Panama Papers Highlight Britain's Role in Global Financial Corruption

A new report from anti-corruption watchdog Transparency International (TI) has described how critical failures in oversight allow illicit funds to easily flow into the legitimate UK economy, at a time when the release of the Panama Papers has shone a light on the scale of Britain's role in global financial corruption and money laundering.

While the tiny overseas tax havens associated with Britain and the access they offer to the UK economy are key to this role, the report argues that the United Kingdom is also an attractive prospect for those seeking to launder money because of its combination of political stability, extremely high property prices, and the ease of hiding suspicious activity within the enormous amount of financial transactions going through London.

More than 36,000 properties in London are owned by companies registered in offshore jurisdictions, found TI, while almost 10 per cent of properties in London's most valuable district Westminster are owned by anonymous companies. In total, at least £122 billion ($172 billion) worth of property in England and Wales is held via companies registered in "secrecy jurisdictions."

"If corrupt individuals are allowed to continue to buy up luxury property and enjoy life in the UK, then the government risks its credibility in leading efforts to tackle corruption on the global stage," said Rachel Davies, Head of UK Advocacy and Research at Tl.

The report comes at a time when tax avoidance and evasion, often through Britain's Crown Dependencies and Overseas Territories, is high on the news agenda. More than half of the 200,000 offshore companies named in the Panama Papers — an enormous cache of documents leaked from Panamanianlaw firm Mossack Fonseca — were registered in the British Virgin Islands, an Overseas Territory with a population of less than 30,000 people

Also among the early revelations to emerge from the Panama Papers were the intricacies of the tax avoidance employed by UK Prime Minister David Cameron's own father. Ian Cameron was one of five directors of the offshore fund Blairmore Holdings Inc, which managed tens of millions of pounds and paid no UK taxes for 30 years.

Cameron has previously called tax avoidance "morally wrong" and made moves to increase transparency at offshore tax havens. But following the Panama Papers leak his office initially responded to requests for comment on whether his family still benefited from such financial arrangements by saying it was a "private matter."

After repeatedly only providing partial answers to questions from journalists, Cameron released a statement on Wednesday saying his family "will not gain from offshore funds in the future" — leaving it unclear to what extent his family gained from them in the past.

Also on Wednesday, the Daily Telegraph reported that Blairmore Holdings Inc., had been moved to Ireland in 2010, the year Cameron became Prime Minister. It maintains assets of £35 million pounds and enjoys a low tax regime comparable to the one it previously had in the Bahamas — begging the question of whether Cameron continues to gain by having family money outside the UK, just not in a strictly offshore fund.

While tax avoidance and evasion is estimated by the British government to cost the country around £32 billion ($45 billion) per year, the amount of money being laundered through Britain is far less clear. According to the National Crime Agency (NCA), the UK's equivalent of the FBI, it could extend into the hundreds of billions of pounds each year.

While money laundered in the country may not appear as damaging to its citizens as the massive hole in tax receipts, as TI explains "it has the potential to inflate house prices, increase inequality, and affect communities, public institutions, and all those who have contact with illicit funds."

The report comes just weeks before the UK hosts an international anti-corruption summit, with TI urging the government to take effective action to address some of the factors that still make the country an inviting money laundering destination, despite some efforts by the government to address the situation.

Those efforts, which TI welcomes in the report, include establishing the country's first anti-corruption plan and implementing greater company owner transparency — with an open register of the beneficiaries of corporate entities set to be established in June.

But the report points out that the exemption of Crown Dependencies and Overseas Territories from such measures means they effectively serve as a back door for illicit funds to enter the UK's legitimate economy, as well as providing an ongoing option for wealthy Brits to avoid tax. While Cameron has previously sought to address the situation, with a 2014 letter to the governments of Crown Dependencies and Overseas Territories calling for a transparent register of firms and individuals whose assets are resident in each jurisdiction, those requests have gone largely unheeded.

Meanwhile, TI points out that a range of other problems persist with the UK's anti-corruption regime, such as the reliance on the private sector to implement its own oversight, the confusing patchwork of regulatory bodies working on the issue, and a lack of resources and legal recourse to effectively address money laundering.

The result is an extremely low level of reporting, with just 179 property purchases deemed suspicious by estate agents between 2013 and 2014, and only 15 cases of suspicious art purchases reported by auction houses during the same period. In the face of such issues, TI calls for the introduction of a "super-supervisor" to lead anti-money laundering efforts.

It also points out that, while regulations were tightened a year ago around visas for people wishing to make investments in Britain, problems persist with the arrangement and major question marks hang over those who previously received such documents and now reside in the country.

Under the current regime, anyone willing to invest at least £2 million ($2.8 million) into the country is able to receive a Tier 1 investor visa once they have acquired a UK bank account and transferred the required funds. Permanent residency can be granted in as little as two years based on the amount of money being invested.

But TI warns that "there is no dedicated system of money laundering or 'fit and proper' person checks for applicants," presenting "clear risk" of the Tier 1 investor bias being used to allow money laundering.

That still represents an improvement on the previous arrangement that ran until April 2015, dubbed the "blind faith" period by TI, under which an investor was trusted to open their UK bank account after arrival, meaning even less oversight of the origin of the funds was implemented.

TI noted that the introduction of the new regulations saw Tier 1 visa applications plummet from 1,173 in 2014 to 200 last year. The report states that 97 percent of those currently in the country on Tier 1 visas invested their money during the "blind faith" period, and "the majority of visas were awarded to nationals from countries with a high corruption risk" — including 37 percent to Chinese nationals and 23 percent to Russian nationals.

"Retrospective checks should be undertaken on historical Tier 1 (Investor) visas for visas granted in the 'blind faith' period and consideration given to publishing their details," said the report.

Much of the early attention generated by the Panama Papers has focused on the offshore financial interests of people linked to the political elites in Russia and China, resulting in some criticism from members of the British public that the media is choosing to focus on the country's political rivals rather than officials at home.

But as the controversy that continues to swirl around Cameron has proven, that is not entirely the case, and given the sheer numbers of Chinese and Russians granted investor visas in the UK over recent years, it seems feasible that some of them will have also dealt with Mossack Fonseca.

With more than half of the corporate entities exposed in the leak registered in the British Virgin Isles, it stands to reason that there will be some crossover between criminals who took advantage of the UK's lax investor visa system and those involved with investments running through British offshore tax havens — links that may well come out as the journalists involved in analyzing the leaked material continue to join the dots.

Follow Charles Parkinson on Twitter: @charlesparkinsn