Written evidence submitted by Professor John Heathershaw (University of Exeter); Thomas Mayne (University of Exeter/ Chatham House); Dr Tena Prelec (University of Oxford / University of Exeter); Professor Ricardo Soares de Oliveira (University of Oxford); Professor Alex Cooley (Barnard College / Columbia University); Casey Michel (journalist and author of American Kleptocracy) (IEF0009)
Towards a Strategy for Countering Kleptocracy
Five Steps to address the UK’s Kleptocracy Problem
- In December 2021, we published the Chatham House report, The UK’s Kleptocracy Problem: how servicing the post-Soviet elite weakens the rule of law. In the report we detailed how the efficiency and effectiveness of the law had been harmed by the phenomenon known as Londongrad, the welcome of persons and monies, agendas and rivalries, from post-Soviet kleptocratic states to the UK by a class of professionals known as enablers. Rather than reprise the evidence from the report, this submission focuses on the steps required to address the UK’s kleptocracy problem and enable more effective foreign policy towards Russia and the post-Soviet states.
- Our five steps to address the UK’s kleptocracy problem are:
- Publicly state that kleptocracy is a threat to the rule of law and international security
- Introduce the concept of kleptocracy into law, via legislation on economic crime
- Capture the expertise of the private sector for effective intelligence & enforcement
- Make transparency a priority for all public institutions
- Provide protection for researchers and investigators of kleptocracy
This requires a cross-government approach where steps 2-5 involve domestic policy changes for the purpose of more effective foreign and security policy, as well as the defence of the UK’s rule of law.
- The five steps also demand a revolution in thinking by the foreign policy establishment. For decades, British foreign policy thinking as fluctuating between roleplaying and realpolitik. The former approach sees Britain as a standard bearer for development and human rights in the so-called Rules Based International Order (RBIO). The latter insists that “national interests”, the balance of power, and participation in the Western alliance.
- But both the RBIO and the Western alliance are under threat like never before due to rising and revisionist powers and the effects of globalization. Neither Western normative hegemony nor deterrence through alliances are sufficient foreign policy framings. This is not merely a matter of relative weakness compared to the 1990s, it reflects the fact that foreign policies are now pursued as much by companies, other private actors, and individuals, as by states and international organisations. The state has been transformed by globalization and a radical new approach is required to address the problem of kleptocracy. These private actors must be made to work for the public good.
- The evidence summarised here is drawn from recent or forthcoming publications emanating from the FCDO-funding Global Integrity Anti-Corruption Evidence programme. These are:
- John Heathershaw et al, The UK’s Kleptocracy Problem: how servicing the post-Soviet elite weakens the rule of law, Chatham House: December 2021
- Tom Mayne and John Heathershaw, Notwithstanding Criminality: The use of Unexplained Wealth Orders in Anti-Corruption Cases, PowerBrief / GI-ACE paper: March 2022
- Alexander Cooley, John Heathershaw and Ricardo Soares de Oliveira, Transnational Uncivil Society Networks: A Framework for Discussion, under review at the European Journal of International Relations, Draft September 2021
- Alexander Cooley, John Heathershaw and Tena Prelec Foreign Donations in the Higher Education Sector of Open Societies: Pathways for Reputation Laundering, Prepared for the Journal of Comparative & International Higher Education, Special Issue on “Malign Foreign Influence”, Draft February 2022
- John Heathershaw, Tom Mayne, Tena Prelec, and David Lewis, Transnational Kleptocracy: the manipulation of the international anti-money laundering regime by post-Soviet kleptocrats and their UK enablers, Draft March 2022
These draft papers can be supplied to the committee on request. They are the evidence base for the claims below and, where necessary, are cited according to the numbers above.
KLEPTOCRACY, THE KAZAKHSTAN CRISIS, AND THE WAR IN UKRAINE
- The events of early 2022 have borne out our analysis. In January, we saw popular protests in Kazakhstan against the corruption of the regime formerly led by Nursultan Nazarbayev. With over £400 million of property in the UK belonging to members of the regime, Britain was correctly understood to be part of the causes, consequences, and solutions to Kazakhstan’s kleptocracy problem. On 3 February, Margaret Hodge MP read out in parliament the names of 29 Kazakhs accused of corruption and with assets in the UK who were members, relatives, or associates of the regime. The government is rushing through the Economic Crime Bill to partially and belated create a public register of property ownership and attempt to fix problems with its unexplained wealth order system.
- Considering Britain’s laissez-faire attitude to post-Soviet kleptocracy, it is unsurprising that when Russia invaded Ukraine on 24 February 2022 it did not take UK threats seriously and expected to ride out sanctions against its businesses. This view may be mistaken as sanctions on banks, the central bank, and SWIFT proceeded rapidly. However, with respect to oligarchs, in the early stages, the UK lagged behind the US, EU and Switzerland in individual person designations as the FCDO sanctions unit lacked capacity and HMG simply didn’t know where many of these assets were to be found. It rushed to amend the Economic Crime Bill to remove the ‘appropriateness test’, something that would have been unnecessary had HMG the capacity to analyse kleptocracy. Frustration in the FCDO was represented by officials privately claiming that oligarch sanctions were headline-grabbing, while the real business of economic coercion of Russia lies elsewhere.
- These comments from officials hold some truths; in wartime oligarchs have infamy not power and their influence on Putin, barely understood, is probably negligible. However, such sceptics also bear witness to a greater truth: the UK lacks and badly needs a strategy for countering kleptocracy.
FIVE STEPS TO STRATEGY
(1) Publicly state that kleptocracy is a threat to the rule of law and international security
- The first step in any strategy is to acknowledge the problem and thereby devote the resources of the state to tackle it. However, opportunities have been missed many times as the kleptocracy problem has festered for at least two decades. After coming to power, Putin built a Russian state on two connected groups: the siloviki (security agencies and modernised armed forces) and oligarchs (businessmen who controlled major business which would noy pay into and be subordinate to the kleptocratic state). This model has been copied across the post-Soviet space in varying forms. In Ukraine, it has been most contested, while in Kazakhstan, as in Russia, it has been consolidated. By providing a route to the global economy for Russia and Kazakhstan, the UK has helped fuel both the hubris of the Ukraine invasion and the resentment of the Kazakhstan crisis. The UK’s kleptocracy problem is not just a matter of the rule of law but of international security.
- The government is yet to acknowledge this problem. The Integrated Review of 2021, failed to mention kleptocracy while making many mentions of organised crime and illicit finance. Its coverage of Russia was confined largely to traditional security questions; but Russia’s of Ukraine invasion was as much geo-economic as it was geo-political, as much about preventing Ukraine’s integration into Western European rule-of-law based political economy as about strategic neutrality. Similarly, when Foreign Secretary Liz Truss gave her maiden foreign policy speech at Chatham House on the same day we launched our report, and was questioned about its findings, she gave the stock reply that ‘the UK has one of the best anti-money laundering systems in the world’.
- However, across the Atlantic, policymakers were less sanguine about Londongrad. The US Government launched its own anti-corruption strategy in December 2021 in the same week of Truss’ speech; this strategy rightly framed kleptocracy as a national security threat. The Center for American Progress, a thinktank closely linked to the Biden Administration, argued in January 2021 that Britain may be the weak link in Western attempts to deter and coerce Russia.
Uprooting Kremlin-linked oligarchs will be a challenge given the close ties between Russian money and the United Kingdom’s ruling conservative party, the press, and its real estate and financial industry. The United States should propose creating [a standing U.S.-U.K. joint counter-kleptocracy] working group in part to prod stronger action from the U.K. government.
These worries were justified as – far from “leading the way” – the UK proved to be the West’s sanctions laggard with respect to individual oligarchs.
- The proposed US-UK joint counter-kleptocracy working group is desperately needed to stimulate the UK’s own anti-kleptocracy strategy. This just be launched via in the Prime Minister in a manner which is realistic and reasonable, recognising past failure as well as pledging future success. One idea for how this may be done is to publish the report into the scandal of the Tier 1 investor visas, a scheme which allowed money laundering and those retaining fealty to kleptocratic states, including Russia, a route to UK citizenship. This Home Office report is as vital as the Intelligence and Security Committee “Russia Report”, finally published in 2020, in order to change the debate on kleptocracy. Its publication by Priti Patel must be a key demand of parliament. On its publication, the Conservative Party must commit to give up all donations from persons identified as high-risks of corruption or threats to national security in the review. Such funds may be considered for asset return or the holding of these assets in escrow for the purposes of future asset return or reparations to victims.
(2) Introduce the concept of kleptocracy into law, via legislation on economic crime
- When Unexplained Wealth Orders (UWOs) were introduced in the United Kingdom in 2017, they were framed as a way to tackle two problems: organised crime and grand corruption emanating from kleptocracies. When the then security minister Ben Wallace made the case for UWOs he referred to a scandal that saw over $20 billion funnelled out of Russia, saying that “we are not going to let it happen anymore.” In effect, the government claimed to address the problem of kleptocracy but did so via legislation that was not fit for purpose.
- Despite much tub-thumping by politicians and promises of up to twenty UWO investigations per year, only four UWO investigations have been reported since 2018, no UWO has been issued since July 2019, none have been issued against Russian nationals, and only one UWO investigation has been successful against property held by a foreign political figure. This investigation (NCA v Hajiyeva) featured UWOs issued against properties owned by a former Azerbaijani banker, Jahangir Hajiyev, and his wife. Even though the UWO was upheld, the properties are yet to be recovered and legal proceedings are still ongoing at the time of writing.
- Another UWO investigation (NCA v Baker) was launched in 2019, with three orders issued on properties later revealed to be owned by Dariga Nazarbayeva and Nurali Aliyev, the daughter and grandson of Kazakhstan’s autocratic first president, Nursultan Nazarbayev, whose rule ran from 1991 to 2019. Other properties that were owned by Nazarbayeva and her son, including a block of flats and offices on Baker Street worth £137 million, were not issued with UWOs, although it is unclear why. The orders were dismissed by the High Court in 2020, which saw the National Crime Agency (NCA), the unit that led the investigation, landed with a £1.5 million bill in costs, a major setback in the struggle against kleptocracy.
- What may have been key in the successful outcome of NCA v Hajiyeva and the lack of success in NCA v Baker is the fact that at the time the orders were issued Jahangir Hajiyev was in jail in Azerbaijan and had no support from the country’s ruling powers, yet Dariga Nazarbayeva, the daughter of the then president of Kazakhstan, retained favour in her home country. Thus, there is the possibility that instead of counteracting kleptocracy, UWOs may reinforce it. Extra efforts must be made to better tackle those who remain in power and not just the “fled and politically dead”. This is a pattern repeated across all £2 Billion of UK real estate linked to kleptocracies in our database, where only exiles are at risk of loosing their property, while kleptocratic regimes are effective at instrumentalising anti-corruption proceedings like UWOs against their enemies.
- There is the danger that UWOs, even in a revised form as proposed by reform of the Economic Crime Bill in March 2022, will only have an impact in the most clear-cut anti-corruption cases, where the state official has no possibility of answering the requirements of the order, likely because they are no longer part of the political elite of their home country. Unless there is further reform or new legal precedent to establish that wealth accrued by such political means is not in fact “lawfully obtained”, then UWOs will remain a weak tool against kleptocracy. This is a problem which is particularly acute in the case of UWOs but is potentially a general problem across other civil recovery tools and powers under the foundational Proceeds of Crime Act of 2002.
- Therefore, the promised White Paper on economic crime must address this problem by establishing that membership of a regime, family tie to a kleptocratic regime, or business connections to regime membership are all themselves prima facie evidence of unlawful sources of wealth according to UK law. Being the child of the president and, coincidentally, a phenomenally successful businessperson must itself be recognised as meeting the civil standard of proof that the source of wealth is unlawful. In the very rare cases that nepotism and cronyism are not decisive, the defendant may submit evidence to the court to make that defence. Organised Crime is a concept which appears across legislation but is no more concrete than kleptocracy – both require interpretation. If organised crime may be named in UK law, why not kleptocracy?
(3) Capture the expertise of the private sector for intelligence gathering and enforcement
- The story of the failure of UWOs – and the heightened awareness of the security risks from kleptocracy in the wake of the Kazakhstan and Ukraine crises – should prompt a revolution in UK thinking and policy. A proper anti-kleptocracy strategy requires not only strong legislation, but strong enforcement. To do this demands not only political will, but increased funding and mandate for the UK enforcement agencies so that they can properly investigate and freeze corruptly obtained assets. Only with a more substantial reform of the UK’s anti-corruption efforts will kleptocrats no longer view the UK as a safe haven for their dubious wealth.
- This may require further reform of the Suspicious Activity Report system to vastly increase the quality of the intelligence received by the NCA and other bodies and turn the private sector from enablers of money laundering by kleptocrats to agents of AML regulation. The essential problem the UK faces is a private sector whose intelligence on economic crime is substantial but incomplete and scattered, and a public sector that lacks the resources to collect and analyse this data. This problem has emerged due to decades of weak- or self-regulation of professional services which has created the phenomenon of enablers: professionals with no incentive to say no to kleptocracts and who passively or actively launder their monies and reputations.
- With respect to banking, we know global system for either proceeding with a transaction or halting it and reporting suspicious activity is risk insensitive. A recent study saw approaches made to all banks in the worldwide SWIFT network regarding the possibility of opening an account by a range of different entities posing varying degrees of risk – for example, a company registered in the UK and a company registered in Pakistan. One would expect that higher-risk clients would receive fewer positive responses. However, this was not the case: ‘[C]ontrary to the risk-based approach, the central regulatory principle of international banking… we find that banks are remarkably insensitive to risk.’ UK banks fared no better when compared to the larger data set.
- The challenge is to move away from the risk-based system to one where private sector expertise is actually harnessed for the benefit of AML system. Radical reform or replacement of the SAR system to require private sector professionals in regulated sectors fewer but more detailed submissions of cases of suspicion of elites, business and their associates from kleptocracies – not just PEPs – to the NCA’s Financial Intelligence Unit (FIU) and/or other enforcement. At a minimum, SARs must include the greater detail requested by the FIU in its new guidance of September 2021 as part of the ongoing reform of the system. Commercial or legal confidentiality requirements must not be allowed to prevent such disclosure in cases of suspected money laundering. Professionals who fail to meet these standards in cases where money is subsequently proven to take place must be subject to prosecution and more severe punishment. Failure to disclose must be considered negligence.
- On the flip side, this may mean that a higher test must be met based on the identity of the beneficial owner and the sources of wealth as opposed to risk assessment according to generic red flags with regard to the nature of the transaction and a narrow definition of the beneficial owner (as a PEP). Rather that a risk-based system, this would create a threat-based system. A threat based-system would necessarily include a list of the states which are the main sources of kleptocracy which would look quite different to current AML high-risk country lists.
- It is important that this is not politicised, but must be based on political economy research. The UK could make its own additions to the European Commission’s ‘high-risk third countries’ list – which since Brexit it has pledged to continue to follow since – by applying the Financial Conduct Authority’s criterion of ‘a political economy dominated by a small number of people/entities with close links to the state’. By this measure, all business from almost all post-Soviet states would count as high-risk, not just that of PEPs. Therefore, transactions involving, for example, very wealthy persons from Russia, Kazakhstan or Azerbaijan, would be subject to more stringent tests, while the checks on domestic customers and clients from low-risk places may actually be reduced.
(4) Make transparency a priority for all public institutions including charities, thinktanks, and universities
- A variety of British public institutions including charities, thinktanks and universities are depositories for kleptocratic wealth and potential vehicles for their influence. In the university sector, Cambridge agreed Nazarbayev scholarships with Kazakhstan and received a donation from Kremlin-linked oligarch Dmytro Firtash for its Ukrainian Studies programme. Oxford took £10 million from an unknown donor to establish a centre for the study of Azerbaijan and Central Asia. Such donations raise potential issues of reputation laundering, the risk of authoritarian influencing of academic research and study, and opportunities for the instrumental use of university affiliations to pursue legal and political agendas against adversaries.
- Considering these risks, it is incumbent on universities to undertake rigorous checks on the donor and their sources of wealth and to be fully transparent about where the money comes from. However, there is currently no requirement to publish information on donations, donors, or the conditions of funding. As there is no law for transparency, we have no idea about the details of these donations nor whether those in the public domain are merely the tip of a very large iceberg. Moreover, only seven of the 24 Russell Group Universities reported to researchers that they have independent gifts committees and published ethics criteria for the acceptance of donations, as suggested by the report into the LSE-Gaddafi scandal of 2011.
- This situation of non-transparency and inadequate internal review needs to change. In January of this year, an amendment to the Higher Education (Freedom of Speech) bill was tabled in parliament to require universities to publish details of all foreign donations over £50,000. Although his particular bill is deeply flawed, and appears to be stalled at the report stage, there must be further opportunities to ensure transparency of university funding from and partnership with countries all over the world, including but not limited to Russia and the post-Soviet states. The proposed Foreign Influence Registration scheme of the draft Counter State Threats bill offers another opportunity to demand transparency from charities and thinktanks involved in lobbying the government.
(5) Provide protection for researchers and investigators of kleptocracy from libel charges and other forms of aggressive reputation management
- Since launching the Chatham House paper in December 2021, we have been subject to threatening letters from two individuals named in our report. Both of these persons are naturalised UK citizens who are donors to the Conservative Party, but have previously been involved in money laundering cases in the post-Soviet region. In each case, the claims against us relate to the precise nouns and verbs use to describe the persons involvement in these illegal acts. These threatening letters, while accusing us as errors of fact, seek to prevent our exercise of academic judgment where facts are subject to interpretation according to concepts found in our fields of Area Studies, International Relations and Political Economy.
- These threats have hampered our work and delayed the printing of the Chatham House report. They have occurred even though the report is a work of research written by authors from some of the UK’s most elite universities, published by one of its leading thinktanks, and went through three stages of legal review and received four double-blind peer reviews. Two of the UK’s leading libel law firms have been involved in these cases. At no point apparently did these lawyers exercise professional ethics and refuse to send the threatening letters on behalf of their client. Libel action has been threatened in both cases, directly in one and implicitly in another. One of the two threatened a Subject Access Request under data protection laws.
- However, both processes are yet to lead to actions. Our colleagues in journalism Catherine Belton and Tom Burgis, who have produced two of the best books on kleptocracy in Russia and Kazakhstan respectively, have not been so lucky and both proceeded to court at great expense of money and time. While Burgis’ case was dismissed, appropriately on 2 March 2022, the eve of World Book Day, Belton’s led to a settlement in December 2021 involving an apology to Kremlin-linked Roman Abramovitch and huge costs for the insurers of her publisher Harper Collins. In retrospect, Belton’s claim the Abramovitch is linked to Putin, and her reportage of interviewees claims that the latter may have asked the former to Chelsea FC, are clearly matters of public interest. Both the Burgis and Belton cases are Strategic Lawsuits Against Public Participation (SLAPPs).
- The government has belatedly recognised this problem emanating from the Defamation Act of 2013. Although the 2013 reform was an improvement on the previous law, and provides a defence for scientific journal articles in section 6, it continues to allow libel tourism by persons who are not resident in the UK and have little reputation to defend here. More fundamentally, it lacks proper free speech and public interest defences whereby only claims that have a clear malign intent should be considered libellous. Such claims made by a proper journalist or academic researcher would constitute a form of professional misconduct on their part. Anything short of such malign attempt, even where it has inadvertently caused harm to the person’s reputation and wealth, should not be considered libellous.
- The government has recently moved measures to provide protection for researchers and journalists publishing on kleptocracy cases. This is welcome but is not enough in itself. These measures must merely be the first steps of a process to reform the Defamation Act and introduce wide-ranging anti-SLAPP measures (including limits on Subject Access Requests).
- Together these five steps offer a pathway with specific measures for a UK Counter-Kleptocracy Strategy. However, framing kleptocracy as a national security threat comes with risks. These include the possibility that the rule of law will be damaged – something indicated in the sanctions amendments in the Economic Crime Bill of March 2022. Such quick and dirty measures take place due to the lack of political will and state capacity tom address kleptocracy prior to the current crisis. Another, related problem is the ongoing lack of capacity to assess the effects of counter-kleptocracy measures on the targets including how state parties will respond and whether private sector enablers will adapt to blunt their effects. Coming late to the business of countering kleptocracy, the UK will have to learn fast and draw on external expertise tom develop its strategy.
11 March 2022
 Unexplained Wealth Orders were introduced as part of the Criminal Finances Act 2017, which gained Royal Assent on 27 April 2017. UWOs came into force on 31 January 2018. See https://www.gov.uk/government/collections/criminal-finances-act-2017. Accessed 10 February 2022.
 https://www.occrp.org/en/laundromat/the-russian-laundromat-exposed/. Accessed 10 February 2022. Wallace’s full comment was: “What we know from the Laundromat exposé is that certainly there have been links to the [Russian] state … The government’s view is that we know what they are up to and we are not going to let it happen anymore.” See https://www.independent.co.uk/news/uk/politics/oligarchs-corruption-unexplained-wealth-order-money-laundering-russia-ben-wallace-london-a8192401.html. Accessed 10 February 2022.
 A phrase used by Dr Peter Sproat in his 2018 paper, “Unexplained Wealth Orders: An Explanation, Assessment and Set of Predictions”. See
https://journals.sagepub.com/doi/abs/10.1177/0022018318773210?journalCode=clja. Accessed 10 February 2022.
 As written in section 326B(3) of the Criminal Finances Act of 2017..
 Findley, M., Nielson, D. and Jason Sharman. Behavioral Institutionalism: A Global Field Experiment in Regulatory Compliance in the Finance Industry, Conference paper, Central Bank of the Bahamas. Draft January 2021