U.K. – London: A Money Laundering Magnet
Last week, Global RADAR briefly reported on the “Global Laundromat” scandal that sent shockwaves across the world in wake of the eye-opening Panama Papers leak of 2016. The Laundromat, essentially a large-scale shadow banking scheme, capitalized on the use of fictitious shell companies, most of which were registered in London, to send profound amounts of dirty money out of Russia for cleaning. The Guardian’s Luke Harding summed up the basic premise of the Laundromat as follows: “Typically, company A ‘loaned’ a large sum of money to company B. Other businesses in Russia – fronted by Moldovans – would then guarantee these ‘loans.’ Company B would fail to return the ‘money.’ Moldovan judges would authenticate the ‘debt,’ allowing Russian companies to transfer real money to a bank in Moldova. From here, the cash went to a bank in Latvia, inside the EU” (Harding, 2017).
Overall, an estimated $20 billion worth of illicit funds were transferred to a total of 96 countries, with the most notable receiving these funds being the United States, United Kingdom, Germany, and China (Harding, 2017). At the center of this latest transgression are several prominent British banks among a group of 20 total that are said to have handled and processed approximately £598 million ($738.1 million USD) of laundered funds between 2010 and 2014 on behalf of Russian businessmen, money launderers, and potentially bureaucrats as well. Of the banks involved, the Royal Bank of Scotland, a UK government-owned entity, reportedly “processed $113.1m, and HSBC $545.3m” (Harding, 2017). Multiple Russian banks have been forced to shut down completely as a result of their respective roles in the illicit scheme, including the Russian Land Bank who itself laundered $9.7 billion. Investigations into the main players involved in this case are currently ongoing, although the alleged kingpin behind the scheme, Moldovan businessman, Vyacheslav Platon was apprehended in 2016 on fraud and money-laundering charges.
The article “Dirty secrets of the Laundromat”, cited in BSA News Now on Friday, March 31st, 2017, examines some of the motives behind the siphoning of funds to the UK in particular, and the development of Britain as the “money-laundering capital of the world.” The article includes several excerpts from individuals with first-hand financial experience in both the Russian and UK markets, with one such segment being very telling of the current state of affairs in London, England’s most populous city. Former Russian banker and current anti-corruption campaigner Roman Borisovich states “London is the most corrupt place on Earth in the sense that there is a higher concentration of dirty money per square foot here than anywhere else on the planet” (Sunderland & Burton, 2017). He is also surprised that there is not more illicit activity occurring in the UK, given the relative ease at which any individual can establish a new, possibly fictitious company behind which their true identity can be hidden.
Another factor that many believe draws those who may benefit from use of shell companies to London is the ability of foreign nationals to buy property in the UK. Of the 1,920 transactions involving British banks discovered by the Organised Crime and Corruption Reporting Project (OCCRP), one in particular illustrates a global trend seen regularly in the past five years. A West London townhouse, valued at £30 million was purchased through a company registered in the offshore tax haven of the British Virgin Islands. This leaves one to wonder if the funds used for this purchase, and many other recent luxury real estate purchases in London were funded with dirty money. This trend has essentially locked low-to-moderate earning individuals out of the real-estate market in London due to housing price inflation, brought about in large part by the influx of the suspected new and illicit funds to this market. However, real-estate purchases made with these funds only begin with residential properties. According to the OCCRP, British Virgin Islands-registered companies have also purchased multiple commercial and historic properties in the city in excess of £10 million each.
Education is also a contributing factor to the growing Russian presence in the UK as well. According to the article, “the Independent Schools Council says more overseas pupils at British private schools come from Russia than any other country apart from China” (Sunderland & Burton, 2017). Unfortunately for British youths, this is another market that citizens are being blocked from, as fees for private education have increased exponentially with the growing demand for placement coming from overseas. However, school’s in the UK realize the risk associated with accepting tuition funds from abroad, and are beginning to implement their “own financial checks to safeguard against tainted funds” (Sunderland & Burton, 2017).
As in most cases of money laundering, the vast majority of the illicit funds from the Laudromat scandal have been spent on luxury goods such as designer clothing, jewelry, and fine dining – each of which London is renowned for. The OCCRP discovered that “Russian buyers have acquired furs and jewelry while issuing fake invoices to make their acquisitions look like humdrum business expenses” (Sunderland & Burton, 2017). One such case in 2013 saw a Russian customer purchase items worth £140,000 and £120,000, respectively, from a jewelry store and invoiced them with Barclays as “building equipment.”
One cannot expect retail stores to actively monitor, nor truly care about where the funds their customers are using come from. But the same cannot be said for banks, specifically those in the United Kingdom, which has developed into a hub for illicit financial activity. Approximately £1 billion worth of hidden funds have entered the country per month since 2010, leading many financial analysts to believe that the economic stability of the UK is in grave danger. It is safe to say that until there is a serious and significant crackdown on corruption and money laundering, the UK will continue to be engaged in a dangerous game of “Russian roulette.”
U.S. – Finance Executive Accused of Laundering
Yet another scandal at the local government level has hit headlines in the United States this week; this time on the west coast. Herbert Norris Trotter, a Los Angeles-based finance executive, is accused of playing a major role in a money laundering scheme involving embezzled funds. Law enforcement officials have reason to believe that Trotter aided former city of Placentia interim-financial services manager Michael Nguyen in laundering over $1 million worth of the reported $5 million Nguyen embezzled while holding his position.
Earlier this month, Nguyen was sentenced to 25 years in prison in addition to having to pay $10 million in fines and $2.6 million in restitution to the city of Placentia. According to reports, “Deputy District Attorney Marc Labreche has helped the city recover around $3 million of the embezzled money. Insurance at one point was expected to bring in $1 million more” (Emery, 2017). Following Nguyen’s conviction, the attention has been turned to Trotter and another man involved in the scheme by the name of Michael McDonald, who is currently a fugitive from justice.
Trotter has pleaded not guilty to each of the felony counts against him.
Global – Fintechs & Banks: Growing Together
Penny Crosman’s article in the American Banker titled “Fintechs: Banks can’t live with ’em, can’t live without ’em” examines the growing relationship between financial technology companies and banks in 2017. The benefits for both parties include quick and creative technological developments created by startups for banks, and the creation of capital and scale, as well as production of data by banks for fintech companies. However, the disparity between the amounts of funds available to these two parties has become a major source of tension between them. Additionally, fintechs have been found to have difficulties in understanding “the regulatory burden with which banks struggle”, as speed and efficiency is of the utmost importance to fintech groups who have a tendency to run through cash rather quickly (Crosman, 2017).
Another area of concern between the parties is in the screen-scraping strategies used by fintechs to process data from bank accounts, which have unsettled banks attempting to place a premium on data privacy and control. For issues like this, larger banks such as Citigroup have begun to suggest the use of open application programming interfaces that grant access to the data needed by fintech groups, while maintaining a much higher level of security. This is done in part by allowing use of various forms of authentication, “where consumers no longer need to give up their user name and password to a third party and aggregators no longer impersonate customers” (Crosman, 2017). Other concerns involve finding a balance between growth and regulation, and the current difficulties involved with investing in fintech startups.
Nevertheless, the ability to incorporate fintech into existing financial service infrastructures, specifically for compliance and AML purposes, has already allowed for the creation of strong regulatory controls that are likely to increase the value of these relationships, as well as the overall customer experience, in the coming years.
China – Corruption Crackdown Drawing To A Close?
The anti-corruption movement in China has been widely regarded as one of the more successful initiatives led by a corruption-plagued country in recent years. However, this campaign has also led to an erosion of economic growth in China and several of its surrounding sovereign states, which may be a contributing factor in the decline of corruption enforcement statistics reported in 2016. According to China’s Supreme People’s Procuratorate, “the number of civil servants detained for accepting bribes in 2016 declined 12% from . Of them, the number of officials at Cabinet-minister and ministry-head levels or above nearly halved to 21” (Otani, 2017). Statistics have also shown that the number of violators of Chinese President Xi Jinping’s eight-point rules, which were designed to hinder corruption and extravagance of party members, have also declined by 25% from 2015.
While this can be interpreted in a positive light, restaurant and retail sales during the Lunar New Year, a large-scale holiday in China, grew 11.4% in 2016 when compared to 2015. This led one financial analyst from Goldman Sachs to state, “Although crackdowns on overly indulgent wining and dining continued through the holiday, they were less strict than before” (Otani, 2017). Revenues are also recovering in the Casino industry, which saw a drastic decline due to gambling becoming discouraged through the anti-corruption initiative. Alcohol and jewelry stores have also reported increases in sales from 2015.
While these findings bode well for the struggling Chinese economy, many in the financial services industry are skeptical of the longevity of these high times, as Beijing will be setting up a new corruption-control commission beginning in March of 2018.
Crosman, Penny. “Fintechs: Banks Can’t Live with ’em, Can’t Live without ’em.”
American Banker. 27 Mar. 2017. Web.
Emery, Sean. “Former Placentia Finance Manager Gets 25 Years in Prison for
Embezzling More than $5 Million.” The Orange County Register. 10 Mar. 2017. Web.
Harding, Luke. “The Global Laundromat: How Did It Work and Who Benefited?” The
Guardian. Guardian News and Media, 20 Mar. 2017. Web.
“LA Executive Accused of Helping Launder Embezzled Funds.” Paradise Post.
Paradise Post, 29 Mar. 2017. Web.
Otani, Atsushi. “China’s Crackdown on Corruption May Be Easing.” Nikkei Asian
Review. 28 Mar. 2017. Web.
Sunderland, Ruth. “Dirty Secrets of the Laundromat: That’s the Name of a Scam Used
by Russian Gangsters Aided by Greedy British Banks to Launder Billions of Illicit Roubles through London .” Daily Mail Online. Associated Newspapers, 31 Mar. 2017. Web.