When Russia invaded Ukraine, it drew the world’s attention to something I’ve been writing about for nearly a decade: Britain’s role as the Kremlin’s dirty money laundromat.
It’s a huge problem. It has helped finance the creation of an aggressive autocracy that is now killing thousands and driving millions from their homes.
But that’s just a part of something much bigger.
Not only is Russian wealth laundered, but money from all over the world is destained, in fabulous amounts.
Every year, a trillion dollars is stolen from the developing nations of the world (a million million dollars!), and a significant amount of it moves through London or its satellite tax havens.
It’s ” offshore laundering .”
But what does it really mean?
It may sound puzzling but, at its heart, it’s a simple idea. It was invented in the City of London, the Wall Street equivalent of New York.
And it is perhaps the UK’s most important contribution to recent history. Without offshore, the world would be a very different place.
To avoid repeating mistakes
In 1944, the Allies, soon to be victorious, were planning for the postwar period.
They wanted to build a better global financial system than the one that had ended in the depression of the 1930s and the catastrophe of World War II.
Its creation took the name of the small American complex where it was negotiated: Bretton Woods .
“That system established rules that made it difficult to transfer funds across borders,” explains Vanessa Ogle, a historian at the University of California, Berkeley.
“Any major outflow or inflow of funds could have a destabilizing impact – something that had happened between the wars – so it was meant to help countries keep out excessive unwanted money flows and allow them to stabilize their currencies and protect their economies. “.
British financiers accepted the need for a less open and more protective financial system, to give the world a chance to rebuild itself, even if it meant a diminished role for the City of London.
10 years later…
The City, however, did not forget the days when it was the beating heart of a vast empire.
In the second half of the 1950s, bankers began to fret.
One prominent financier said it was “like driving a powerful car at 20 kilometers per hour . “
“Things were looking up. The German economy was showing signs of strong recovery and growth,” says Ogle.
“Impatient with the measures that were initially taken, there were deliberate attempts by the bankers to create legal devices that would allow them to deal in more unrestricted ways that perhaps did not violate the Bretton Woods rules, but their spirit.”
a small bank
One of the banks in the City was the Midland. It was small and wanted to grow, but the rules prevented the banks from competing with each other for customers.
I needed more money.
In 1955, the Midland had a brilliant idea that hinged on the fact that there was another bank not far away with the opposite problem.
The Moscow Narodny was based in the City but was owned by the Soviet Union, and its vault was full of dollars.
“They feared expropriation and seizure of funds if they were placed in the United States, given the growing antagonism of the Cold War, which is why the funds ended up in London,” explains Ogle.
So, there was one bank that had too little money and another that had too much money… if only they could find a way around the regulations!
Someone in the Midland realized that he didn’t need to buy the dollars; he could simply borrow them , avoiding British restrictions on the purchase of foreign currency.
With those dollars, he could buy pounds sterling, to lend at a yield.
Moscow’s Narodny, meanwhile, not only put his cash out of Uncle Sam’s reach, he made a profit.
The details are incredibly complex but, in essence, everything was very simple: the deal allowed Narodny Bank to make money by circumventing US restrictions and Midland Bank to make money by circumventing British restrictions.
Everything could have remained in that, if not for a shocking news from the Middle East .
a colossal business
In 1956, Egypt nationalized the Suez Canal, which until then had been controlled by the British and the French.
London and Paris sent troops, the US opposed it, and it all ended in shameful farce.
The mighty British Empire had sunk very low.
But out of the ashes of the disaster sprang a truly colossal business opportunity.
“The Bank of England and the Treasury tried to contract the international use of the pound sterling, which made the dollar more attractive because it was outside those controls,” says Catherine Shank, a historian at Oxford University.
City banks had previously relied on sterling to finance trade. With access to that currency increasingly restricted, they looked for a new source of funds.
Remember that little Midland Bank prank ?
When merchant banks followed suit and began borrowing dollars to finance their day-to-day business, everything changed.
“Those dollars had a kind of extraterritorial status because they were not subject to the regulations of the Federal Reserve Bank. That gave the bankers of the City the way to do with things prevented by the Bretton Woods system and the current national regulations” .
The City had invented one of the most important financial tools of the 20th century .
Euro$ at sea
They called it the Eurodollar, which was and was not a dollar, depending on what was most profitable at the time.
Bankers became bowler-hatted pirates sailing an ocean of liquid cash, profiting from their ability to ignore the rules that everyone else had followed.
But what were they going to call this legal loophole they had created?
They borrowed a term from maritime law to describe what happens when you’re on the high seas, where land laws don’t apply: ” offshore . “
“It very quickly became an offshore interbank market, disconnected from any national regulatory body,” says Schenk.
Nobody in the British government seemed to have realized what was happening.
But the leaders of the Bank of England knew it, and they loved it. At last, after its tortuous post-war journey, the mighty engine of the City of London was starting to rev up.
Foreign banks have rushed to open branches in London to take advantage of the profits available from an unregulated market .
Over the next two decades, the money that flowed through the City swept away all the restrictions of the Bretton Woods system, and attempts to control capital flows to protect stability and defend living standards became quaint.
This is how the first crucial tool needed to launder money was launched, that offshore market, which freed the wealth from external scrutiny.
But London was not the perfect place to hide the cash, mainly due to the great enemy of all fortunes: taxes .
If British financiers were really going to help their clients, they needed more than a loophole; they needed places where those spoils were at peace.
Fortunately, they didn’t have to look far to find them.
Nearby, in the English Channel, was Jersey, an island that, for almost a thousand years, had been more or less British: it is ruled by the British monarch, but it is not part of the United Kingdom; uses the pound sterling, but sets its own taxes.
That was potentially a highly profitable combination.
“Until the late 1950s, there was a clause in the constitution that restricted interest payments and generally limited the use of the island as a tax haven to people who actually lived there,” says John Christensen, who was a senior figure in the Jersey administration and later became a prominent campaigner against tax havens.
The profits could be huge, if the island was willing to be a little less demanding. And so it was: Jersey politicians removed the awkward obstacles.
Bankers were already circumventing US restrictions by trading dollars through the City of London.
Moving their money through Jersey’s profitably opaque bank accounts enabled them to circumvent British restrictions.
Better yet, the move more than halved the taxes they had to pay on their winnings.
“In the 1970s UK corporate tax was over 50% and in Jersey it was 20%.
“Also Jersey was geographically perfect as they could set up a meeting from London in Jersey, fly during the day and then fly home at night.
“Little by little, Jersey became a very close satellite to the City of London ,” says Christensen.
Banks from North America and continental Europe have also opened branches on the island.
And Jersey was just the beginning.
As more and more British colonies became independent, the vast expanse of the Empire took up less and less space on the map.
The remnants – Bermuda, the Cayman Islands, the British Virgin Islands, Gibraltar, Anguilla – were places too poor or remote to become independent.
But they had a natural resource to exploit : their connection to the UK .
Just as in Jersey, its politicians happily created loopholes to cut through the restrictions that other countries put on money.
They also became tax havens, offering low taxes and confidentiality to customers reluctant to scrutiny.
Why specifically did the British jurisdictions do it?
“One advantage was the shared doctrines of common law within the British Empire, which made negotiations much easier,” Ogle says.
“And there were local Britons in those territories so if for example an American lawyer wanted to set up a company registration business in the Cayman Islands, due to the absence of taxes, he could target a small group of officials and thus capture local leadership. promising them to be part of the tax haven business”.
But, how much of the money that arrived was to avoid taxes, and how much was the result of something darker, such as human trafficking, drugs, weapons, corruption or theft?
“They arrived with suitcases of money”
There’s not a lot of data, especially before the 1980s, on what the ultra-rich of all stripes hid in paradise, but every once in a while, a door swings open and a glimpse inside is revealed.
“On a couple of occasions in the 1960s and ’70s, after major crises, links to organized crime, particularly money laundering, were revealed.
“But these are rare cases where, after the fact, there is an investigation and it becomes clear that that has always been part of what made offshore jurisdictions flourish ,” says Ogle.
“It’s extremely difficult to be precise because secrecy and anonymity is the main asset these jurisdictions sell.”
“All kinds of money flowed into Jersey,” recalls Christensen.
“There were people flying in private planes with suitcases literally full of cash.”
And Christiansen saw it with his own eyes.
“I worked at a major accounting firm in the trust management department, and when I started looking at what clients I had on my particular list, I found all kinds of activity.
“There was not only tax evasion, but also creditor evasion, illegal party financing, illegal financing with other activities, and a huge amount of the money flowing through Jersey was coming from some very despotic regimes.
“They came from all over the world, deposited money in Jersey and set up offshore structures involving legal trusts and companies.”
But how did Jersey and the other havens intertwine with financial services in the UK?
In money laundering terms, there’s talk of ” laddering ” — using one destination after another to make it extremely difficult to penetrate the secret, Christensen explains.
“London is the top of the ladder. So it wasn’t unusual for, say, a kleptocrat to have five or six rungs on that ladder, which leads to London.
“So if the London authorities wanted to find out what the source of that wealth is, they would have to make inquiries in Jersey, where they would find that there is a trust, and no one would reveal who the beneficiary is, because the beneficiaries are not revealed anywhere in any country. Registration.
“And then you find out that the trust owns a lot of companies in the British Virgin Islands or wherever.”
Those companies that Christensen refers to are the so-called ” shell companies “, which in Spanish are known as paper, screen, ghost or fictitious companies .
But what are they?
The 3rd part of the washing machine
“It’s a company with no commercial purpose,” explains Graham Barrow, an expert in the murky world of paper companies.
“It is a container of assets -not always illegitimate-, which has no employees, no offices, and does not sell anything, but can be used in many ways and has no other reason to exist than to exist.”
Why precisely are the British so useful for money laundering?
“The UK is almost universally regarded as a low-risk jurisdiction in terms of crime.”
If many companies and many bank accounts for those companies are established in different flexible jurisdictions, money can be moved through them.
And, if they are British companies with British directors, everything appears to be legitimate for the next country of destination.
“Those companies are easy to create: you can pay £12 from a computer anywhere in the world, say you’re Darth Vader and live on the Moon, and create a company with that information .”
“You will have an entity that can be a conduit for hundreds of millions of dollars without really saying who you are, hiding behind others, because there are no systems to verify what you say.”
Deliberately falsifying company information is illegal, but it is a low-risk crime.
Those who want to hide their loot and move it as they please have been unhindered by using UK corporate structures to disguise their identities.
“You’d be amazed how many cases there are in Companies House where company A is owned by company B which is owned by company A… you can drive yourself crazy investigating!” exclaims Barrow.
Companies House – the UK registrar of companies – is faced with a flood of new listings on a daily basis, and lacks the powers or resources to verify the information provided.
“Most days, about 3,500 companies are added to sign up, each providing about 15-20 separate data points. So on a daily basis that’s about 100,000 data points.
“How can you monitor all of that with limited resources and outdated IT?
” It’s impossible , and criminals know it .”
Successive governments have tried, with greater or lesser vigor, to clean up the financial system.
Jersey, for example, has made significant efforts.
“It was the Tony Blair government (1997-2007) that really started to put serious pressure on not only Jersey, the Channel Islands and the overseas territories,” says Christiansen.
“There have been a lot of improvements, but having said that, there remains a huge queue of what are known as legacy customers, who settled in Jersey in the 1970s and ’80s who, in many cases, are still lurking around, like ghosts of the past. “.
In the City itself, not only much remains to be done, but also a great deal of will to do it.
* This article is adapted from part of author and journalist Oliver Bullough’s series “How to Steal a Trillion”, produced by BBC Radio 4’s Phil Tinline .
- Oliver Bullough
- “How to Steal a Trillion” series, BBC Radio 4