
for “being a good friend” allegedly owns five apartments in the building through a
number of Isle of Man Corporations. So why is so much London property owned by
wealthy foreigners who don’t live in the homes, and why are so many owned through offshore
companies? Well, there are tax reasons that might incentivize
wealthy foreigners to own UK Real Estate through corporate structures.

The company structures might also provide
asset protection, guarding wealth from angry creditors. But secrecy might be the most important reason,
as these structures allows wealthy foreigners to avoid scrutiny from their home country’s
tax—or criminal—authorities. According to transparency international (an
anticorruption advocacy group), London has a big problem with dirty money. Just before Russia invaded Ukraine, they estimated
that Russians accused of corruption or having close links to the Kremlin owned 2 billion
dollars’ worth of property in the United Kingdom, and that front companies registered
in the United Kingdom and its Overseas Territories and Crown Dependencies had concealed more
than $100 billion of corrupt Russian funds.

The Financial Times claims that over the past
two decades, London has become one of the preferred investment locations and destinations
for international oligarchs, referring to the city as the London Laundromat. To highlight how things work in wealthy parts
of London we can look at The Bishops Avenue in North London which is often referred to
as Billionaires Row. It’s considered to be one of the wealthiest
streets in the world. When Salman Rushdie was forced into hiding
after writing The Satanic Verses, he moved into a house on the Bishops Avenue. A strong security gate, fortified walls, bullet
proof glass, bomb proof curtains, and a staff of six armed security officers were installed
in the house before he moved in, making it extremely safe. All of this activity went entirely unnoticed,
as such activity is totally standard in parts of town like this. Rushdie spent eight years in hiding from Muslim
fundamentalists on a street where ten of the houses were owned by the Saudi Arabian royal
family. Anywhere else a secretive homeowner with unusually
high security would have stood out like a sore thumb. For Rushdie, Bishops Avenue was the perfect
hiding place.

So, what is going on in London, and is it
really the money laundering center of the world as some people say? First up, money laundering is a serious financial
crime that involves making large amounts of money generated by criminal activity, appear
to have come from a legitimate source. The money from the criminal activity is considered
dirty, and the process “launders” it to make it look clean. Money laundering underpins and enables most
forms of large-scale crime, as it allows criminals to conceal their assets, and enjoy the proceeds
of their crimes. So how did London find itself in this position? The Suez Canal crisis in 1956 is often portrayed
as having been the end of the British Empire. Dean Acheson a former US secretary of State
famously remarked in 1962 that Britain had "lost an empire and failed to find a role". He wasn’t quite right though, Britain had
found a role, as a center of international finance. International investors at the time wanted
to hold dollars, but for a variety of reasons didn’t want to hold them in American banks. On top of that the British government had
placed severe restrictions on sterling credits to nonresidents and banned the use of sterling
to finance third-party transactions.

To work around these issues, London banks
started using dollar deposits as credit instruments for nonresidents. This was the Eurodollar market, which later
became the Euromoney market. Storing U.S. dollar deposits in a London bank,
meant that these deposits were free of the regulations imposed by the U.S. Federal Reserve
Board, and the “new deal” era regulations in the United States. London banks didn’t have to provide (and
pay for) FDIC insurance, they could pay higher interest rates on these deposits too if they
wanted to, as interest rates were not capped as they were in the United States.

Additionally, British banks could lend these
deposits to finance foreign trade, and because they weren’t lending British pounds, this
didn’t fall under any Bank of England regulations either. Britain had found itself a role at the center
of offshore banking, which allowed for minimal regulation and provided greater freedom to
move money around the world and store it away from the prying eyes of governments and financial
regulators. Britain also had a web of overseas territories
and crown dependencies that specialized in helping clients to hide their cash. Waves of wealthy foreigners began arriving
in London around that time. Greeks arrived in the 1960’s when their
government was overthrown.

The OPEC Oil Crisis of the 1970’s brought
in Arab money. Iranians arrived after the Iranian revolution
in 1979. American bankers came in the 80’s in the
wake of Margaret Thatcher’s financial reforms. But, the biggest wave of all came after the
fall of the Soviet Union in 1989. The vast corrupt privatizations that occurred
in the early 1990’s was minting billionaires all over Eastern Europe. According to Mark Hollingsworth the author
of the book “Londongrad” These new billionaires saw London as the most secure, the fairest
and the most honest place to park their cash.

They felt sure that British judges would never
extradite them either.” Their money bounced through offshore tax havens
like Cyprus and Gibraltar on its way into London. London wasn’t necessarily where money was
laundered, but it was the airing cupboard where freshly laundered money was moved for
storage. London had become the place where dirty money
came to party. The new arrivals didn’t always just party
though. In 2006 the Piccadilly branch of Itsu, a chain
of Japanese restaurants was cordoned off by the police.

Scientists inside tested for traces of polonium-210,
a radioactive substance that had been used earlier that month to poison Alexander Litvinenko,
a former KGB officer. From his death bed, Litvinenko blamed Vladimir
Putin for poisoning him. Polonium was eventually detected at more than
40 sites in London and beyond; British Airways advised 30,000 of their customers to contact
health authorities after radioactive traces were found in two of their airplanes. Russian money had been pouring into London
at the time. Roman Abramovich, a Russian billionaire, had
bought Chelsea football club only a few years earlier. Oligarchs were donating money to the arts,
schools, universities and even political campaigns. A new name for the city was jokingly coined:
Londongrad, an outpost in the West for Russian money.

So, what made (and makes) London so attractive
to those with questionably sourced funds? Well, the same things that make London attractive
to everyone else. It is a very international city, where having
a foreign accent doesn’t make you stand out. That means that there is also a large international
community to blend in with. It is a financial center, with asset management
and legal expertise, there is nothing unusual about large sums of money being moved around.

There is also a relaxed attitude to foreign
ownership and there’s lots of luxury property to live in. There are great restaurants and high-end stores
for shopping. There are also top-notch schools and universities
to send your children to. And unlike in other European countries, there
is no national identity card requirement, meaning that no one has the right to stop
you in the street and ask to see your papers. It is only so surprising that wealthy individuals
from all over the world turn up in a city like London, the problem is that not all of
them will have earned that wealth honestly. A lot of countries have schemes in place that
provide a ‘fast track’ to residency (or even citizenship) for wealthy individuals
who invest a defined amount of money in the country.

Cyprus and Malta for example got in trouble
with the EU in 2020 for essentially ‘selling’ EU citizenship. The UK has had this type of ‘golden’ investor
visa scheme in place since 1994. In 2008, these visas were upgraded and rebranded
as “Tier 1 Investor Visas” after the financial crisis. This restructuring went on to become an embarrassment
for the government as it failed to take money-laundering and other national security risks into account
in its design. The main problem was that the checks that
were supposed to be carried out on the visa applicants were the sole responsibility of
the law firms that the applicants had hired to help them get their visas. The state had no real oversight on the more
than 3,000 individuals who were granted visas during this time, leading it to be dubbed
‘the blind faith’ period by Transparency International. Among the individuals known to have acquired
a Tier 1 visa are the wife of a former chair of Azerbaijan’s state bank.

She was the recipient of the UK’s first
ever unexplained wealth order when it was disclosed in court that she had spent £16.3
million at Harrods and bought twenty-two million pounds worth of UK property – expenditure
which the British authorities said was out of keeping with her husband's official salary. Obviously, the majority of people who got
visas to live in the UK under programs like this will have made their money honestly,
but badly designed checks will have allowed some bad apples in with the mix. Kleptocracy is a system in which ruling elites
abuse their positions or connections in government to steal public funds for their own private
gain, and for this reason, much of the dirty money that we’re talking about is in the
hands of what are known in the financial industry as PEP’s or politically exposed persons.

Anyone who is on a government list of ‘politically
exposed persons’, is subject to extra scrutiny when moving money between financial institutions. Wealth, that is beyond what can be explained
with an individual’s known legitimate source of wealth will raise a lot of red flags. The issue though, is that people in political
power are more easily able to gather the required documentation to show that their wealth is
legitimate in their home countries – simply because they are in political power. An analysis of politically exposed persons
buying property in the UK done by Chatham House showed that those who had fallen out
of power in their home countries were caught by these rules, while those who remain in
favor back home were able to tick all of the boxes. That is only so surprising. A real problem is – that when huge wealth
is acquired in countries where there is almost no rule of law and where courts are controlled
by the very political figures being examined. It becomes extremely difficult to rule whether
the acquisition of that wealth should be considered legal or not.

A lot of the money that arrived in the UK
falls into this basket, where it looks quite shady, but no specific law has been broken. A big issue that had been highlighted over
the years was that individuals could own real estate in the UK through offshore corporate
structures and not disclose the true ownership. A 2015 television documentary in the UK called
“From Russia With Cash”, showed reporters posing as wealthy Russians approaching London
real estate agents wanting to buy properties using what they explained were ill-gotten
gains. The agents were often very helpful, even sometimes
recommending lawyers who could help the buyers hide their identities. A new register has recently been launched
where the end owners of overseas companies that control land in the UK must be disclosed
to Companies House. There are loopholes though, the register only
applies to situations where an entity owns more than 25 per cent of a property, and that
is in line with international norms. In theory a kleptocrat could share ownership
with a few family members and avoid disclosure.

A Paper by Findley, Nielson and Sharman tried
to understand and explain how anonymous incorporation works internationally. The academics posed as consultants seeking
confidential incorporation. They contacted incorporation services in 177
countries, about half of the sample were in the United States. Despite what you might have expected, incorporation
services based in tax havens were found to comply with international standards at a much
higher rate than those in OECD countries. Tax havens don’t want to be put on blacklists
for crimes like this. Providers in developing countries were sometimes
found to be more compliant with international laws than those in wealthy nations.

The researchers found that only the risk of
terrorism and the specter of the IRS decreased offers for anonymous incorporation in the
sample they contacted. UK libel law has also made London an attractive
domicile for international kleptocrats and oligarchs. Reputation management firms combine legal
work with public relations and even private investigator services. These firms can be used to enable corrupt
individuals to silence allegations against them and hide negative media portrayals.

When two Wall Street Journal reporters published
a book ‘Billion Dollar Whale’ about Jho Low, a Malaysian wanted for his role in a
$4bn fraud, they were surprised to learn that a London law firm was threatening libel cases
against bookstores for advertising the book, claiming that a synopsis they were publishing
was defamatory. Free speech campaigners at the time were alarmed,
warning that the threats risked setting a precedent that would intimidate booksellers. Media laws in England and Wales on defamation
are notorious amongst investigative journalists. So too is the industry of lawyers who use
the English legal system to protect the reputations of their rich and powerful clients. Prior to reform of defamation law, London’s
reputation lawyers relied heavily on libel to file or threaten cases against the media.

“Responsible journalism” was given statutory
protection in 2013 and claimants were required to prove “serious harm.” Lawyers have since turned to laws on privacy,
confidentiality, and data protection to keep negative news about their clients out of the
press. Reputation laundering can also involve donations
to cultural institutions and Universities. The Gaddafi Foundation for example, pledged
to donate 1.5 million pounds over five years to The LSE’s Centre for The Study of Global
Governance, of which three hundred thousand pounds was paid. In 2008, the university granted a PhD degree
to the son of the Libyan leader, for a dissertation. Dr Gaddafi… This turned into a big scandal. While only British citizens and companies
are legally allowed to donate money to UK political parties, this group increasingly
includes a number of naturalized citizens from all over the world, and of course this
can be problematic.

The son of a Russian Oligarch and former KGB
agent was controversially given a life peerage in the House of Lords in 2020. It was alleged by the Sunday Times that the
peerage was granted despite a warning from the security services that such an appointment
posed a national security risk to the country. The British Government has promised to do
more about money laundering and since the Russian Invasion of Ukraine has sanctioned
a number of individual oligarchs. As I mentioned earlier many of the things
that attract kleptocrats and oligarchs to major cities and financial centers like London,
are the same things that ordinary citizens enjoy about living there. So, while it makes sense to make it difficult
for criminals to use the money they illegally obtain, we should be careful not to overdo
it and end up with a lot of laws and regulations that require financial institutions to spy
on their customers in hopes that this will inhibit money laundering. The Heritage Foundation estimates that Anti
Money Laundering Regulations cost an estimated $4.8 billion to $8 billion annually in the
United States alone, and that this system then results in fewer than 700 convictions
annually, a number of these convictions are just additional counts against individuals
charged with a list of other crimes.

They calculate that each conviction costs
approximately $7 million and might even cost much more. The costs of excessive regulation are passed
on to law abiding financial services customers driving up the transaction costs that they
pay and slowing down the pace of business. Banks close thousands of accounts per year
of people considered suspicious, high‐risk or difficult to monitor, often they are flagged
as such because they simply transfer funds to a foreign country. I often hear law abiding individuals say that
they would rather transfer funds using crypto assets due to the high cost and slow pace
of transacting in the traditional financial system. That is obviously a problem. Any new regulations that are brought in should
first undergo a cost/benefit analysis. There is little evidence that the higher burdens
of regulation that have been put on banks over the years have done much to reduce criminality
globally. The best way to deal with international criminals
and the proceeds of their crimes may just be old-fashioned police work, where a person
is only investigated when there is good reason to believe they committed a crime.

At that point financial firms can hand over
relevant information to authorities, rather than screening everyone, searching for a needle
in a haystack. New financial technology means that criminals
are less likely to need to use the traditional financial system today to move wealth, than
at any time in the past. Since the Russian invasion of Ukraine, the
UK government in an effort to target Putin allies, pushed forward part of its previously
discussed Economic Crimes Legislation, which had been promised but not delivered for over
five years. Golden visas to the UK have been scrapped. The new legislation includes a registry of
foreign-owned property in the UK. There have been reforms in the way Unexplained
Wealth Orders are used, and improvement to the targeted sanctions regime. So, will it hurt London to lose the Russian
Oligarch money that has been circulating in the city since the 1990’s? Well, maybe not as much as you might expect.

Wealthy Russians may be big spenders when
they spend time in London, but Britain gets less from them than you might think. According to the Economist, in 2020 foreigners
held roughly 13 trillion pounds of British assets. Russia’s share of that was just 0.16%
If you enjoyed this video you should click on this link and watch my video on how Russian
Oligarchs got so rich next. See you again soon, bye..

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