Showing posts with label bank. Show all posts
Showing posts with label bank. Show all posts
Monday 24 May 2021
Saturday 27 February 2021
Friday 29 January 2021
Wednesday 1 April 2020
Will the coronavirus crisis rehabilitate the banks?
Lenders who triggered financial crash are now being asked to funnel stimulus money to companies and individuals write David Crow, Stephen Morris and Laura Noonan in The FT
On the day that Lehman Brothers filed for bankruptcy in September 2008, the front page of the Financial Times carried a photograph of John Thain, the then chief executive of Merrill Lynch. He was getting into his car after hours of talks at the Federal Reserve Bank of New York, and looked like a man who had stared into the abyss. In the following days more pictures would emerge of bankers leaving crisis meetings with policymakers, their ashen faces a portent of the horror to come.
As coronavirus rages and brings the global economy to a near standstill, bankers are once again roaming the corridors of power. In early March, Donald Trump summoned the chief executives of Bank of America, Citigroup and other large lenders to the White House, while Rishi Sunak, the UK chancellor, has held meetings and calls with their counterparts in Britain.
But this time is different, bankers say. Rather than being admonished for their role in causing the 2008 crisis, they are being called on to help distribute unprecedented stimulus programmes worth trillions of dollars designed to save the global economy from collapse. Although governments and central banks are providing much of the cash, lenders are being asked to serve as the “transmission mechanism” to ensure support finds its way to the companies and consumers who need it most.
Mike Corbat, chief executive of Citigroup, says the US lender is in “daily contact” with the White House and regulators, “relaying information . . . [on] what we’re seeing in the marketplace . . . what’s under stress”. In France, the finance minister and bank governor now speak daily to Frédéric Oudéa, chief executive of Société Générale, a bank that became a pariah in 2008 following a rogue trader scandal.
“The difference with 2008 is that we were seen as the problem then, everybody today knows the problem is the virus,” Mr Oudéa says. “We are one of the activities that has to function . . . we are the doctors of the economy.” (A dangerous thought - Editor)
While that description will jar with some, the difference in the tone of the discussions between governments, policymakers and banks has surprised some veterans of the financial crisis. “I don’t want to quote [former Goldman chief executive Lloyd] Blankfein and say we’re doing ‘God’s work’, but at least it feels like we’re on the side of the good this time round,” says one banker who advised the UK government in 2008.
Whether banks can maintain this new-found trust depends in large part on their ability to withstand coronavirus and its aftershocks. That in turn rests on whether post-financial crisis reforms — some of which the banks are lobbying furiously to relax — have left the system strong enough to survive. Banks appear to have passed the first test: a short but pronounced period of market mayhem and a co-ordinated drawdown of hundreds of billions of dollars of credit by corporations feeling the strain. One policymaker says that, faced with the coronavirus fallout, the global banking system of 2007 would have already imploded by now.
Jes Staley, chief executive of Barclays, says that “by any measure, the financial markets have traded and demonstrated volatility never seen before,” noting the “significant value destruction happening in pools of assets”. But, so far at least, the system is operating as it should. “It’s pretty extraordinary that with this amount of distress you haven’t seen more failures in asset management companies.”
He adds that the potential harbingers of a full-blown financial meltdown have not yet happened, such as a mutual fund preventing investors from making withdrawals. “There are just a lot of things you’d expect to happen before you start to see a real crisis,” says Mr Staley.
The real test of the resilience of banks and the wider financial system is yet to come. Huge swaths of the global economy, from airlines to retailers, have seen their revenues all but evaporate. Many companies and consumers will default on their loans, leading to a string of excruciating credit losses for banks that will hit profitability and blast a hole in their balance sheets. Meanwhile, ultra-low interest rates introduced by central banks to support the economy during the pandemic will put extra pressure on profits generated from lending.
“Everything in the world is on hold, and this cannot not be reflected in the financial world,” says Romain Boscher, chief investment officer for equities at Fidelity International. “Banks are still too big to fail, but also too crucial to disappear.”
Standard & Poor’s, the rating agency, last week warned that the US banking industry — which generated $195bn of profits last year — could swing to a $15bn loss in the next 12 months. Analysts at Berenberg say US and European lenders are facing an average 30 per cent plunge in profits this year and next. “Confronted with reduced activity, lower-for-longer interest rates, inflexible costs and higher loan losses, the outlook for bank earnings is one-way traffic,” they wrote in a recent note to clients.
Despite these headwinds, some bank executives have projected confidence. Ana Botín, executive chairman of Santander, the eurozone’s largest lender, told a financial services conference in March that the bank was forecasting only a 5 per cent drop in earnings this year, and that it expected no impact on its capital levels or midterm financial targets. Appearing via video link from a locked down Madrid, Ms Botin said those estimates were based on a “V-shaped” recession — a sharp shock followed by a rapid recovery, but stressed this was only one possible scenario.
However, some bankers say that such talk is premature, bordering on wishful thinking.
“If someone can tell me when they think [the virus] is going to be contained globally, and we will get back to a normalised global economy, then I can tell you what the credit cycle will look like,” says an executive at a rival global bank. “But given that no one can predict that, I find it hard to see people going out and being so confident.”
The depth of credit losses hinges on the amount of risk that countries are willing to share with the banking sector. Governments and central banks have rolled out fiscal and monetary stimulus programmes on a scale not seen since the second world war, ranging from central bank-backed credit facilities to loan guarantees and bailouts for industries including the US aviation sector. One Swiss bank executive says that absent such extraordinary support, banks’ loss-absorbing capital buffers “would have been like a brolly in a hurricane”.
One banker advising the UK government — which has earmarked £330bn for corporate loan guarantees and a commercial paper financing facility — says the schemes are untested. In particular, he warns that the guarantees will only apply to future lending. “It’s for new money, not for all the loans we’ve already made that are going to go bad.”
Bank executives have also warned that new accounting rules in Europe — which force lenders to set aside provisions for bad loans at an earlier date — will aggravate the problem by quickly impairing capital buffers and crimping their ability to lend at the very moment companies and consumers need cash. Policymakers are sympathetic, and have taken steps to reduce the shock of the new regulations. On Friday, regulators agreed to soften the impact of similar rules in the US.
But relaxing the rules will only buy time. “If the world blows up and all this government intervention doesn’t work, then this will eventually get to banks,” says the banker advising the UK government. “It will be an old-fashioned credit loss crisis, but on a scale not seen before.”
Even if banks can absorb the losses, some of the actions taken by policymakers will hurt the sector in the long run. Although recent interest rate cuts by the US Federal Reserve and the Bank of England are intended as a temporary measure, the 2008 crisis showed that central banks can struggle to increase rates once an immediate economic shock has passed. Meanwhile, a boom in first-quarter trading revenues for investment banks will probably only provide a short-term fillip.
Standard Chartered’s head of finance Andy Halford warns that “incredibly low interest rates” could cause corporate and retail depositors to move their cash out of accounts that have tended to pay a higher rate of interest in exchange for having the deposit locked up for a specific period of time. “Banks like to have deposit stickiness that can be used to underpin lending,” he says. “[If] there is less inclination to put money into sticky pots, there is less confidently there for circulation into the system.”6
The coronavirus crisis might have given banks an opportunity to repair their public image, but it also brings new reputational risks. As the transmission mechanism for doling out state aid, they will be required to perform a thorny task: deciding which companies should receive financial assistance and which would have struggled to survive regardless of the virus, and should therefore be cut loose. One policymaker says “picking winners and losers” could provoke a long-term public and political backlash against the banks.
“We want to avoid any moral hazard . . . governments should not just shell out money,” says Lars Machenil, chief financial officer of BNP Paribas, the French bank. “If a company, an airline for example, was in good shape in February then the government guarantees are [there] just to get it through the Covid-19 period.”
Mr Corbat says banks must walk a “fine line” between “being as supportive as we can be” without “in any way calling into question the soundness” of the bank or the financial system. “The last thing that we all want to see is . . . our consumers, our small businesses and our big businesses coming out of this . . . [with a] precariously bigger or larger position of indebtedness.”
Although many retail and consumer borrowers have been given payment holidays, some will never be able to repay their loans, which could lead to a wave of bankruptcies and repossessions that will test the public’s patience.
“This crisis did not originate in banking, but they can be part of the solution, and it might engulf them if, instead, they turn away,” says Paul Tucker, chair of the Systemic Risk Council, a group of former regulators, and previously deputy governor of the Bank of England. “They must not gouge customers, and need to suspend dividends and high-end bonuses. It is not a moment to put themselves first.”
Peter Orszag, an executive at Lazard who was White House budget director in 2009-10 in the first Obama administration, warns that the new-found trust between banks and policymakers could come under strain.
“I don’t want to call this the honeymoon period, because what’s going on is so awful, but there is a bit of coming together and recognising goodwill,” he says. However as banks are forced to decide which consumers and companies receive support, political and public opinion could change. “What happens is that six months in the dynamic can start to shift — the backlash doesn’t start immediately.”6
Like other businesses, banks are also facing huge logistical obstacles, with their scattered staff either working from home or off sick. A lockdown in India, where many lenders have chosen to locate call centres, is making it harder to deal with a deluge of incoming customer inquiries. Some banks have had to put restructuring efforts on hold, like HSBC, which last week said it would pause the vast majority of redundancies barely two months after it announced plans to slash 35,000 jobs. The cost of running a bank, already stubbornly high, is only going to rise.
Above all else, the survival of banks and the global financial system depends on whether governments can contain the public health crisis.
Brian Moynihan, chief executive of Bank of America, says the $2tn stimulus agreed last week by US lawmakers was of “a substantial size and dimension that most of us think is big enough to help do the trick”.
But he acknowledges the wider challenge: “What they’re doing on fiscal and monetary [policy] . . . is terrific, but the real thing that they have got to solve is the healthcare crisis.”
As coronavirus rages and brings the global economy to a near standstill, bankers are once again roaming the corridors of power. In early March, Donald Trump summoned the chief executives of Bank of America, Citigroup and other large lenders to the White House, while Rishi Sunak, the UK chancellor, has held meetings and calls with their counterparts in Britain.
But this time is different, bankers say. Rather than being admonished for their role in causing the 2008 crisis, they are being called on to help distribute unprecedented stimulus programmes worth trillions of dollars designed to save the global economy from collapse. Although governments and central banks are providing much of the cash, lenders are being asked to serve as the “transmission mechanism” to ensure support finds its way to the companies and consumers who need it most.
Mike Corbat, chief executive of Citigroup, says the US lender is in “daily contact” with the White House and regulators, “relaying information . . . [on] what we’re seeing in the marketplace . . . what’s under stress”. In France, the finance minister and bank governor now speak daily to Frédéric Oudéa, chief executive of Société Générale, a bank that became a pariah in 2008 following a rogue trader scandal.
“The difference with 2008 is that we were seen as the problem then, everybody today knows the problem is the virus,” Mr Oudéa says. “We are one of the activities that has to function . . . we are the doctors of the economy.” (A dangerous thought - Editor)
While that description will jar with some, the difference in the tone of the discussions between governments, policymakers and banks has surprised some veterans of the financial crisis. “I don’t want to quote [former Goldman chief executive Lloyd] Blankfein and say we’re doing ‘God’s work’, but at least it feels like we’re on the side of the good this time round,” says one banker who advised the UK government in 2008.
Whether banks can maintain this new-found trust depends in large part on their ability to withstand coronavirus and its aftershocks. That in turn rests on whether post-financial crisis reforms — some of which the banks are lobbying furiously to relax — have left the system strong enough to survive. Banks appear to have passed the first test: a short but pronounced period of market mayhem and a co-ordinated drawdown of hundreds of billions of dollars of credit by corporations feeling the strain. One policymaker says that, faced with the coronavirus fallout, the global banking system of 2007 would have already imploded by now.
Jes Staley, chief executive of Barclays, says that “by any measure, the financial markets have traded and demonstrated volatility never seen before,” noting the “significant value destruction happening in pools of assets”. But, so far at least, the system is operating as it should. “It’s pretty extraordinary that with this amount of distress you haven’t seen more failures in asset management companies.”
He adds that the potential harbingers of a full-blown financial meltdown have not yet happened, such as a mutual fund preventing investors from making withdrawals. “There are just a lot of things you’d expect to happen before you start to see a real crisis,” says Mr Staley.
The real test of the resilience of banks and the wider financial system is yet to come. Huge swaths of the global economy, from airlines to retailers, have seen their revenues all but evaporate. Many companies and consumers will default on their loans, leading to a string of excruciating credit losses for banks that will hit profitability and blast a hole in their balance sheets. Meanwhile, ultra-low interest rates introduced by central banks to support the economy during the pandemic will put extra pressure on profits generated from lending.
“Everything in the world is on hold, and this cannot not be reflected in the financial world,” says Romain Boscher, chief investment officer for equities at Fidelity International. “Banks are still too big to fail, but also too crucial to disappear.”
Standard & Poor’s, the rating agency, last week warned that the US banking industry — which generated $195bn of profits last year — could swing to a $15bn loss in the next 12 months. Analysts at Berenberg say US and European lenders are facing an average 30 per cent plunge in profits this year and next. “Confronted with reduced activity, lower-for-longer interest rates, inflexible costs and higher loan losses, the outlook for bank earnings is one-way traffic,” they wrote in a recent note to clients.
Despite these headwinds, some bank executives have projected confidence. Ana Botín, executive chairman of Santander, the eurozone’s largest lender, told a financial services conference in March that the bank was forecasting only a 5 per cent drop in earnings this year, and that it expected no impact on its capital levels or midterm financial targets. Appearing via video link from a locked down Madrid, Ms Botin said those estimates were based on a “V-shaped” recession — a sharp shock followed by a rapid recovery, but stressed this was only one possible scenario.
However, some bankers say that such talk is premature, bordering on wishful thinking.
“If someone can tell me when they think [the virus] is going to be contained globally, and we will get back to a normalised global economy, then I can tell you what the credit cycle will look like,” says an executive at a rival global bank. “But given that no one can predict that, I find it hard to see people going out and being so confident.”
The depth of credit losses hinges on the amount of risk that countries are willing to share with the banking sector. Governments and central banks have rolled out fiscal and monetary stimulus programmes on a scale not seen since the second world war, ranging from central bank-backed credit facilities to loan guarantees and bailouts for industries including the US aviation sector. One Swiss bank executive says that absent such extraordinary support, banks’ loss-absorbing capital buffers “would have been like a brolly in a hurricane”.
One banker advising the UK government — which has earmarked £330bn for corporate loan guarantees and a commercial paper financing facility — says the schemes are untested. In particular, he warns that the guarantees will only apply to future lending. “It’s for new money, not for all the loans we’ve already made that are going to go bad.”
Bank executives have also warned that new accounting rules in Europe — which force lenders to set aside provisions for bad loans at an earlier date — will aggravate the problem by quickly impairing capital buffers and crimping their ability to lend at the very moment companies and consumers need cash. Policymakers are sympathetic, and have taken steps to reduce the shock of the new regulations. On Friday, regulators agreed to soften the impact of similar rules in the US.
But relaxing the rules will only buy time. “If the world blows up and all this government intervention doesn’t work, then this will eventually get to banks,” says the banker advising the UK government. “It will be an old-fashioned credit loss crisis, but on a scale not seen before.”
Even if banks can absorb the losses, some of the actions taken by policymakers will hurt the sector in the long run. Although recent interest rate cuts by the US Federal Reserve and the Bank of England are intended as a temporary measure, the 2008 crisis showed that central banks can struggle to increase rates once an immediate economic shock has passed. Meanwhile, a boom in first-quarter trading revenues for investment banks will probably only provide a short-term fillip.
Standard Chartered’s head of finance Andy Halford warns that “incredibly low interest rates” could cause corporate and retail depositors to move their cash out of accounts that have tended to pay a higher rate of interest in exchange for having the deposit locked up for a specific period of time. “Banks like to have deposit stickiness that can be used to underpin lending,” he says. “[If] there is less inclination to put money into sticky pots, there is less confidently there for circulation into the system.”6
The coronavirus crisis might have given banks an opportunity to repair their public image, but it also brings new reputational risks. As the transmission mechanism for doling out state aid, they will be required to perform a thorny task: deciding which companies should receive financial assistance and which would have struggled to survive regardless of the virus, and should therefore be cut loose. One policymaker says “picking winners and losers” could provoke a long-term public and political backlash against the banks.
“We want to avoid any moral hazard . . . governments should not just shell out money,” says Lars Machenil, chief financial officer of BNP Paribas, the French bank. “If a company, an airline for example, was in good shape in February then the government guarantees are [there] just to get it through the Covid-19 period.”
Mr Corbat says banks must walk a “fine line” between “being as supportive as we can be” without “in any way calling into question the soundness” of the bank or the financial system. “The last thing that we all want to see is . . . our consumers, our small businesses and our big businesses coming out of this . . . [with a] precariously bigger or larger position of indebtedness.”
Although many retail and consumer borrowers have been given payment holidays, some will never be able to repay their loans, which could lead to a wave of bankruptcies and repossessions that will test the public’s patience.
“This crisis did not originate in banking, but they can be part of the solution, and it might engulf them if, instead, they turn away,” says Paul Tucker, chair of the Systemic Risk Council, a group of former regulators, and previously deputy governor of the Bank of England. “They must not gouge customers, and need to suspend dividends and high-end bonuses. It is not a moment to put themselves first.”
Peter Orszag, an executive at Lazard who was White House budget director in 2009-10 in the first Obama administration, warns that the new-found trust between banks and policymakers could come under strain.
“I don’t want to call this the honeymoon period, because what’s going on is so awful, but there is a bit of coming together and recognising goodwill,” he says. However as banks are forced to decide which consumers and companies receive support, political and public opinion could change. “What happens is that six months in the dynamic can start to shift — the backlash doesn’t start immediately.”6
Like other businesses, banks are also facing huge logistical obstacles, with their scattered staff either working from home or off sick. A lockdown in India, where many lenders have chosen to locate call centres, is making it harder to deal with a deluge of incoming customer inquiries. Some banks have had to put restructuring efforts on hold, like HSBC, which last week said it would pause the vast majority of redundancies barely two months after it announced plans to slash 35,000 jobs. The cost of running a bank, already stubbornly high, is only going to rise.
Above all else, the survival of banks and the global financial system depends on whether governments can contain the public health crisis.
Brian Moynihan, chief executive of Bank of America, says the $2tn stimulus agreed last week by US lawmakers was of “a substantial size and dimension that most of us think is big enough to help do the trick”.
But he acknowledges the wider challenge: “What they’re doing on fiscal and monetary [policy] . . . is terrific, but the real thing that they have got to solve is the healthcare crisis.”
Thursday 12 September 2019
Central banks were always political – so their ‘independence’ doesn’t mean much
The separation of monetary and fiscal policy serves the neoliberal status quo. It won’t survive the next crash writes Larry Elliott in The Guardian
‘The Federal Reserve is coming under enormous pressure from Donald Trump to cut interest rates.’ Donald Trump with Jerome Powell, then his nominee for chairman of the Federal Reserve, Washington DC, November 2017. Photograph: Carlos Barría/Reuters
Independent central banks were once all the rage. Taking decisions over interest rates and handing them to technocrats was seen as a sensible way of preventing politicians from trying to buy votes with cheap money. They couldn’t be trusted to keep inflation under control, but central banks could.
And when the global economy came crashing down in the autumn of 2008, it was central banks that prevented another Great Depression. Interest rates were slashed and the electronic money taps were turned on with quantitative easing (QE). That, at least, is the way central banks tell the story.
An alternative narrative goes like this. Collectively, central banks failed to stop the biggest asset-price bubble in history from developing during the early 2000s. Instead of taking action to prevent a ruinous buildup of debt, they congratulated themselves on keeping inflation low.
Even when the storm broke, some institutions – most notably the European Central Bank (ECB) – were slow to act. And while the monetary stimulus provided by record-low interest rates and QE did arrest the slide into depression, the recovery was slow and patchy. The price of houses and shares soared, but wages flatlined.
A decade on from the 2008 crash, another financial crisis is brewing. The US central bank – the Federal Reserve – is coming under huge pressure from Donald Trump to cut interest rates and restart QE. The poor state of the German economy and the threat of deflation means that on Thursday the ECB will cut the already negative interest rate for bank deposits and announce the resumption of its QE programme.
But central banks are almost out of ammo. If cutting interest rates to zero or just above was insufficient to bring about the sort of sustained recovery seen after previous recessions, then it is not obvious why a couple of quarter-point cuts will make much difference now. Likewise, expecting a bit more QE to do anything other than give a fillip to shares on Wall Street and the City is the triumph of hope over experience.
There were alternatives to the response to the 2008 crisis. Governments could have changed the mix, placing more emphasis on fiscal measures – tax cuts and spending increases – than on monetary stimulus, and then seeking to make the two arms of policy work together. They could have taken advantage of low interest rates to borrow more for the public spending programmes that would have created jobs and demand in their economies. Finance ministries could have ensured that QE contributed to the long-term good of the economy – the environment, for example – if they had issued bonds and instructed central banks to buy them.
This sort of approach does, though, involve breaking one of the big taboos of the modern age: the belief that monetary and fiscal policy should be kept separate and that central banks should be allowed to operate free from political interference.
The consensus blossomed during the good times of the late 1990s and early 2000s, and survived the financial crisis of 2008 . But challenges from both the left and right, especially in the US, suggest that it won’t survive the next one. Trump says the Fed has damaged the economy by pushing up interest rates too quickly. Bernie Sanders says the US central bank has been captured by Wall Street. Both arguments are correct. It is a good thing that central bank independence is finally coming under scrutiny.
For a start, it has become clear that the notion of depoliticised central bankers is a myth. When he was governor of the Bank of England, Mervyn King lectured the government about the need for austerity while jealously guarding the right to set interest rates free from any political interference. Likewise, rarely does Mario Draghi, the outgoing president of the ECB, hold a press conference without urging eurozone countries to reduce budget deficits and embrace structural reform.
Central bankers have views and – perhaps unsurprisingly – they tend to be quite conservative ones. As the US economist Thomas Palley notes in a recent paper, central bank independence is a product of the neoliberal Chicago school of economics and aims to advance neoliberal interests. More specifically, workers like high employment because in those circumstances it is easier to bid up pay. Employers prefer higher unemployment because it keeps wages down and profits up. Central banks side with capital over labour because they accept the neoliberal idea that there is a point – the natural rate of unemployment – beyond which stimulating the economy merely leads to higher inflation. They are, Palley says, institutions “favoured by capital to guard against the danger that a democracy may choose economic policies capital dislikes”.
Until now, monetary policy has been deemed too important to be left to politicians. When the next crisis arrives it will become too political an issue to be left to unelected technocrats. If that crisis is to be tackled effectively, the age of independent central banks will have to come to an end.
Independent central banks were once all the rage. Taking decisions over interest rates and handing them to technocrats was seen as a sensible way of preventing politicians from trying to buy votes with cheap money. They couldn’t be trusted to keep inflation under control, but central banks could.
And when the global economy came crashing down in the autumn of 2008, it was central banks that prevented another Great Depression. Interest rates were slashed and the electronic money taps were turned on with quantitative easing (QE). That, at least, is the way central banks tell the story.
An alternative narrative goes like this. Collectively, central banks failed to stop the biggest asset-price bubble in history from developing during the early 2000s. Instead of taking action to prevent a ruinous buildup of debt, they congratulated themselves on keeping inflation low.
Even when the storm broke, some institutions – most notably the European Central Bank (ECB) – were slow to act. And while the monetary stimulus provided by record-low interest rates and QE did arrest the slide into depression, the recovery was slow and patchy. The price of houses and shares soared, but wages flatlined.
A decade on from the 2008 crash, another financial crisis is brewing. The US central bank – the Federal Reserve – is coming under huge pressure from Donald Trump to cut interest rates and restart QE. The poor state of the German economy and the threat of deflation means that on Thursday the ECB will cut the already negative interest rate for bank deposits and announce the resumption of its QE programme.
But central banks are almost out of ammo. If cutting interest rates to zero or just above was insufficient to bring about the sort of sustained recovery seen after previous recessions, then it is not obvious why a couple of quarter-point cuts will make much difference now. Likewise, expecting a bit more QE to do anything other than give a fillip to shares on Wall Street and the City is the triumph of hope over experience.
There were alternatives to the response to the 2008 crisis. Governments could have changed the mix, placing more emphasis on fiscal measures – tax cuts and spending increases – than on monetary stimulus, and then seeking to make the two arms of policy work together. They could have taken advantage of low interest rates to borrow more for the public spending programmes that would have created jobs and demand in their economies. Finance ministries could have ensured that QE contributed to the long-term good of the economy – the environment, for example – if they had issued bonds and instructed central banks to buy them.
This sort of approach does, though, involve breaking one of the big taboos of the modern age: the belief that monetary and fiscal policy should be kept separate and that central banks should be allowed to operate free from political interference.
The consensus blossomed during the good times of the late 1990s and early 2000s, and survived the financial crisis of 2008 . But challenges from both the left and right, especially in the US, suggest that it won’t survive the next one. Trump says the Fed has damaged the economy by pushing up interest rates too quickly. Bernie Sanders says the US central bank has been captured by Wall Street. Both arguments are correct. It is a good thing that central bank independence is finally coming under scrutiny.
For a start, it has become clear that the notion of depoliticised central bankers is a myth. When he was governor of the Bank of England, Mervyn King lectured the government about the need for austerity while jealously guarding the right to set interest rates free from any political interference. Likewise, rarely does Mario Draghi, the outgoing president of the ECB, hold a press conference without urging eurozone countries to reduce budget deficits and embrace structural reform.
Central bankers have views and – perhaps unsurprisingly – they tend to be quite conservative ones. As the US economist Thomas Palley notes in a recent paper, central bank independence is a product of the neoliberal Chicago school of economics and aims to advance neoliberal interests. More specifically, workers like high employment because in those circumstances it is easier to bid up pay. Employers prefer higher unemployment because it keeps wages down and profits up. Central banks side with capital over labour because they accept the neoliberal idea that there is a point – the natural rate of unemployment – beyond which stimulating the economy merely leads to higher inflation. They are, Palley says, institutions “favoured by capital to guard against the danger that a democracy may choose economic policies capital dislikes”.
Until now, monetary policy has been deemed too important to be left to politicians. When the next crisis arrives it will become too political an issue to be left to unelected technocrats. If that crisis is to be tackled effectively, the age of independent central banks will have to come to an end.
Tuesday 9 October 2018
Whistleblower Rudolf Elmer on Why a Court Ruling Could Finally Topple Swiss Banking Secrecy
Rudolf Elmer in The Wire.In
Editor’s Note: For nearly 14 years, Rudolf Elmer has tried to chip away at the principle of Swiss banking secrecy, which laid the groundwork for an international system that helped the world’s rich and multinational conglomerates evade billions of dollars in taxes through offshore financial structures and tax havens.
Elmer was the Chief Operating Officer of the Caribbean operations of the Swiss bank, Julius Baer, for eight years before being dismissed in 2002. He was, as The Wire has noted in a 2017 interview, was part of the first wave of Swiss bank whistleblowers who helped expose the inner workings of a patently unjust system.
In 2011, he was tried for sharing information about tax evasion, money laundering and other financial violations with Swiss t0ax authorities and Swiss newspapers.
In 2014 he was tried for sharing information with US, German tax authorities and WikiLeaks. While it’s unclear if the Americans made use of Elmer’s data, in early 2016, Julius Baer coughed up $547 million in fines after the Obama administration filed criminal charges against the bank. The German government went onto levy another EUR 50 million penalty. Both fines were paid instantly in order to avoid prosecution.
Elmer’s crusade has taken a personal toll as well. Due to multiple cases, he has been imprisoned for over 220 days, most of it solitary confinement, and has had to fend off an orchestrated harassment campaign against his family.
In 2016, he won a partial victory in the high court of Zurich, which turned down demands by the prosecution to convict the 63-year-old of breaching Swiss banking secrecy laws, but upheld other less minor charges.
On October 10, 2018, in response to appeals filed by both Elmer and the prosecutor’s office, the Federal Supreme Court of Switzerland will take a final call. Elmer, whose as-of-yet-unpublished data also contains the offshore secrets of 20 ultra-high-networth Indian clients, writes below on what’s at stake.
In my view as the accused person, the essence of this highly political and crucial case for Switzerland’s finance industry is if the much-vaunted principle of Swiss bank secrecy can be applied extra-territorially.
In this case, whether the banking secrecy can be applied to entities that operate in the Cayman Islands.
In the Cayman Islands, the Julius Baer Trust Company Ltd. (Cayman) administered trusts, companies, equity- and debt-funds but also hedge funds on a big scale. Some of those special purpose vehicles held Swiss bank accounts with Bank Julius Baer & Co. AG, Zürich in Switzerland.
The statements and other advices associated with those Swiss bank accounts were regularly sent to the Cayman Islands in order to perform administrative tasks for the accounts of those special purpose vehicles.
It is because of these Swiss bank accounts that “Causa Elmer” (Case Elmer) has turned into a “Causa Swiss Bank Secrecy” (Case Swiss Bank Secrecy). It particularly focuses on its future, because the crucial question is if Swiss bank secrecy can protect client data outside Switzerland.
In 2011, when I was in solitary confinement for 220 days, a famous Swiss lawyer wrote me a letter that explains my predicament nicely:
This also tells me why the entire legal case, which was opened under dubious circumstances in 2005, has been investigated and re-investigated several times.
The judges of the Higher Court of Zurich acted even as a supervisor of the Prosecution Office and provided guidance. A materially changed indictment was issued in 2013, roughly 70 court rulings were issued during the 14 years of investigation and close to 40 interrogations were performed.
My lawyer, Ganden Tethong, has over 180 binders filled with court documents. In addition to this, I underwent two forensic psychological evaluations.
To top it off, my wife was accused of having violated Swiss bank secrecy – a tactic I believe was carried out to make sure she was not allowed to visit me during my time in solitary confinement.
I had to review 8 million computer files under the supervision of a police officer within three months in order to find evidence to justify my actions. The stress caused by the cases against me sent me to the hospital for three months, where I recovered but then was forced on December 10, 2014 (incidentally, World Human Rights Day) to attend a court trial where I had a second serious collapse within two days and was hospitalised again.
This has had a toll on my eleven year old daughter, who attempted to commit suicide, but was able to be rescued by a bunch of brilliant doctors. Family photographs, her computers, her play-machine her first story writings and other parts of her belongings are still confiscated by Swiss authorities.
In short, astronomical effort bordering on psychological warfare has been performed in order to make the scapegoat for the difficult times that Swiss bank secrecy has been exposed to in the last few years.
The Swiss media has not been helpful to say in the least. Various publications have called me a thief, a blackmailer, a psychologically sick person, a terrorist, neo-Nazi and caused irreversible reputational damage. One newspaper, Die Weltwoche a right-wing magazine, was later found guilty in three court trials of violating my personal rights.
However, as a former Swiss army captain of the Air Force, one knows the methodology by which people are mentally destroyed. One also knows how to defend oneself in such circumstances.
“Causa Elmer”, therefore, has turned into a “Causa Swiss bank secrecy”.
This was clear to me from when a well-known Geneva-based banker stated in 2007 to Professor Jean Ziegler that Julius Baer should make Elmer an offer of hush money of CHF 10 million or so to be silenced and to agree to close the pending legal case which threatens the entire Swiss banking industry as a whole.
The filing of the complaint by Bank Julius Baer & Co. AG, Zurich was a big management mistake. This case should have been solved with a cordial or gentlemen agreement which was common in Switzerland in those days.
On October 10, 2018, the five judges of the Federal Court of Switzerland will present their view and their rulings based on the governing law of Switzerland which currently requests a Swiss banker to be under Swiss bank secrecy law if he/she holds an employment contract with a bank that is domiciled in Switzerland and holds a Swiss banking license.
Julius Baer Bank & Trust Company Ltd., Cayman Islands is neither domiciled in Switzerland and does not have a Swiss banking licence. During the time of my employment, from 1994 to 2002, I held a Cayman employment contract with the sister entity of Julius Baer Bank & Co. AG, Zurich and had no reporting requirements to fulfill to the Swiss bank at all.
Therefore, according to leading Swiss legal experts, Swiss bank secrecy cannot be applied in my case.
The agreement with Bank Julius Baer & Co. AG, Zurich in respect of pension matters is by far not a Swiss employment contract because most of the key elements of an employment contract are missing. Besides this, for the very same time period, there was the true Cayman employment contract applicable. It appears that the true employment contracts were kept deliberately as long as possible out of the court files.
Only when two well-known legal professors, Mark Piet and Thomas Geiser, gave a second opinion to the courts, the judges of the Higher Court of Zurich were mostly forced to issue an acquittal in my case for charges related to violation of Swiss bank secrecy laws.
What is at stake?
The present causa of Swiss bank secrecy must be keeping the Swiss banking industry’s biggest clients on their toes.
Why? Because ultra high networth individuals all over the world and even multinational conglomerates, who use special purpose vehicles administered by Swiss banks holding a Swiss bank account, will be very keen on knowing the outcome of the Federal Court ruling.
Here are the questions at stake:
First, is it a fact that Swiss bank secrecy ends at the boundary of Switzerland?
Second, what happens to a client’s offshore structure (trusts, companies etc.) if it holds a Swiss bank account? Or put another way, how is it protected outside Switzerland?
Third, it is known that Swiss banks have outsourced accounting administration to so called low-costs countries such as Poland and therefore the question is how and under which law is my data protected if it is outside Switzerland in a so-called out-sourcing centre?
Fourth, in confirming the partial acquittal granted to me by the high court in 2016, with regard to violating Swiss bank secrecy, could this allow future and potential whistleblowers to come forward and make even more offshore data public?
Considering all of this, the Federal Court of Switzerland one or the other way will come up with an important verdict not only for me but for the future of Swiss Bank secrecy and the Swiss Banking industry.
The entire case is one for the history books, dealing as it does with one of the world’s best known secrecy laws. The outcome of the court ruling could also cause big change in the Swiss Banking industry as it puts a spotlight on questions that very few people in Switzerland’s financial industry have raised or want answered.
Friday 25 May 2018
How Britain let Russia hide its dirty money
For decades, politicians have welcomed the super-rich with open arms. Now they’re finally having second thoughts. But is it too late? By Oliver Bullough in The Guardian
In March, parliament’s foreign affairs committee asked me to come and tell them what to do about dirty Russian cash. As a journalist, I’ve spent much of my career writing about financial corruption in the former Soviet Union, but the invitation came as something of a surprise. After all, ever since I was at school in the 1990s, British politicians have welcomed Russian money to our shores. They have celebrated when oligarchs have bought our football clubs, cheered when they’ve listed their companies on our Stock Exchange. They have gladly accepted their political donations and patronised their charitable foundations.
When journalists and academics pointed out that these murky fortunes could buy influence over our democracy and undermine the rule of law, they were largely dismissed as inconvenient Cassandras warning MPs to beware Russians bearing gifts. But earlier this year, after the poisoning in Salisbury of the former spy Sergei Skripal and his daughter Yulia, those little-heeded prophecies jumped straight into the pages of Hansard. “To those who seek to do us harm, my message is simple: you are not welcome here,” Theresa May told the House of Commons on 14 March, in a speech that blamed Russia for the attack. “There is no place for these people, or their money, in our country.”
Britain’s entire political class joined the prime minister in this screeching handbrake turn. MPs who had long presented the nation’s openness to trade as a great virtue suddenly wanted to be seen as tough on kleptocrats, tough on the causes of kleptocrats. Having allowed so much Russian money into Britain, these MPs were now seized with concern that Vladimir Putin might, through his power over his nation’s super-rich, be able to influence our institutions. Were we selling Putin the rope with which he would hang us, they wondered.
That is why, on 28 March, I took a seat in committee room six, a chamber high up in the Palace of Westminster, with heavy furniture, a view over the River Thames, and a carpet like a migraine. The foreign affairs committee exists to monitor the work of the Foreign Office – essentially, to keep an eye on Boris Johnson – but its members can investigate any subjects they choose. This time, they had chosen to look into the money Putin and his cronies hold in Britain and its overseas territories, with a view to exploring fresh opportunities for sanctions.
I had brought along a list of things I wanted to talk about: how we should improve our defences against money laundering; how we need transparency about who owns property; how MPs themselves must stop taking money from dodgy ex-Soviet oligarchs if they want others to do the same.
Oliver Bullough talking to the the Foreign Affairs Committee in March. Photograph: parliamentlive.tv
But the first question, from Priti Patel, the former international development secretary, threw me: “Can you give the committee a sense of the scale of so-called ‘dirty money’ being laundered through London?” she asked.
It is a vast question, worthy of a book in itself, and one that even the National Crime Agency would struggle to answer, let alone me. Then came her second question: “What assets has that hidden money gone into?”
I tried my best – I mentioned property, private schools, luxury goods – but I think she and I both knew I’d fluffed it. I should have brought along specific examples, with times and dates and names. The embarrassing truth is that, although I have written about Russia and its neighbours for two decades, during which I have increasingly specialised in analysing corruption, it had never really occurred to me to ascertain precisely how much stolen Russian money had found a home in the UK, or to chart exactly where it had ended up.
If someone like me had been this culpably incurious, it is hardly surprising that politicians with dozens of other priorities have had to scramble to understand what we’re facing. But for the past couple of months, I have belatedly tried to discover an answer to the foreign affairs committee’s questions.
It turns out that the situation is even more worrying than I had suspected.
One way to begin investigating exactly how much Russian money there is in Britain – and how much of it is dirty – is to look at the official data. According to Russia’s Federal State Statistics Service, at the end of September, Russian investors held financial assets in the UK worth a total of $3.5bn (£2.6bn). Our own Office of National Statistics provides a broader measure of all Russian investment in the UK, and assessed it – at the end of 2016 – at £25.5bn.
That seems like a lot of money but, on a national scale, it’s small change. Investors from Finland alone have a stake in Britain worth twice that much, and we don’t lose sleep over the Finns destabilising our democracy. Sadly, the statistics are telling a misleading story. Russian money that moves through another jurisdiction before arriving in Britain isn’t counted as Russian and, since the overwhelming majority of money that enters and leaves Russia does so via tax havens such as Cyprus and the Bahamas, this means the official figures reflect only a small portion of the money the MPs were interested in.
Over the past decade, £68bn has flowed from Russia into Britain’s offshore satellites such as the British Virgin Islands, Cayman, Gibraltar, Jersey and Guernsey. That’s seven times more money than has flowed directly from Russia into the UK. (On top of that, some £94bn has poured out of Russia into Cyprus, £13bn into Switzerland, and £23bn into the Netherlands, which has its own network of tax havens.)
This wealth is not actually in the offshore centres – it is just registered there, which helps to obscure its origins. If you’re a Russian official whose wealth is wildly disproportionate to your salary, this anonymity allows you to spend your money in London without anyone realising you’re a crook. The French economist Thomas Piketty estimates that more than half of Russians’ total wealth is held offshore in this manner – some $800bn (£597bn) – and by a tiny number of people, perhaps just a few hundred. “Rich Russians live between London, Monaco and Moscow,” Piketty wrote in a blogpost in April. “Post-communism has become the worst ally of hyper-capitalism.”
This means that there is not a single sewer pumping dirty Russian cash into the UK to which we can attach a meter, so as to measure its output. Instead, the cash is diluted into the great tidal flows of liquid capital that pour in and out of the City of London every day, from every corner of the globe. The ordure churned out by Russian crooks and kleptocrats is thus, thanks to the skilled attentions of the tax havens’ best brains, indistinguishable from ordinary investment.
Vladimir Putin and Tony Blair in Downing Street in 2003. Photograph: Grigory Dukor/Reuters
Their salvation came from an unlikely quarter: the Soviet Union, which didn’t want to keep its dollar reserves in US banks. Instead, it kept them in London, where British banks began lending them to each other in an entirely unregulated market – they became known as “Eurodollars” – thus giving birth to offshore finance, and providing the City with the startup capital it needed to get back in business. By the end of the communist period, Soviet institutions routinely sent their money through Britain’s offshore territories, and the City was booming. The Central Bank in Moscow even had a shell company in Jersey, which it used to hide money from the government that it was supposedly a part of.
This is one of the problems with trying to ascertain the volume of dirty Russian money in London: how far back do we go? Do the fees Midland Bank received for banking Soviet money in the 1950s still count as Russian cash, and if so, are they dirty? Does the commission the estate agent earned by selling those flats in Kensington in the early 1990s count as dirty money? And what about the £800m that Russians paid for government bonds in return for golden visas? Or the $41,000 of Magnitsky money that was spent on a wedding dress in London? How many times does money have to circulate in the economy before we decide it’s not dirty any more?
This money is so deeply embedded in the UK that extracting it, or even identifying it, would be an unrivalled feat of investigation. “It would be impossible,” says Prem Sikka, professor of accounting at Sheffield University. “They have the big accountancy firms advising them where best to stash the money, to conceal it, to disguise it, all kind of things. The brains of this pinstriped mafia are available to everyone. They’re for hire.”
Recently, I spoke to Jon Benton, who led teams fighting dirty money at the Met and the NCA, and advised Cameron at the Cabinet Office, until his retirement in 2016. “We used to get these suspicious activity reports coming in, Russian ones, all the time. It would be for an investment or a property or a load of other things,” Benton said. “You’re looking at something that doesn’t look right, doesn’t smell right, but we had a tiny number of resources. To get caught up in some really complex Russian money-laundering case, when we weren’t going to get any assistance – you have to weigh it up. Do I try to throw lots of resources at this, when I know I’m really going to struggle to get the door open?”
Benton was optimistic about the introduction of so-called unexplained wealth orders, which came into effect in February this year. Once a UWO has been issued, property is frozen, and its owner has to respond and justify why they own it. But that will only confiscate property, Benton noted. It won’t put anyone in jail.
“The time when we might have been able to do something about this was 20 years ago, when it wasn’t particularly sophisticated, and the large sums of money were just arriving in the country,” he said. By ignoring the provenance of dirty cash, and allowing it to be spent on property, British authorities have cleansed it of its taint: it is legitimate investment now. “Unpicking all that is a real challenge. The reality is that it’s probably the hardest area to penetrate in the world.”
We don’t know how much dirty money there is in the UK, nor do we know exactly where it is, and there’s nothing we can do about it. Or rather, there’s nothing we can do about it with the laws as they stand, and without giving greater resources to law enforcement agencies. Almost 100,000 UK properties are currently owned via offshore companies, obscuring their ownership, many of them undoubtedly by Russian criminals and kleptocrats we could happily do without. The government has promised to force these offshore companies to disclose their true owners, but that won’t be until 2021. For the next three years, criminals will be free to profit from their property in the UK without admitting they own it. Why can’t we hurry that up? To answer both of Priti Patel’s questions – how much money is there, and where is it? – we need transparency.
The foreign affairs committee published its conclusions this week, drawing on the evidence that I and others gave it, and they were impressively robust. Its report demanded a more coherent government approach to the “assets stored and laundered in London (which) both directly and indirectly support President Putin’s campaign to subvert the international rules-based system, undermine our allies, and erode the mutually reinforcing international networks that support UK foreign policy”.
Earlier this week, it was reported that Abramovich is finding it hard to renew his British visa, and some newspapers are speculating that this suggests Britain is already pioneering a new approach to Russian money, one that demands checks on the fortunes even of the very richest, and even when there is no apparent evidence of corruption. We do not yet know the reasons for the delay in the Chelsea owner’s visa, but such checks should be welcomed anyway: in cases where evidence emerges that someone is corrupt, that person should be kept out of Britain. But this alone is insufficient; we need to find the dodgy money that is already here. Confiscating it and finding a way to return it to the Russian people would diminish those who mean us harm, while simultaneously helping those we wish to befriend.
That requires strengthening Britain’s investigative power. The National Crime Agency and the UK’s police forces currently lack the resources to bring the prosecutions that could really make a difference to criminals’ calculation about whether to bring their money here. If we wish to prevent Russian kleptocrats from buying our country, we need to start catching them and their enablers in the act, and prosecuting them. That is the only true deterrent.
In March, parliament’s foreign affairs committee asked me to come and tell them what to do about dirty Russian cash. As a journalist, I’ve spent much of my career writing about financial corruption in the former Soviet Union, but the invitation came as something of a surprise. After all, ever since I was at school in the 1990s, British politicians have welcomed Russian money to our shores. They have celebrated when oligarchs have bought our football clubs, cheered when they’ve listed their companies on our Stock Exchange. They have gladly accepted their political donations and patronised their charitable foundations.
When journalists and academics pointed out that these murky fortunes could buy influence over our democracy and undermine the rule of law, they were largely dismissed as inconvenient Cassandras warning MPs to beware Russians bearing gifts. But earlier this year, after the poisoning in Salisbury of the former spy Sergei Skripal and his daughter Yulia, those little-heeded prophecies jumped straight into the pages of Hansard. “To those who seek to do us harm, my message is simple: you are not welcome here,” Theresa May told the House of Commons on 14 March, in a speech that blamed Russia for the attack. “There is no place for these people, or their money, in our country.”
Britain’s entire political class joined the prime minister in this screeching handbrake turn. MPs who had long presented the nation’s openness to trade as a great virtue suddenly wanted to be seen as tough on kleptocrats, tough on the causes of kleptocrats. Having allowed so much Russian money into Britain, these MPs were now seized with concern that Vladimir Putin might, through his power over his nation’s super-rich, be able to influence our institutions. Were we selling Putin the rope with which he would hang us, they wondered.
That is why, on 28 March, I took a seat in committee room six, a chamber high up in the Palace of Westminster, with heavy furniture, a view over the River Thames, and a carpet like a migraine. The foreign affairs committee exists to monitor the work of the Foreign Office – essentially, to keep an eye on Boris Johnson – but its members can investigate any subjects they choose. This time, they had chosen to look into the money Putin and his cronies hold in Britain and its overseas territories, with a view to exploring fresh opportunities for sanctions.
I had brought along a list of things I wanted to talk about: how we should improve our defences against money laundering; how we need transparency about who owns property; how MPs themselves must stop taking money from dodgy ex-Soviet oligarchs if they want others to do the same.
Oliver Bullough talking to the the Foreign Affairs Committee in March. Photograph: parliamentlive.tv
But the first question, from Priti Patel, the former international development secretary, threw me: “Can you give the committee a sense of the scale of so-called ‘dirty money’ being laundered through London?” she asked.
It is a vast question, worthy of a book in itself, and one that even the National Crime Agency would struggle to answer, let alone me. Then came her second question: “What assets has that hidden money gone into?”
I tried my best – I mentioned property, private schools, luxury goods – but I think she and I both knew I’d fluffed it. I should have brought along specific examples, with times and dates and names. The embarrassing truth is that, although I have written about Russia and its neighbours for two decades, during which I have increasingly specialised in analysing corruption, it had never really occurred to me to ascertain precisely how much stolen Russian money had found a home in the UK, or to chart exactly where it had ended up.
If someone like me had been this culpably incurious, it is hardly surprising that politicians with dozens of other priorities have had to scramble to understand what we’re facing. But for the past couple of months, I have belatedly tried to discover an answer to the foreign affairs committee’s questions.
It turns out that the situation is even more worrying than I had suspected.
One way to begin investigating exactly how much Russian money there is in Britain – and how much of it is dirty – is to look at the official data. According to Russia’s Federal State Statistics Service, at the end of September, Russian investors held financial assets in the UK worth a total of $3.5bn (£2.6bn). Our own Office of National Statistics provides a broader measure of all Russian investment in the UK, and assessed it – at the end of 2016 – at £25.5bn.
That seems like a lot of money but, on a national scale, it’s small change. Investors from Finland alone have a stake in Britain worth twice that much, and we don’t lose sleep over the Finns destabilising our democracy. Sadly, the statistics are telling a misleading story. Russian money that moves through another jurisdiction before arriving in Britain isn’t counted as Russian and, since the overwhelming majority of money that enters and leaves Russia does so via tax havens such as Cyprus and the Bahamas, this means the official figures reflect only a small portion of the money the MPs were interested in.
Over the past decade, £68bn has flowed from Russia into Britain’s offshore satellites such as the British Virgin Islands, Cayman, Gibraltar, Jersey and Guernsey. That’s seven times more money than has flowed directly from Russia into the UK. (On top of that, some £94bn has poured out of Russia into Cyprus, £13bn into Switzerland, and £23bn into the Netherlands, which has its own network of tax havens.)
This wealth is not actually in the offshore centres – it is just registered there, which helps to obscure its origins. If you’re a Russian official whose wealth is wildly disproportionate to your salary, this anonymity allows you to spend your money in London without anyone realising you’re a crook. The French economist Thomas Piketty estimates that more than half of Russians’ total wealth is held offshore in this manner – some $800bn (£597bn) – and by a tiny number of people, perhaps just a few hundred. “Rich Russians live between London, Monaco and Moscow,” Piketty wrote in a blogpost in April. “Post-communism has become the worst ally of hyper-capitalism.”
This means that there is not a single sewer pumping dirty Russian cash into the UK to which we can attach a meter, so as to measure its output. Instead, the cash is diluted into the great tidal flows of liquid capital that pour in and out of the City of London every day, from every corner of the globe. The ordure churned out by Russian crooks and kleptocrats is thus, thanks to the skilled attentions of the tax havens’ best brains, indistinguishable from ordinary investment.
Gorey harbour in Jersey, a UK crown dependency and international finanical centre. Photograph: Brian Lawrence/Getty Images
One of the few studies to forensically address this phenomenon came from analysts at Deutsche Bank, who, in 2015, looked at discrepancies in the records of money that flows into and out of the UK, and concluded that since the early 1990s, £133bn had arrived here without ever being publicly accounted for. They estimated that “less than half” of that sum was likely to be Russian, which means that Russians could have secret holdings here of up to £67.5bn, on top of the officially declared figure. (That is still a small amount compared with the holdings of German, American or French investors.)
So whose money is this? How is it getting here? The bank’s analysts didn’t look into that question. However, had they wanted to, they could have walked down the hall and asked their colleagues, since it turned out that Deutsche Bank itself was a significant culprit in spiriting money out of Russia without informing the authorities. Less than two years after the report – called Dark Matter – was published, Deutsche Bank traders in Moscow were caught secretly moving $10bn (£7.5bn) of their clients’ money out of Russia by illegally exploiting the stock market. (As a result, the bank had to pay finesof $425m (£317m) in the US and £163m in the UK.)
With institutions as sophisticated as Deutsche Bank working to hide Russian money, it is unsurprising that the total amount in the UK remains vague. So there is no real answer to the foreign affairs committee’s first question, except to say that the volume of Russian money in Britain is far larger than the official statistics would have us think.
There are two reasons why we should be worried about this. The first is the low-probability but high-impact chance that Putin is hiding money here in the financial equivalent of sleeper cells, ready to slip out and buy influence when a crisis comes. The second is more significant: no one steals money if they can’t keep it. By letting Putin’s allies launder their stolen fortunes, and hide them in our country, we are drawing a line under their crimes, and rewarding them for actions we should not be condoning. Do we really want Britain to be the Kremlin’s fence?
To attempt an answer to Priti Patel’s second question – what assets has all this money gone into? – we need to look at how wealthy Russians responded to the collapse of communism. They chose to spend their newly freed money on assets they had long been denied, and ones that could not be taken away from them. Above all, they bought luxury goods and property outside their own country, particularly in London.
In early 1993, rich Russians were enough of a novelty for the Independent to report that three of them had bought flats in Kensington – at prices between £200,000 and £320,000 – under the headline “Property – a haven for rich refugees”. A month later, a Russian tycoon dropped £1.1m on a house in Hampstead, and then bought all the contents, too. “All he took into the house were four televisions and a vanload of carrier bags from Harrods,” an estate agent told the Evening Standard.
Those purchases were the first ripples of a tsunami of wealth that crashed over the whole south-east of England, with spectacular consequences. In 2013, an analysis by the estate agency Knight Frank estimated that almost a tenth of all buyers at the top end of the London market came from the former Soviet Union, while rival estate agents Savills calculated that Russians like to buy the biggest houses of any group of purchasers. Average house prices in Kensington have risen eightfold over the past two decades, at least partly thanks to the influx from Russia.
The poster boy for ostentatious expenditure has been the oligarch Roman Abramovich, who bought Chelsea football club in 2003. But even his London house – valued at £125m – was second division in the spending league. In April 2011, a Ukrainian bought the world’s most expensive flat – the penthouse at One Hyde Park – for £136.4m. Five months later, a Russian bought Park Place, a stately home near Henley-on-Thames, for £140m. Russians who acquired homes valued merely in the tens of millions barely deserved notice.
Among those lesser buyers was a banker called Grigory Guselnikov, a boyish 42-year-old who moved to London in 2008. He and his family came on tier 1 investor visas, which provide successful applicants with residency in exchange for an investment (of, at the time, £1m) in government bonds. In the eight years to September 2015, Russian citizens made up 764 of the 3,396 people who paid for these so-called golden visas – making them the second largest group of applicants, after Chinese citizens. This arrangement brought in around £800m of Russian investment, but the flow dropped markedly after April 2015, when the UK authorities began to check the origin of the money used to buy these government bonds. Once rigorous checks were put in place and the price of the visa was doubled, the number of applications fell sharply. In the final quarter of last year, just 16 Russians applied for a golden visa.
Guselnikov believes that politicians’ sudden panic about Russian money in Britain is misplaced. When we met in his office in a grand terraced house on Grosvenor Square, he began by pointing out that Russian money had less influence over British business than people think. “I can’t recall any big enterprise controlled by Russians, or any big company. They open restaurants, wine shops, they buy luxury stuff like football clubs.
“Where the impact is significant is real estate,” Guselnikov continued. “And primarily real estate in London.” His most high-profile investment was the shop that houses the Rolex concession on the ground floor of One Hyde Park, which he bought in 2011 for £12m (and sold for £20m three years later), and which demonstrates the peculiar dynamics at the top end of the property market, where the price of residential property is inflated beyond any conceivable income it could generate. “There is a shop, with advertising, 300 sq metres and the price is £12m. The flat above has no advertising, no shop, no ability to make money; it’s the same size, 300 sq metres, and cost £25m. The shop was two times cheaper than the flat, that was really funny,” he said, with a laugh.
His second point was that it was a misconception to think Russians are Machiavellian masterminds buying up slabs of Britain in order to undermine us from within. “You have to understand why people buy real estate abroad – they see it as their pension, they want to diversify the risk. In Russia, you have to be ready to lose everything, you never know what will happen,” he said. “They just spend money here. They don’t invest, they spend.”
One reason the Russian super-rich come to Britain, Guselnikov said, was for education. His own children attended private schools, although they now have British passports, so they were not counted among the 2,806 Russian children attending schools surveyed by the Independent Schools Council last year. By multiplying that total with the average fees parents pay, we can calculate that a minimum of £48.3m comes to Britain’s private schools each year from Russia.
Guselnikov said banks had become more stringent in their checks on the provenance of money in the last few years, so it was unlikely that significant flows of dirty money were entering the UK from Russia any more. But he conceded things had been different in the past. “If any dirty money is invested in UK property, it was before 2008; or before 2011 at the latest, not now. I don’t think the UK’s attractive any more, I don’t think it’s possible any more,” he said.
It may well be that, as Guselnikov said, many honest Russian businesspeople have indeed been behind these purchases of London property. However, thanks to tax havens and skilled enablers from the world’s major financial institutions, their money has been mingled with the proceeds of theft, bribery and corruption. Imagining that Britain will be unscathed by this influx is the macro equivalent of letting a kidnapper, a bent copper, and a heroin trafficker move into your village, and still expecting warm chats at the school gates.
Transparency International published a report last year, which, relying only on public sources of information, identified 160 properties in the UK, together worth £4.4bn, that had been bought by what it called “high-corruption-risk individuals”. Most of those properties were in London, and half of them were within three miles of Buckingham Palace – and that is just a fraction of the true total. “There is currently no credible deterrent in place for money-laundering failings from estate agents,” the report noted.
Two years ago, a former fund manager called Bill Browder gave evidence to parliament’s home affairs committee in which he revealed how $30m (£22m) that had been stolen from the Russian state by a group of corrupt police officers and officials had come to the UK, via 12 different banks, and been spent on an array of luxury goods: $176,000 went on chartering a private jet; $192,000 on redecorating a yacht; $20,000 on private school fees; $41,000 on a wedding dress; $295,000 to pay off an exclusive women-only credit card that offers “the most privileged and luxurious service”.
Browder, who was born in the US but is a British citizen, ran a successful Moscow-based fund until 2007, when the corrupt officials fraudulently claimed ownership of two of his investment companies. They realised that, by fiddling the books, they could claw back the $230m in taxes that he had paid on the year’s profits, which is what they did. The $30m that ended up in the UK derived from this act of grand larceny. When Browder’s lawyer Sergei Magnitsky exposed the fraud, he was arrested and detained in jail, where he was beaten and denied treatment for pancreatitis until he died. Browder has devoted the years since Magnitsky’s death to seeking justice for his lawyer, and punishment for those responsible. He employs a team of forensic accountants, who have traced the movement of the money that was stolen from the Russian budget.
The spending that he described to parliament fitted the pattern laid out by Guselnikov: it was being blown on luxury goods, rather than being invested to win influence over British politics or society. But that doesn’t mean we shouldn’t be concerned about it. This money should have been paid as taxes and spent on hospitals, schools and other services in Russia. Instead, it had been stolen from taxpayers and splashed on an absurd array of goodies. This is the kind of money Britain has been happily fencing for decades. Even now, British MPs only seem to care about it because its owners might harm our national security, rather than because it should be returned to the people it was originally stolen from.
Browder told the home affairs committee that he had traced chunks of the stolen money to 11 other countries – including France, Switzerland and the US – and investigators in every one of those countries had opened criminal cases based on the information he provided. But in Britain – where he had spoken to the Metropolitan police, the Serious Organised Crime Agency (now part of the National Crime Agency), the Serious Fraud Office, and HMRC – he had been turned away every time.
Why was Britain the only country that declined to act on the information Browder provided? His conclusion was that too many influential people – lawyers, bankers, accountants, property developers – were dependent on dirty Russian money for their livelihoods. “If that money was stopped,” he said in 2016, “certain people would find themselves without businesses, and I think those people have political weight in this country.”
Many British institutions have indeed accepted donations from wealthy Russian businesspeople: Sadiq Khan’s City Hall from Elena Baturina, whose husband was mayor of Moscow; the Conservative party from Lubov Chernukhin, whose husband was one of Putin’s ministers, and who paid £160,000 to play tennis with Boris Johnson and David Cameron in 2014.
One of the few studies to forensically address this phenomenon came from analysts at Deutsche Bank, who, in 2015, looked at discrepancies in the records of money that flows into and out of the UK, and concluded that since the early 1990s, £133bn had arrived here without ever being publicly accounted for. They estimated that “less than half” of that sum was likely to be Russian, which means that Russians could have secret holdings here of up to £67.5bn, on top of the officially declared figure. (That is still a small amount compared with the holdings of German, American or French investors.)
So whose money is this? How is it getting here? The bank’s analysts didn’t look into that question. However, had they wanted to, they could have walked down the hall and asked their colleagues, since it turned out that Deutsche Bank itself was a significant culprit in spiriting money out of Russia without informing the authorities. Less than two years after the report – called Dark Matter – was published, Deutsche Bank traders in Moscow were caught secretly moving $10bn (£7.5bn) of their clients’ money out of Russia by illegally exploiting the stock market. (As a result, the bank had to pay finesof $425m (£317m) in the US and £163m in the UK.)
With institutions as sophisticated as Deutsche Bank working to hide Russian money, it is unsurprising that the total amount in the UK remains vague. So there is no real answer to the foreign affairs committee’s first question, except to say that the volume of Russian money in Britain is far larger than the official statistics would have us think.
There are two reasons why we should be worried about this. The first is the low-probability but high-impact chance that Putin is hiding money here in the financial equivalent of sleeper cells, ready to slip out and buy influence when a crisis comes. The second is more significant: no one steals money if they can’t keep it. By letting Putin’s allies launder their stolen fortunes, and hide them in our country, we are drawing a line under their crimes, and rewarding them for actions we should not be condoning. Do we really want Britain to be the Kremlin’s fence?
To attempt an answer to Priti Patel’s second question – what assets has all this money gone into? – we need to look at how wealthy Russians responded to the collapse of communism. They chose to spend their newly freed money on assets they had long been denied, and ones that could not be taken away from them. Above all, they bought luxury goods and property outside their own country, particularly in London.
In early 1993, rich Russians were enough of a novelty for the Independent to report that three of them had bought flats in Kensington – at prices between £200,000 and £320,000 – under the headline “Property – a haven for rich refugees”. A month later, a Russian tycoon dropped £1.1m on a house in Hampstead, and then bought all the contents, too. “All he took into the house were four televisions and a vanload of carrier bags from Harrods,” an estate agent told the Evening Standard.
Those purchases were the first ripples of a tsunami of wealth that crashed over the whole south-east of England, with spectacular consequences. In 2013, an analysis by the estate agency Knight Frank estimated that almost a tenth of all buyers at the top end of the London market came from the former Soviet Union, while rival estate agents Savills calculated that Russians like to buy the biggest houses of any group of purchasers. Average house prices in Kensington have risen eightfold over the past two decades, at least partly thanks to the influx from Russia.
The poster boy for ostentatious expenditure has been the oligarch Roman Abramovich, who bought Chelsea football club in 2003. But even his London house – valued at £125m – was second division in the spending league. In April 2011, a Ukrainian bought the world’s most expensive flat – the penthouse at One Hyde Park – for £136.4m. Five months later, a Russian bought Park Place, a stately home near Henley-on-Thames, for £140m. Russians who acquired homes valued merely in the tens of millions barely deserved notice.
Among those lesser buyers was a banker called Grigory Guselnikov, a boyish 42-year-old who moved to London in 2008. He and his family came on tier 1 investor visas, which provide successful applicants with residency in exchange for an investment (of, at the time, £1m) in government bonds. In the eight years to September 2015, Russian citizens made up 764 of the 3,396 people who paid for these so-called golden visas – making them the second largest group of applicants, after Chinese citizens. This arrangement brought in around £800m of Russian investment, but the flow dropped markedly after April 2015, when the UK authorities began to check the origin of the money used to buy these government bonds. Once rigorous checks were put in place and the price of the visa was doubled, the number of applications fell sharply. In the final quarter of last year, just 16 Russians applied for a golden visa.
Guselnikov believes that politicians’ sudden panic about Russian money in Britain is misplaced. When we met in his office in a grand terraced house on Grosvenor Square, he began by pointing out that Russian money had less influence over British business than people think. “I can’t recall any big enterprise controlled by Russians, or any big company. They open restaurants, wine shops, they buy luxury stuff like football clubs.
“Where the impact is significant is real estate,” Guselnikov continued. “And primarily real estate in London.” His most high-profile investment was the shop that houses the Rolex concession on the ground floor of One Hyde Park, which he bought in 2011 for £12m (and sold for £20m three years later), and which demonstrates the peculiar dynamics at the top end of the property market, where the price of residential property is inflated beyond any conceivable income it could generate. “There is a shop, with advertising, 300 sq metres and the price is £12m. The flat above has no advertising, no shop, no ability to make money; it’s the same size, 300 sq metres, and cost £25m. The shop was two times cheaper than the flat, that was really funny,” he said, with a laugh.
His second point was that it was a misconception to think Russians are Machiavellian masterminds buying up slabs of Britain in order to undermine us from within. “You have to understand why people buy real estate abroad – they see it as their pension, they want to diversify the risk. In Russia, you have to be ready to lose everything, you never know what will happen,” he said. “They just spend money here. They don’t invest, they spend.”
One reason the Russian super-rich come to Britain, Guselnikov said, was for education. His own children attended private schools, although they now have British passports, so they were not counted among the 2,806 Russian children attending schools surveyed by the Independent Schools Council last year. By multiplying that total with the average fees parents pay, we can calculate that a minimum of £48.3m comes to Britain’s private schools each year from Russia.
Guselnikov said banks had become more stringent in their checks on the provenance of money in the last few years, so it was unlikely that significant flows of dirty money were entering the UK from Russia any more. But he conceded things had been different in the past. “If any dirty money is invested in UK property, it was before 2008; or before 2011 at the latest, not now. I don’t think the UK’s attractive any more, I don’t think it’s possible any more,” he said.
It may well be that, as Guselnikov said, many honest Russian businesspeople have indeed been behind these purchases of London property. However, thanks to tax havens and skilled enablers from the world’s major financial institutions, their money has been mingled with the proceeds of theft, bribery and corruption. Imagining that Britain will be unscathed by this influx is the macro equivalent of letting a kidnapper, a bent copper, and a heroin trafficker move into your village, and still expecting warm chats at the school gates.
Transparency International published a report last year, which, relying only on public sources of information, identified 160 properties in the UK, together worth £4.4bn, that had been bought by what it called “high-corruption-risk individuals”. Most of those properties were in London, and half of them were within three miles of Buckingham Palace – and that is just a fraction of the true total. “There is currently no credible deterrent in place for money-laundering failings from estate agents,” the report noted.
Two years ago, a former fund manager called Bill Browder gave evidence to parliament’s home affairs committee in which he revealed how $30m (£22m) that had been stolen from the Russian state by a group of corrupt police officers and officials had come to the UK, via 12 different banks, and been spent on an array of luxury goods: $176,000 went on chartering a private jet; $192,000 on redecorating a yacht; $20,000 on private school fees; $41,000 on a wedding dress; $295,000 to pay off an exclusive women-only credit card that offers “the most privileged and luxurious service”.
Browder, who was born in the US but is a British citizen, ran a successful Moscow-based fund until 2007, when the corrupt officials fraudulently claimed ownership of two of his investment companies. They realised that, by fiddling the books, they could claw back the $230m in taxes that he had paid on the year’s profits, which is what they did. The $30m that ended up in the UK derived from this act of grand larceny. When Browder’s lawyer Sergei Magnitsky exposed the fraud, he was arrested and detained in jail, where he was beaten and denied treatment for pancreatitis until he died. Browder has devoted the years since Magnitsky’s death to seeking justice for his lawyer, and punishment for those responsible. He employs a team of forensic accountants, who have traced the movement of the money that was stolen from the Russian budget.
The spending that he described to parliament fitted the pattern laid out by Guselnikov: it was being blown on luxury goods, rather than being invested to win influence over British politics or society. But that doesn’t mean we shouldn’t be concerned about it. This money should have been paid as taxes and spent on hospitals, schools and other services in Russia. Instead, it had been stolen from taxpayers and splashed on an absurd array of goodies. This is the kind of money Britain has been happily fencing for decades. Even now, British MPs only seem to care about it because its owners might harm our national security, rather than because it should be returned to the people it was originally stolen from.
Browder told the home affairs committee that he had traced chunks of the stolen money to 11 other countries – including France, Switzerland and the US – and investigators in every one of those countries had opened criminal cases based on the information he provided. But in Britain – where he had spoken to the Metropolitan police, the Serious Organised Crime Agency (now part of the National Crime Agency), the Serious Fraud Office, and HMRC – he had been turned away every time.
Why was Britain the only country that declined to act on the information Browder provided? His conclusion was that too many influential people – lawyers, bankers, accountants, property developers – were dependent on dirty Russian money for their livelihoods. “If that money was stopped,” he said in 2016, “certain people would find themselves without businesses, and I think those people have political weight in this country.”
Many British institutions have indeed accepted donations from wealthy Russian businesspeople: Sadiq Khan’s City Hall from Elena Baturina, whose husband was mayor of Moscow; the Conservative party from Lubov Chernukhin, whose husband was one of Putin’s ministers, and who paid £160,000 to play tennis with Boris Johnson and David Cameron in 2014.
Prime minister David Cameron with Russian president Dmitry Medvedev in Moscow in 2011. Photograph: Stefan Rousseau/PA
But it is not venal politicians who are stopping British police conducting investigations into the laundering of Russian money in the UK. According to Tristram Hicks, who was the detective superintendent in charge of economic crime at the Met until 2009, and who now acts as a freelance consultant to police forces around the world, the problem is far more serious than that.
In order to prosecute a foreign crook in Britain, you need to prove their money originated in a crime of some kind, and that requires evidence from overseas. Essentially, if you want to prosecute a Kremlin insider, you need evidence from the Kremlin, which naturally it will not provide, and that stops investigations from progressing. And this is not just a British problem. After France, Switzerland and the Netherlands received information from Browder that some of the stolen $230m had been spent in their countries, they froze the assets in question – but their criminal investigations are yet to secure convictions. Only US prosecutors have managed a result, and even that was just an out-of-court settlement, without an admission of guilt by the defendant. “You cannot underestimate the technical hurdle that is bringing the evidence to a British standard for a British court,” Hicks said.
That isn’t the only obstacle to investigating money laundering. Given that all wealthy Russians have political connections – otherwise, they wouldn’t be wealthy – if the UK does gain cooperation from Russian investigators in a prosecution, the defendant will invariably claim, often with good reason, that he is being politically persecuted, which allows his lawyers to discount the evidence being used against him.
Take Andrey Borodin, the owner of that £140m house in Henley-on-Thames. He arrived in Britain in 2011, pursued by Russian charges of having defrauded his own bank. Borodin insisted the charges were politically motivated, and gained asylum here. Had prosecutors brought charges in the UK, his lawyers could have discounted any evidence from Russia as the revenge of political rivals, and Hicks conceded this would essentially doom the prosecution’s case. “That’s hard to argue against,” he said.
There is also a third difficulty that Hicks didn’t address, which is just as serious. If a wealthy, ruthless Russian faces investigation, he can stop any chance of prosecution by killing the witnesses. This may well have been what happened to Alexander Litvinenko, who was murdered with radioactive polonium-210 in 2006, and who was working with Spanish and British authorities to expose Russian money flows. It may also explain the death of Alexander Perepilichny, a 44-year-old banker who was helping Browder’s team to understand the destination of the $230m stolen from the Russian budget, and who died while jogging in Surrey in 2012. Investigators at first thought he had suffered a heart attack, but it appears that he may have been poisoned with a rare plant extract.
In short, to bring a successful money-laundering prosecution against a wealthy Russian, officers need to win cooperation from Moscow, which is all but impossible; to convince a UK court that any cooperation that does result was not politically motivated, which is extremely difficult; and then to keep their witnesses alive, which has proven rather hard. In the circumstances, it’s not surprising that the NCA decided bringing a prosecution in the Magnitsky case was not the best use of its resources.
The amazing thing is that we have tolerated this situation for so long. Britain has consistently welcomed Russian money, and consistently ignored the warnings of those concerned about what it is buying. In March 2000, when Putin was still just acting president and had spent six months pulverising Chechnya, Tony Blair dashed to St Petersburg to be the first western leader to secure a meeting with the new man, and to urge more investment in each other’s countries.
At least Blair could claim not to have known what kind of man Putin was, but David Cameron had no such excuse. In September 2011, Cameron went to Moscow to seek business for the City of London, although most of the facts that are currently concerning MPs about Russia were already known. Litvinenko had been murdered five years previously, and Russia had given one of the Met’s suspects in the case a seat in parliament. Magnitsky had died in jail two years earlier, and his tormentors were walking free. But Cameron went to Moscow anyway.
“The whole point about trade is that we are baking a bigger cake and everyone can benefit from it and this is particularly true, perhaps, of Russia and Britain. Russia is resource-rich and services-light whereas Britain is the opposite,” Cameron told students at Moscow State University, on a trip that also involved meetings with Putin and his then placeholder president Dmitry Medvedev.
In his speech, Cameron boasted that Russian companies accounted for a quarter of share offerings on the London Stock Exchange. “Governments need to remember that businesses don’t have to invest in our country – they choose to. And we need to help them make that choice,” Cameron said. “It means minimising the burden of regulation so that business and entrepreneurship can flourish.”
With a prime minister who considered regulations on the origin of money to be a burden, it’s unsurprising that not many of them were made. This approach did not of course begin with Cameron, or even with Blair. In fact, it goes back to the mid-20th century. After the second world war, Britain was all but bankrupt, the City of London was somnolent, and economic power rested on Wall Street. City bankers wanted to get back into business, but were frustrated by the weakness of the pound, and its unsuitability as a means to finance the world’s trade.
But it is not venal politicians who are stopping British police conducting investigations into the laundering of Russian money in the UK. According to Tristram Hicks, who was the detective superintendent in charge of economic crime at the Met until 2009, and who now acts as a freelance consultant to police forces around the world, the problem is far more serious than that.
In order to prosecute a foreign crook in Britain, you need to prove their money originated in a crime of some kind, and that requires evidence from overseas. Essentially, if you want to prosecute a Kremlin insider, you need evidence from the Kremlin, which naturally it will not provide, and that stops investigations from progressing. And this is not just a British problem. After France, Switzerland and the Netherlands received information from Browder that some of the stolen $230m had been spent in their countries, they froze the assets in question – but their criminal investigations are yet to secure convictions. Only US prosecutors have managed a result, and even that was just an out-of-court settlement, without an admission of guilt by the defendant. “You cannot underestimate the technical hurdle that is bringing the evidence to a British standard for a British court,” Hicks said.
That isn’t the only obstacle to investigating money laundering. Given that all wealthy Russians have political connections – otherwise, they wouldn’t be wealthy – if the UK does gain cooperation from Russian investigators in a prosecution, the defendant will invariably claim, often with good reason, that he is being politically persecuted, which allows his lawyers to discount the evidence being used against him.
Take Andrey Borodin, the owner of that £140m house in Henley-on-Thames. He arrived in Britain in 2011, pursued by Russian charges of having defrauded his own bank. Borodin insisted the charges were politically motivated, and gained asylum here. Had prosecutors brought charges in the UK, his lawyers could have discounted any evidence from Russia as the revenge of political rivals, and Hicks conceded this would essentially doom the prosecution’s case. “That’s hard to argue against,” he said.
There is also a third difficulty that Hicks didn’t address, which is just as serious. If a wealthy, ruthless Russian faces investigation, he can stop any chance of prosecution by killing the witnesses. This may well have been what happened to Alexander Litvinenko, who was murdered with radioactive polonium-210 in 2006, and who was working with Spanish and British authorities to expose Russian money flows. It may also explain the death of Alexander Perepilichny, a 44-year-old banker who was helping Browder’s team to understand the destination of the $230m stolen from the Russian budget, and who died while jogging in Surrey in 2012. Investigators at first thought he had suffered a heart attack, but it appears that he may have been poisoned with a rare plant extract.
In short, to bring a successful money-laundering prosecution against a wealthy Russian, officers need to win cooperation from Moscow, which is all but impossible; to convince a UK court that any cooperation that does result was not politically motivated, which is extremely difficult; and then to keep their witnesses alive, which has proven rather hard. In the circumstances, it’s not surprising that the NCA decided bringing a prosecution in the Magnitsky case was not the best use of its resources.
The amazing thing is that we have tolerated this situation for so long. Britain has consistently welcomed Russian money, and consistently ignored the warnings of those concerned about what it is buying. In March 2000, when Putin was still just acting president and had spent six months pulverising Chechnya, Tony Blair dashed to St Petersburg to be the first western leader to secure a meeting with the new man, and to urge more investment in each other’s countries.
At least Blair could claim not to have known what kind of man Putin was, but David Cameron had no such excuse. In September 2011, Cameron went to Moscow to seek business for the City of London, although most of the facts that are currently concerning MPs about Russia were already known. Litvinenko had been murdered five years previously, and Russia had given one of the Met’s suspects in the case a seat in parliament. Magnitsky had died in jail two years earlier, and his tormentors were walking free. But Cameron went to Moscow anyway.
“The whole point about trade is that we are baking a bigger cake and everyone can benefit from it and this is particularly true, perhaps, of Russia and Britain. Russia is resource-rich and services-light whereas Britain is the opposite,” Cameron told students at Moscow State University, on a trip that also involved meetings with Putin and his then placeholder president Dmitry Medvedev.
In his speech, Cameron boasted that Russian companies accounted for a quarter of share offerings on the London Stock Exchange. “Governments need to remember that businesses don’t have to invest in our country – they choose to. And we need to help them make that choice,” Cameron said. “It means minimising the burden of regulation so that business and entrepreneurship can flourish.”
With a prime minister who considered regulations on the origin of money to be a burden, it’s unsurprising that not many of them were made. This approach did not of course begin with Cameron, or even with Blair. In fact, it goes back to the mid-20th century. After the second world war, Britain was all but bankrupt, the City of London was somnolent, and economic power rested on Wall Street. City bankers wanted to get back into business, but were frustrated by the weakness of the pound, and its unsuitability as a means to finance the world’s trade.
Vladimir Putin and Tony Blair in Downing Street in 2003. Photograph: Grigory Dukor/Reuters
Their salvation came from an unlikely quarter: the Soviet Union, which didn’t want to keep its dollar reserves in US banks. Instead, it kept them in London, where British banks began lending them to each other in an entirely unregulated market – they became known as “Eurodollars” – thus giving birth to offshore finance, and providing the City with the startup capital it needed to get back in business. By the end of the communist period, Soviet institutions routinely sent their money through Britain’s offshore territories, and the City was booming. The Central Bank in Moscow even had a shell company in Jersey, which it used to hide money from the government that it was supposedly a part of.
This is one of the problems with trying to ascertain the volume of dirty Russian money in London: how far back do we go? Do the fees Midland Bank received for banking Soviet money in the 1950s still count as Russian cash, and if so, are they dirty? Does the commission the estate agent earned by selling those flats in Kensington in the early 1990s count as dirty money? And what about the £800m that Russians paid for government bonds in return for golden visas? Or the $41,000 of Magnitsky money that was spent on a wedding dress in London? How many times does money have to circulate in the economy before we decide it’s not dirty any more?
This money is so deeply embedded in the UK that extracting it, or even identifying it, would be an unrivalled feat of investigation. “It would be impossible,” says Prem Sikka, professor of accounting at Sheffield University. “They have the big accountancy firms advising them where best to stash the money, to conceal it, to disguise it, all kind of things. The brains of this pinstriped mafia are available to everyone. They’re for hire.”
Recently, I spoke to Jon Benton, who led teams fighting dirty money at the Met and the NCA, and advised Cameron at the Cabinet Office, until his retirement in 2016. “We used to get these suspicious activity reports coming in, Russian ones, all the time. It would be for an investment or a property or a load of other things,” Benton said. “You’re looking at something that doesn’t look right, doesn’t smell right, but we had a tiny number of resources. To get caught up in some really complex Russian money-laundering case, when we weren’t going to get any assistance – you have to weigh it up. Do I try to throw lots of resources at this, when I know I’m really going to struggle to get the door open?”
Benton was optimistic about the introduction of so-called unexplained wealth orders, which came into effect in February this year. Once a UWO has been issued, property is frozen, and its owner has to respond and justify why they own it. But that will only confiscate property, Benton noted. It won’t put anyone in jail.
“The time when we might have been able to do something about this was 20 years ago, when it wasn’t particularly sophisticated, and the large sums of money were just arriving in the country,” he said. By ignoring the provenance of dirty cash, and allowing it to be spent on property, British authorities have cleansed it of its taint: it is legitimate investment now. “Unpicking all that is a real challenge. The reality is that it’s probably the hardest area to penetrate in the world.”
We don’t know how much dirty money there is in the UK, nor do we know exactly where it is, and there’s nothing we can do about it. Or rather, there’s nothing we can do about it with the laws as they stand, and without giving greater resources to law enforcement agencies. Almost 100,000 UK properties are currently owned via offshore companies, obscuring their ownership, many of them undoubtedly by Russian criminals and kleptocrats we could happily do without. The government has promised to force these offshore companies to disclose their true owners, but that won’t be until 2021. For the next three years, criminals will be free to profit from their property in the UK without admitting they own it. Why can’t we hurry that up? To answer both of Priti Patel’s questions – how much money is there, and where is it? – we need transparency.
The foreign affairs committee published its conclusions this week, drawing on the evidence that I and others gave it, and they were impressively robust. Its report demanded a more coherent government approach to the “assets stored and laundered in London (which) both directly and indirectly support President Putin’s campaign to subvert the international rules-based system, undermine our allies, and erode the mutually reinforcing international networks that support UK foreign policy”.
Earlier this week, it was reported that Abramovich is finding it hard to renew his British visa, and some newspapers are speculating that this suggests Britain is already pioneering a new approach to Russian money, one that demands checks on the fortunes even of the very richest, and even when there is no apparent evidence of corruption. We do not yet know the reasons for the delay in the Chelsea owner’s visa, but such checks should be welcomed anyway: in cases where evidence emerges that someone is corrupt, that person should be kept out of Britain. But this alone is insufficient; we need to find the dodgy money that is already here. Confiscating it and finding a way to return it to the Russian people would diminish those who mean us harm, while simultaneously helping those we wish to befriend.
That requires strengthening Britain’s investigative power. The National Crime Agency and the UK’s police forces currently lack the resources to bring the prosecutions that could really make a difference to criminals’ calculation about whether to bring their money here. If we wish to prevent Russian kleptocrats from buying our country, we need to start catching them and their enablers in the act, and prosecuting them. That is the only true deterrent.
Wednesday 8 November 2017
Britain's role in the growth of tax havens
Andrew Verity in The BBC
Here's the received wisdom: when the British Empire faded in size and significance after World War Two, a few scattered islands around the globe wanted to keep their imperial ties to London.
The British government had to find a way to reduce the economic dependence of the likes of Bermuda, Montserrat or the British Virgin Islands, so it awarded them special tax-exempt status, creating the conditions for a thriving financial services industry.
Yes, tax evasion and money laundering may have got a little out of hand from time to time, but overall it succeeded in lifting them out of dependence on the UK government.
But there's a deeper story. It wasn't by design that the remnants of a dying British Empire morphed into a world leader in offshore financial services, selling secrecy and tax avoidance to multi-nationals and the wealthiest individuals in the world.
Instead, the crucial moment was more of an accident - which gave rise to advantages no-one had foreseen.
And it began not in Bermuda or Jersey but in another offshore centre - "offshore" not to the UK, but to the US - the City of London.
Incentives to avoid
When the 20th Century began, income tax was in single digits and progressive taxation - charging richer people a higher rate - had barely begun.
In the run-up to World War One, chancellors of the exchequer - from Asquith to Lloyd George - began raising taxes to pay for social reforms, such as the old age pension.
As the war progressed, the state demanded more and more income tax from every citizen and higher rates for the wealthy, leading to a top rate of 30% by 1919.
Accountants to wealthy individuals began to devise ways to avoid tax. Clients could become resident in Jersey, where tax rates were far lighter.
Or, if they wanted to stay in London, they might put their money in a trust registered elsewhere, perhaps on the Isle of Man, where in theory it was no longer theirs - and therefore not visible to the prying eyes of an Inland Revenue inspector.
David Lloyd George served as Chancellor in Herbert Henry Asquith's government, before rising to PM in 1916
By accident - not design
In 1957, Britain and its imperial remains were trying to recover from a financial crisis. The previous year the UK had joined forces with France and Israel to try to recapture the Suez Canal after it was nationalised by the defiant anti-colonial Egyptian President, Gamal Abdel Nasser.
Viewing the invasion as European imperialism at its worst, the US refused any assistance.
By the end of 1956, a run on the pound was under way. The Bank of England wanted to curb the outflow of pounds by boosting interest rates sharply, but Her Majesty's Treasury had other ideas.
Since the Bretton Woods economic conference of 1944 towards the end of World War Two, countries had agreed to control movements of capital to curb the speculative flows into and out of countries that had worsened the economic crises of the past.
If, say, Tate & Lyle wanted to invest several million pounds in a new sugar production facility in Jamaica, it would need signed approval from Her Majesty's Treasury.
Normally this was a formality. But during the Suez crisis, the Treasury announced that, on a temporary basis, it would no longer approve foreign capital investments.
Image copyrightREUTERSImage captionThe Bank of England did not get its way against the Treasury
The City's merchant banks were alarmed. Arranging finance for projects in the former colonies was their lifeblood. How would they avoid ruin?
Digging through the archives, financial academic Gary Burn unearthed what happened next.
Hearing the banks' complaints in a series of meetings, the Bank of England agreed in late 1957 to allow the commercial banks to continue to lend and borrow to foreign clients on two conditions:
the lending had to be in a currency other than sterling, and
both sides of the transaction - the lender and the borrower - had to reside somewhere other than the UK
"The decision was momentous in all respects," says one of the leading experts in offshore finance, Prof Ronen Palan of City, University of London. "They simply deemed certain transactions as not taking place in the UK. Where did the transactions take place for regulatory purposes? Nowhere.
"I think it wasn't at all by design; it was a mistake. They didn't understand the implications. It was seen as an accounting device."
The so-called "Eurodollar" was born - a global offshore financial market, transacting in dollars and allowing unlimited sums to be borrowed and lent, but under the control of no single state. No act of Parliament (or Congress) sanctioned the decision. There was no thoughtful policy-making, no careful debate.
Success of the Eurodollar
The Treasury was at first left in the dark. But within years the implications were obvious - this could revive the City of London's fortunes.
"By the time the Treasury figured it out, they thought, 'this is good business for the City'," said Prof Palan.
Banks from all around the world could borrow and lend in dollars without being subject to US tax or banking regulations - making banking in dollars more profitable out of London than out of Wall Street.
Offshore banks didn't have to hold money in reserve for every dollar they lent (as they would in the US), which would dramatically cut their costs.
While transactions were arranged in London, the lenders and borrowers could be registered anywhere. But the parties to Eurodollar transactions needed addresses.
So, zero-tax jurisdictions from the Cayman Islands to the Montserrat were used by London's investment banks as the official tax residences of their wealthy customers.
Clients could avoid both tax and undesirable scrutiny - for example from the US tax authorities.
In the British Overseas Territories, local laws were passed to attract more registration business, collecting modest fees that mounted up. No need for a bank branch out there - just a drawer in an offshore lawyer's filing cabinet.
Not for the weather
Banks' wealthy individual and corporate clients didn't incorporate in the Cayman Islands or the British Virgin Islands because they liked the weather there - many never visited.
Offshore centres were attractive to businesses looking to reduce their tax bill, but sometimes, more importantly, to avoid what they regarded as excessive regulation.
Cayman Islands-registered companies were used heavily, for example, by the energy giant Enron as it built its business model based on fraudulent accounts.
Tax-free, light regulation jurisdictions, including the Bahamas, the Cayman Islands and Delaware in the US, became the corporate locations of choice for legitimate hedge funds.
They were also used to incorporate the vehicles at the heart of the global financial crisis - the 'structured investment vehicles' that did not show up on bank's balance sheets and bought billions of mortgage-backed securities, massively increasing the unnoticed risks in the global financial system which led to the crisis of 2008.
Likewise, the British Virgin Islands has been used by many legitimate businesses. It has also become the favourite secrecy jurisdiction for clients of the Panama-based law firm exposed in last year's Panama Papers revelations, Mossack Fonseca.
Since those revelations, governments around the world have pledged to improve transparency with measures such as automatic information sharing and registers of beneficial owners of offshore companies.
Many of those measures are yet to be enacted or tested.
But as the Paradise Papers are now confirming, the secrets of Britain's offshore empire are no longer quite so safe.
Here's the received wisdom: when the British Empire faded in size and significance after World War Two, a few scattered islands around the globe wanted to keep their imperial ties to London.
The British government had to find a way to reduce the economic dependence of the likes of Bermuda, Montserrat or the British Virgin Islands, so it awarded them special tax-exempt status, creating the conditions for a thriving financial services industry.
Yes, tax evasion and money laundering may have got a little out of hand from time to time, but overall it succeeded in lifting them out of dependence on the UK government.
But there's a deeper story. It wasn't by design that the remnants of a dying British Empire morphed into a world leader in offshore financial services, selling secrecy and tax avoidance to multi-nationals and the wealthiest individuals in the world.
Instead, the crucial moment was more of an accident - which gave rise to advantages no-one had foreseen.
And it began not in Bermuda or Jersey but in another offshore centre - "offshore" not to the UK, but to the US - the City of London.
Incentives to avoid
When the 20th Century began, income tax was in single digits and progressive taxation - charging richer people a higher rate - had barely begun.
In the run-up to World War One, chancellors of the exchequer - from Asquith to Lloyd George - began raising taxes to pay for social reforms, such as the old age pension.
As the war progressed, the state demanded more and more income tax from every citizen and higher rates for the wealthy, leading to a top rate of 30% by 1919.
Accountants to wealthy individuals began to devise ways to avoid tax. Clients could become resident in Jersey, where tax rates were far lighter.
Or, if they wanted to stay in London, they might put their money in a trust registered elsewhere, perhaps on the Isle of Man, where in theory it was no longer theirs - and therefore not visible to the prying eyes of an Inland Revenue inspector.
David Lloyd George served as Chancellor in Herbert Henry Asquith's government, before rising to PM in 1916
But it was in the dying days of the Empire that the offshore financial services industry truly boomed.
Defined by purpose rather than geography, "offshore" means any jurisdiction that seeks to attract investors on the basis of light taxes and looser regulations.
On that basis, the epicentre of the offshore industry is not Nassau in the Bahamas or George Town in the Cayman Islands.
As author Nick Shaxson points out in his fascinating offshore expose, Treasure Islands: "The modern offshore system did not start its explosive growth on scandal-tainted and palm-fringed islands in the Caribbean, or in the Alpine foothills of Zurich. It all began in London, as Britain's formal Empire gave way to something more subtle."
Defined by purpose rather than geography, "offshore" means any jurisdiction that seeks to attract investors on the basis of light taxes and looser regulations.
On that basis, the epicentre of the offshore industry is not Nassau in the Bahamas or George Town in the Cayman Islands.
As author Nick Shaxson points out in his fascinating offshore expose, Treasure Islands: "The modern offshore system did not start its explosive growth on scandal-tainted and palm-fringed islands in the Caribbean, or in the Alpine foothills of Zurich. It all began in London, as Britain's formal Empire gave way to something more subtle."
By accident - not design
In 1957, Britain and its imperial remains were trying to recover from a financial crisis. The previous year the UK had joined forces with France and Israel to try to recapture the Suez Canal after it was nationalised by the defiant anti-colonial Egyptian President, Gamal Abdel Nasser.
Viewing the invasion as European imperialism at its worst, the US refused any assistance.
By the end of 1956, a run on the pound was under way. The Bank of England wanted to curb the outflow of pounds by boosting interest rates sharply, but Her Majesty's Treasury had other ideas.
Since the Bretton Woods economic conference of 1944 towards the end of World War Two, countries had agreed to control movements of capital to curb the speculative flows into and out of countries that had worsened the economic crises of the past.
If, say, Tate & Lyle wanted to invest several million pounds in a new sugar production facility in Jamaica, it would need signed approval from Her Majesty's Treasury.
Normally this was a formality. But during the Suez crisis, the Treasury announced that, on a temporary basis, it would no longer approve foreign capital investments.
Image copyrightREUTERSImage captionThe Bank of England did not get its way against the TreasuryThe City's merchant banks were alarmed. Arranging finance for projects in the former colonies was their lifeblood. How would they avoid ruin?
Digging through the archives, financial academic Gary Burn unearthed what happened next.
Hearing the banks' complaints in a series of meetings, the Bank of England agreed in late 1957 to allow the commercial banks to continue to lend and borrow to foreign clients on two conditions:
the lending had to be in a currency other than sterling, and
both sides of the transaction - the lender and the borrower - had to reside somewhere other than the UK
"The decision was momentous in all respects," says one of the leading experts in offshore finance, Prof Ronen Palan of City, University of London. "They simply deemed certain transactions as not taking place in the UK. Where did the transactions take place for regulatory purposes? Nowhere.
"I think it wasn't at all by design; it was a mistake. They didn't understand the implications. It was seen as an accounting device."
The so-called "Eurodollar" was born - a global offshore financial market, transacting in dollars and allowing unlimited sums to be borrowed and lent, but under the control of no single state. No act of Parliament (or Congress) sanctioned the decision. There was no thoughtful policy-making, no careful debate.
Success of the Eurodollar
The Treasury was at first left in the dark. But within years the implications were obvious - this could revive the City of London's fortunes.
"By the time the Treasury figured it out, they thought, 'this is good business for the City'," said Prof Palan.
Banks from all around the world could borrow and lend in dollars without being subject to US tax or banking regulations - making banking in dollars more profitable out of London than out of Wall Street.
Offshore banks didn't have to hold money in reserve for every dollar they lent (as they would in the US), which would dramatically cut their costs.
While transactions were arranged in London, the lenders and borrowers could be registered anywhere. But the parties to Eurodollar transactions needed addresses.
So, zero-tax jurisdictions from the Cayman Islands to the Montserrat were used by London's investment banks as the official tax residences of their wealthy customers.
Clients could avoid both tax and undesirable scrutiny - for example from the US tax authorities.
In the British Overseas Territories, local laws were passed to attract more registration business, collecting modest fees that mounted up. No need for a bank branch out there - just a drawer in an offshore lawyer's filing cabinet.
The City of London began its recovery to become the centre of finance it is today
Howls of protest from the US government were ignored. Between 1960 and 1970, the size of the Eurodollar market went from $1bn to $46bn.
In the 1970s, countries rich in petrodollars from soaring oil prices were faced with a dilemma: repatriate the money to New York - where they would be taxed on it - or keep it offshore.
By 1980, the so-called Eurodollar market was worth more than half a trillion.
After the deregulation of the City of London in the 1986 "Big Bang", US banks joined in, setting up in London.
And as the 1990s and 2000s progressed, it became the undisputed global centre for foreign currency trading.
In the 1970s, countries rich in petrodollars from soaring oil prices were faced with a dilemma: repatriate the money to New York - where they would be taxed on it - or keep it offshore.
By 1980, the so-called Eurodollar market was worth more than half a trillion.
After the deregulation of the City of London in the 1986 "Big Bang", US banks joined in, setting up in London.
And as the 1990s and 2000s progressed, it became the undisputed global centre for foreign currency trading.
Not for the weather
Banks' wealthy individual and corporate clients didn't incorporate in the Cayman Islands or the British Virgin Islands because they liked the weather there - many never visited.
Offshore centres were attractive to businesses looking to reduce their tax bill, but sometimes, more importantly, to avoid what they regarded as excessive regulation.
Cayman Islands-registered companies were used heavily, for example, by the energy giant Enron as it built its business model based on fraudulent accounts.
Tax-free, light regulation jurisdictions, including the Bahamas, the Cayman Islands and Delaware in the US, became the corporate locations of choice for legitimate hedge funds.
They were also used to incorporate the vehicles at the heart of the global financial crisis - the 'structured investment vehicles' that did not show up on bank's balance sheets and bought billions of mortgage-backed securities, massively increasing the unnoticed risks in the global financial system which led to the crisis of 2008.
Likewise, the British Virgin Islands has been used by many legitimate businesses. It has also become the favourite secrecy jurisdiction for clients of the Panama-based law firm exposed in last year's Panama Papers revelations, Mossack Fonseca.
Since those revelations, governments around the world have pledged to improve transparency with measures such as automatic information sharing and registers of beneficial owners of offshore companies.
Many of those measures are yet to be enacted or tested.
But as the Paradise Papers are now confirming, the secrets of Britain's offshore empire are no longer quite so safe.
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