Home Business Insights & Advice Comprehensive strategy, not piecemeal sanctions, will root out Britain’s dirty cash

Comprehensive strategy, not piecemeal sanctions, will root out Britain’s dirty cash

by John Saunders
12th May 21 3:14 pm

For the first time, the UK has flexed the muscles of its new global sanctions regime, an anti-corruption scheme akin to the US’s flagship Magnitsky Act. On April 26th, Britain imposed asset freezes and travel bans on 22 individuals accused of egregious graft–including 14 Russians allegedly involved in the $230 million tax fraud uncovered by Sergei Magnitsky, three members of South Africa’s corruption-riddled Gupta family, and several Central American officials accused of abetting drug cartels.

While outlining the sanctions in Parliament, Foreign Secretary Dominic Raab made the startling admission that the UK has become a “honey pot” and a “lightning rod” attracting corrupt actors. Raab’s remarks were a rare acknowledgement from a member of an administration which has shown remarkably little appetite for cracking down on the dirty money which leading journalists and transparency campaigners have warned for years is clogging the City.

Indeed, the honey pot has attracted so many flies–money launderers and tax evaders from every corner of the globe, freely taking advantage of UK institutions–that, as opposition politicians and anti-corruption groups alike warned, sanctions against a few big fish will be a mere drop in the bucket. Britain is long overdue for a bolder strategy, one which addresses everything from the controversial billionaires who’ve found a convenient tax home on British shores, to the loopholes and lax standards of UK overseas territories, to the top-flight British firms which have lent legitimacy to a motley crew of dictators and despoilers.

Is the UK becoming a haven for the continent’s tax dodgers?

Plenty of ink has been spilled about the British business elite who’ve shifted their main residence away from the UK to low-tax zones–Richard Branson drew particular ire when he asked the British government for £500 million to bail out his airline Virgin Atlantic, after spending the past 14 years as a tax exile on his private Caribbean island.

Less tabloid-famous tycoons, however, have done the reverse, emigrating to the UK in search of more favourable tax policies. Baltic billionaire Nerijus Numa, for example, is Lithuania’s richest man thanks to his investment in holding company Vilniaus Prekyba, which notably controls the Maxima supermarket empire–but Numa hasn’t lived in Lithuania since summer 2015, when he shifted his tax residence to the UK.

The move raised eyebrows at the time–even prompting questions about the double taxation avoidance treaty between Lithuania and the UK–particularly given that Numa left Lithuania right as prosecutors there opened a probe into potential tax evasion and widespread fraud at Vilniaus Prekyba. The retail magnate’s business activities are once again under an international spotlight, as Dutch investigators are looking into allegations that Numa transferred some €26 million “for tax reasons” to a company nominally based in the Netherlands. While Numa persistently denies any wrongdoing, the fresh investigation could raise further questions about his move to the UK.

A rulebook of their own for the UK’s overseas territories

Those who, like Numa, have sought tax residence in the mainland UK are merely a drop in the bucket compared to the countless billionaires and international firms who’ve stashed their cash in British overseas territories. The British Virgin Islands, the Caymans and Bermuda round out the podium of the world’s greatest enablers of tax abuse, each earning the maximum possible score for enabling corporate profit shifting.

It’s no accident that the UK’s offshore jurisdictions feature so prominently in the list of global tax paradises. For decades, successive British governments have at a minimum turned a blind eye to–and in many cases, actively encouraged–the development of special tax schemes in overseas territories, arguing that they sparked much-needed foreign investment and economic growth.

This promised prosperity, however, has not materialised across the board. 22% of the British Virgin Islands’ 30,000 residents, for example, live in poverty, while the islands play host to some 400,000 companies registered at post office boxes or nondescript office parks, holding $1.5 trillion in assets. Nor are island residents the only ones who lose out from this dichotomy–the BVI are singlehandedly responsible for global tax losses of up to $37.5 billion a year.

No questions asked at elite consultancies?

The transformation of Britain’s overseas territories into personal cashboxes for multinational firms and ultra-wealthy individuals would not have been possible without the support of countless British consultants and advisers–something that speaks to a broader trend which was laid painfully bare by last year’s Luanda Leaks scandal.

A cache of over 700,000 documents lifted the curtain on how Western consultants and auditors helped Isabel dos Santos, once Africa’s richest woman and the daughter of Angola’s longtime autocratic leader, amass a $2.2 billion fortune at the expense of the Angolan public. In particular, London-headquartered consulting giant PwC managed the affairs of an opaque network of over 20 companies which dos Santos and her late husband used to lend legitimacy to their sprawling empire of businesses and assets, including a £13 million Kensington mansion which dos Santos apparently purchased secretly through an anonymous company registered in a tax haven.

A number of senior PwC employees left or were forced out in the wake of the Luanda Leaks revelations, but the broader problem–the countless UK-based professionals charged with creating shell companies, improvising tax avoidance strategies and lending a veneer of legitimacy to controversial clients–is not so easily addressed, and will take more than Magnitsky-style sanctions to unravel.

Indeed, British firms once bent over backwards to burnish the reputation of the Gupta brothers who figured on the recent sanctions list, and the $230 million tax fraud which landed 14 Russians a place on the inaugural sanctions roll was carried out, in part, through companies registered in the British Virgin Islands. Until Britain develops a decisive and comprehensive strategy including greater oversight of new tax residents in both the mainland UK and overseas territories, reevaluating tax breaks and opaque provisions, and augmented due diligence for British advisors working with companies or individuals setting off red flags, the UK will continue to be the “honey pot” that Raab described.

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