The bizarre assassination attempt against a former Russian double agent and his daughter in Britain has unleashed a spate of intense debate on the fortunes of so- called Russian oligarchs, especially those close to President Putin, and their wealth in Britain as well as the wider question of money laundering in UK real estate.
It is widely assumed that the offshore finance industry puts trillions of dollars worldwide beyond the local taxman’s reach but there are legal and jurisdictional issues as no one can actually agree on what a tax haven is. The issue is simple: one person’s tax haven is another’s “offshore financial centre”.
No one can also agree on how many there are, as new one is popping up all the time, .nor on exactly how much money is stashed offshore. The industry’s key word is privacy, or secrecy - a word it doesn’t like so much but that is what it is in reality. As one taxation expert summed it up nicely: “Those who know don’t talk. And those who talk don’t know.”
And so a guessing game begins on how much is stashed away in these centres with some putting this at about 10 percent of global Gross Domestic Product or $7.8 trillion, and others at $10 trillion.
Others put it at a mind boggling $36 trillion – twice as big as the US economy. But no one really knows but what is known is that money is disguised and laundered by owners to hide its original source.
This is often done legally through double taxation; tax inversion; trusts; shell companies, but the question is whether these methods are ethical or not. The legal reasons are seemingly innocent and some stem from self preservation of wealth and passing these to future generations or keep it out of the reach of would be creditors.
Staving off creditors
If you want to protect your assets to stave off creditors, stick them in an offshore shell company, making them much harder to get at. Similarly, if one wants to hide ownership of a property, then this can be done through a trust.
This is not illegal. There are many other schemes, legal, illegal and sometimes ethically debatable. The USA and UK are two of the biggest Offshore Financial Centres (OFCs), with setting up shell firms is easy in some US states, like Delaware.
In the UK the City of London acts as the facilitating hub for Crown dependencies and overseas territories that channel trillions of offshore dollars. But OFC’s are not free wheeling centres as some are also better regulated than others, but not enough according to OFC critics, as the dealings in the Panama Papers and more recently the Paradise Papers exposes so dramatically revealed.
Some of the UK’s overseas dependent territories in the Bahamas object to the term of tax havens and argue, like Bermuda has fully signed up to an international agreement that allows for the automatic transfer of tax information within governments and such a jurisdiction cannot be a tax haven.
Transparency International, which tacks global governance and corruption index says it is far too easy for criminals to bring dirty money into the UK. According to those investigating money laundering activities in the UK, corrupt individuals cannot steal public funds unless they have a getaway vehicle and anonymous companies are the getaway vehicle and UK assets, such as property, are the safe haven, prompting Labour shadow chancellor John McDonnell, to state that the UK has become the money laundering capital of the worldDr. Mohamed Ramady
What makes this a vicious circle is that many governments are fully prepared to sanction offshore finance to generate income and what is worse is that many people in government use it, whether inadvertently or not, as in the case of former UK Prime Minister Cameron’s trust, as these leaks show.
The Panama Papers revelations and the fast paced modern social media has forced governments to be seen to act and secrecy is now harder to achieve, transparency is greater. International cooperation is also greater with country by country reporting requiring multinationals to break down how they operate in different nations and public registries of companies has increased with more disclosure of final ownership.
Even Russia, which has suffered from ill -gotten gains by oligarchs, has brought in a law requiring the disclosure of offshore assets but there was an unintended consequence whereby many of the corrupt oligarchs gave up Russian residency to avoid it and moved abroad, many to London. Like many other investors looking for a solid return on their capital, the gangsters saw a promising opportunity for their cash in the London property market.
Transparency International, which tacks global governance and corruption index says it is far too easy for criminals to bring dirty money into the UK. According to those investigating money laundering activities in the UK, corrupt individuals cannot steal public funds unless they have a getaway vehicle and anonymous companies are the getaway vehicle and UK assets, such as property, are the safe haven, prompting Labour shadow chancellor John McDonnell, to state that the UK has become the money laundering capital of the world.
“Our reputation is being damaged by it. There’s been too many examples over years of dirty money coming into the city and by allowing this to happen we are almost aiding and abetting these criminals,” he said. This stinging rebuke has prompted the ruling Conservative government to promise to introduce a public register to reveal the true owners of UK properties owned by offshore companies.
Key to this is the power to seize assets and the new powers include unexplained wealth orders, which allow assets to be seized where the source of funds is suspicious. But those wishing to hide ill-gotten wealth will find loopholes and with the assistance of clever auditors and unethical lawyers there will always be a way to be one step ahead of slow moving regulators.
The only way to reduce these schemes is if all the major financial centres put ethical considerations above narrow national interests and cooperate to expose illegal assets before yet more Panama Papers type scandals erupt and claim political scalps.
Dr. Mohamed Ramady is an energy economist and geo political expert on the GCC and former Professor at King Fahd University of Petroleum and Minerals, Dhahran, Saudi Arabia and co-author of ‘OPEC in a Post Shale world – where to next?’ His latest book is on ‘Saudi Aramco 2030: Post IPO challenges’.