Written evidence submitted by RUSI Centre for Financial Crime and Security Studies (IEF0013)
This submission is made by the Centre for Financial Crime and Security Studies (CFCS) at the Royal United Services Institute (RUSI). It represents the views of the research team members who have contributed their expertise as it relates to the wide-ranging themes covered by the inquiry. It does not represent the views of RUSI itself. Further details of our programme and activities can be found at the end of this submission.
Queries about this submission should be forwarded to the CFCS Programme Manager, Alanna Putze.
For ease, the key points, and recommendations of each section of this submission are laid out below. Further detail is provided in each of the subsequent sections:
1.1. Illicit finance and international order
1.2. The role of the FCDO in responding to illicit and emerging finance
The FCDO must further boost investment in its illicit finance capabilities to ensure that it has the tools and skills necessary to address this national security threat.
1.3. International governance, sanction regimes and alternative measures
1.4. Finance and state threats
1.5. Crypto and digital currencies
The UK currently lacks a discernible strategy on illicit finance; it also has a response that is fragmented across departments and agencies from which the FCDO is often excluded and with no responsible minister, department or agency. Therefore, to create an accountable and unified response to illicit finance, the UK government should appoint an Independent Commissioner on Illicit Finance who is statutorily empowered, with the necessary security clearance, to hold to account the government and the wide range of departments/agencies involved in the UK’s response to illicit finance (this could be modelled on the Independent Reviewer of Terrorism Legislation and the Independent Anti-Slavery Commissioner).
What are the pressures affecting the global rules-based economic order and how might illicit and emerging forms of finance affect these?
2.1. Since the end of the Cold War, the West – dominated by the US – has enjoyed global financial hegemony. Whether via the provision of key global banking services (such as correspondent banking); access to capital via bond markets and stock exchanges; or the ubiquity of the US dollar and the Western-dominated structure of global payment services, finance has been exploited by the West as a highly effective tool of soft power and coercion.
2.2. Unsurprisingly, those that resist Western dominance have sought to counter this hegemony and, with the rapid growth of the Chinese economy, an increasingly polarised system has emerged, a system that has employed finance (both legitimate and illicit) strategically to enhance geopolitical standing.
2.3. Furthermore, finance, and its influence, lie at the heart of, and contribute to, democratic values. Finance can spur innovation, development, and renewal. But finance can also be used to undermine democracy. Authoritarian regimes are increasingly co-opting the global norms for combatting illicit finance and corruption to supress civil society and human rights. These regimes also continue to exploit loopholes and lax standards in democratic countries to fund anti-democratic activities. Kleptocracy and corruption, sometimes enabled by finance professionals, serve to further corrode trust in democratic institutions. Put simply, there is a financial dimension to the challenges and opportunities facing democracies.
2.4. This is something that President Biden has recognised as one element of his Summit for Democracy, something with which the UK must be visibly and actively engaging.
2.5. At the domestic level, foreign actors pose a threat to countries’ economic security by, for instance, abusing corporate vehicles or buying assets and property close to critical infrastructure. Thus, legislation aimed at tackling economic crime, such a second Economic Crime Bill that includes important reforms such as reform to Companies House, as well as appropriate resourcing of law enforcement agencies, should be drafted to target key vulnerabilities in the UK system.
How, and how effectively, does the FCDO co-ordinate with other UK government departments and agencies to respond to illicit and emerging finance? To what extent does the FCDO participate in multilateral forums such as the Financial Action Task Force?
What skills and expertise does the FCDO need to respond to the challenges and where are these lacking? What skills on illicit finance has the FCO merger with DFID brought, and how are these skills being exploited?
3.1. In assessing the role of the FCDO in responding to illicit finance, it is important to note that diplomacy is a core part of the response to illicit finance, and it is thus necessary to consider the role the FCDO plays alongside other government departments, notably HM Treasury and the Home Office; and the skills and capabilities of the FCDO in engaging with and addressing illicit finance.
3.2. In RUSI’s experience, over the past 2-3 years, meaningful cross-HMG collaboration at a working level on illicit finance has developed, including a growing understanding that the international dimension of illicit finance requires domestic (addressing vulnerabilities at home) as well as international action (which much include diplomatic and development engagement). This work is underpinned by the creation of the International Illicit Finance Strategy Working Group (IIFSWG), and the increased focus on the international dimension of illicit finance in both the Home Office and HM Treasury. It is notable that this momentum has been significantly enabled by the injection into the FCDO of illicit finance understanding and motivation following the FCO/DFID merger.
3.3. However, despite this improved coordination, the FCDO is excluded from several key domestic and international forums - notable the FCDO is not included in ‘Quad’ meetings that occur prior to Economic Crime Delivery Board (ECDB) meetings - which means that its voice is absent from key agenda discussions. Furthermore, the FCDO has been removed from the Economic Crime Steering Board (ECSB).
3.4. These exclusions are inexplicable given these forums will be key contributors to the government’s planned ‘Economic Crime Plan 2’ that will replace the existing plan when it expires in July 2022; and ECP2 will form the Integrated Review’s sub-strategy on illicit finance and economic crime.
3.5. Although the FCO/DFID merger has brought illicit finance capabilities into the combined department, our external engagement suggests that this capability within the FCDO has not been effectively integrated and leveraged. Whereas there is close coordination between traditional FCO activities and the DFID illicit finance capabilities in some areas (e.g. on programming capacity building), analysis and research remain fragmented. For example, enquiries on illicit finance related to Russia come to RUSI from multiple, uncoordinated sources.
3.6. Away from Whitehall, a further positive development is the growth of HMG’s ‘SOCnet’ (currently owned by the Home Office but transferring to FCDO from April 2022). Based in a range of relevant UK embassies, along with the FCDO’s own illicit finance leads (mainly located in global financial centres such as Singapore, Hong Kong, and the UAE), these capabilities have significantly enhanced UK’s understanding of international illicit finance and the ability of HMG to effectively engage, at a policy level, with host governments, to supplement existing operational activities. The FCDO must further boost investment in its illicit finance capabilities (including via SOCnet) to ensure that it has the tools and skills necessary to address this national security threat.
3.7. A further area of FCDO impact is in coordinating a better understanding of current and emerging illicit finance threats. The FCDO has led the collaborative cross-HMG design of the International Centre of Excellence on Illicit Finance (ICE), a commitment of the 2019 Economic Crime Plan that has been reiterated by the government in its written commitment to the Biden Summit for Democracy.
3.8. Due to budget cuts, the ambition of ICE has been significantly reduced. Given the importance of research and analysis to support response design and policymaking, these cuts are regrettable as they risk the ICE vision not being fully realised in line with the government’s commitment and the necessary specialist expertise not being recruited. The creation of ICE should represent an opportunity to build an HMG cadre of practical illicit finance expertise and consolidate the fragmented landscape of HMG illicit finance research commissioning to ensure money is spent in a coordinated fashion on projects with impact.
3.9. Lastly, a review of UK’s involvement in IF-relevant multilateral organisations should be undertaken to ensure that FCDO’s illicit finance expertise is appropriately represented and achieving greatest impact for HMG.
3.10. Greater collaboration must be established between the FCDO’s illicit finance capability and those in HMT leading HMG’s engagement with the Financial Action Task Force (FATF). Despite claims that the FATF is ‘only’ a technical standard setting body, this is clearly not the case. The political ramifications of decisions made by the FATF (e.g. the ‘grey-listing’ of a country) have meaningful repercussions for UK diplomatic relations. Thus, the UK’s delegation to the FATF should be a joint HMT/FCDO-led effort, particularly given the extent to which the practical response to illicit finance is increasingly featuring in the FCDO’s portfolio since the merger with DFID; the expansion of FCDO responsibilities via SOCnet and its network of IF leads; and the establishment of a dedicated research capabilities (ICE).
3.11. Beyond the importance of ensuring appropriate leadership by FCDO of HMG’s response to international illicit finance, and mindful of HMG’s desire to develop more expansive global trade relations, a mechanism must be created to ensure greater collaboration between FCDO and HMG trade/investment departments. HMG’s expansion of trade relations will require illicit finance compromises – there is currently no substantive coordination mechanism for ensuring these trade-offs are made on an informed basis.
3.12. In sum, the FCDO has demonstrated that it has the potential to make a material difference to the UK’s response to illicit finance via enhanced understanding of the threat; engagement with international partners (countries and multilateral bodies); and coordination, across HMG, on certain elements of the required response. Ensuring the FCDO, including SIS (as noted above) can play this role to its full effect, without being impeded by ODGs and seen merely as a programme ‘implementer’, is critical.
How effective are existing international governance regimes and other measures to tackle illicit finance, and what gaps remain?
4.1. The FATF lies at the heart of the international governance regime for tackling illicit finance. Since its inception in 1989, it has certainly made considerable progress in bolstering anti-financial crime standards around the world. Its 40 Recommendations have created a technical framework which countries are on the whole implementing, or aspiring to, in a convincing fashion.
4.2. This technical framework, however, can only go so far in bolstering defences. To have a meaningful impact, countries must properly resource, supervise and enforce this framework, which is rarely the case. This fundamental shortcoming is compounded by the fact that the effectiveness of these standards relies on a strong understanding of financial crime risks, something that very few countries have and where more support across the globe is required.
4.3. The international governance system led by FATF is also challenged by how quickly it can respond to emerging risks. FATF proved it could do so when it countered growing concerns emanating from cryptocurrencies with its so-called ‘travel rule’, but it has been more common for this consensus-led body to take a slower response to risks and reforms. There are several areas where the group must act to ensure that it remains relevant, including: setting a basic standard for ultimate beneficial ownership transparency, incentivising asset recovery, embracing innovation and streamlining information sharing.
4.4. It must also be acknowledged that FATF has caused unintended consequences. Not only has the disproportionate implementation of its standards caused derisking, but authoritarian states are increasingly using its standards to suppress opposition and civil society. For FATF’s legitimacy to be ensured, it is essential it is given a permanent legal footing, the resources necessary to ensure the correct implementation of its standards, and an ombudsman to ensure that it is held accountable for its impact.
How effective are the UK’s sanctions regimes on corruption and human rights? How could sanctions be used to greater effect in countering illicit finance?
4.5. The UK’s independent sanctions regimes on human rights and anti-corruption are nascent. They have primarily been used to ‘catch up’ with Magnitsky designations made by the US and in collaboration with other Western allies to address more recent developments such as human rights abuses connected with the Lukashenko regime in Belarus.
4.6. In contrast to the US that operates a ‘whole of government’ response to illicit finance, which includes the use – and aggressive implementation of – thematic sanctions, the UK’s response to illicit finance, and the role of sanctions as part of it, remains fragmented and uncoordinated. Notably, there is no singular, senior government lead on illicit finance with the authority to pull together the various HMG tools available for combatting illicit finance. This lack of senior leadership and accountability results in an underpowered response that is less effective than it could be. The UK should display a far more strategic understanding of the value of sanctions, for example introducing regimes that respond to failures by the UN Security Council to act, such as is currently the case on North Korea.
4.7. More broadly – and as discussed further below – the UK’s response to illicit finance is often too focused on ‘technical’ support rather than more directing meaningful action against those individuals and entities that have illicit finance connections with the UK.
4.8. For example, the UK’s sanctions response both prior and subsequent to the Russian invasion of Ukraine has revealed significant weaknesses. There has undoubtedly been close coordination with allies, however the public designation of targets has been laborious, suggesting that sufficient preparations have not been made. Specifically, the FCDO’s ability to ‘target’ individuals has lagged allies. Like US OFAC, the FCDO must develop a cadre of ‘targeters’ whose job it is to identify and target individuals with sanctions. This must be a standing and ongoing capability that facilitates the use of UK economic power.
What other measures beyond sanctions can counter illicit finance, including bilateral and multilateral approaches?
4.9. Sanctions are just one tool for countering illicit finance. It is important to not only freeze illicit financial flows, but, where there is a case for doing so, to also remove these funds from the global financial system. It is therefore important to bolster international cooperation on tracing, freezing, and seizing the proceeds of crimes.
4.10. Bolstering the work of multi-lateral asset recovery cooperation mechanisms, such as the CARIN network to increase the ability of law enforcement and prosecutorial agencies to freeze and seize the proceeds of multi-jurisdictional crimes should form part of the wider response to illicit finance.
To what extent and how do hostile states use investment in and through UK-based businesses to further their strategic interests and build a platform for their values?
5.1. The extent to which the UK acts as a haven for, and facilitator of illicit finance has been well reviewed by this Committee and others (for example the ISC Russia Report); it has also been extensively revealed by journalists and civil society. However, the focus is on the criminal/kleptocratic nature of the provenance of these funds, rather than the use to which they are put. This is not surprising, as the global anti-financial crime system is set up to identify the proceeds of crime, rather than the intent behind the movement of money (the one exception is the need to identify terrorist financing).
5.2. The result is that malign actors – be they states themselves or state-directed/enabled – can move with relative freedom through the financial system and use their finance to establish influence; launder reputations; stifle criticism, etc.
5.3. State threats are diversifying and evolving in ways which present new challenges to the UK’s security, prosperity, social cohesion, resilience, democracy, values, institutions, and strategic advantage. This is being abetted by a favourable cost equation. On one hand, new technologies and their widespread commercial availability are creating new avenues for attacks at lower cost, both in financial terms and in terms of risk of attribution. On the other hand, the cost of hostile activity by states has been estimated to run into the hundreds of billions of dollars in the US (the corresponding UK figure is believed to be “very significant”) while the impact of a loss in public confidence in Parliamentary democracy may be immeasurable.
5.4. The overlapping nature of these threats can make them difficult to categorise, but the government’s recent Counter State Threats consultation established a series of categories, including physical threats to people; physical threats to things; espionage; interference; and threats to geostrategic interests, such as challenges to the rules-based international order, the UK’s interests, or existing alliances.
5.5. In policy and legislation terms, attempts by HMG to strengthen its defences against State Threats are ongoing. The Counter State Threats Bill introduced in 2021 has three core strands: reform of the Official Secrets Acts 1911, 1920, 1939 and 1989 (“the OSAs”); the creation of a ‘Foreign Influence Registration Scheme’ to help combat espionage, foreign influence, and protect research; and bringing together new and modernised powers to ensure the security services can tackle hostile activity. A raft of other legislation, such as the Telecommunications (Security) Bill and the National Security and Investment Bill has been designed with similar issues in mind.
5.6. Understanding the finance related to state threats should be a critical element of the UK’s response and yet this dimension does not seem to feature to the extent necessary. We would argue that the government should establish capabilities that place finance as a central tool used by the intelligence community to combat state threats, not merely rely on law enforcement to respond to criminal activity.
5.7. We therefore believe that illicit finance should be included in the Intelligence Outcomes Prioritisation Process, with illicit finance designated a priority for UKIC both as a geographic priority and a theme in its own right.
What is the potential impact of new distributed ledger technologies and digital currencies?
What is the potential impact of new distributed ledger technologies and digital currencies:
- On illicit finance and money laundering?
- On the UK’s international relations and economic security?
What steps has the Government taken to assess this potential impact and determine the most appropriate UK response?
6.1. The use of mixers, decentralized finance applications, and exchanges with relaxed KYC measures provide an opportunity for criminals to launder digital currencies and disrupt law enforcements investigation into illicit misconduct. Decentralized finance technology that uses sideshift.ai also allows for users to exchange between different forms of digital currency without know your customer measures. Criminals can exploit this technology to implement a laundering technique called chain hopping, which refers to transitioning between blockchains for different digital currencies.
6.2. These laundering techniques can also be used by sanctioned nations and undermine the UK’s sanctions efforts. Sanctioned nations can implement these techniques following hacks at digital currency industries or after receiving ransomware payments. There is also a risk of sanctioned countries mining prominent forms of digital currencies to raise funds and using these funds at exchanges registered within its jurisdiction to facilitate international trade.
6.3. To understand how to approach digital currencies, the Bank of England and HM Treasury established the Cryptoassets Taskforce in 2018. A more recent development is that the FCA launched measures to strengthen promotion rules for digital currencies.
6.4. The impact of foreign Central Bank Digital Currencies (CBDCs) on UK sanction efforts is contingent on various factors: how much financial traffic the City of London retains in the future; the extent to which a CBDC would augment China’s influence along the Belt and Road; and the extent to which the underlying CBDC technology could prevent sanctioned entities from using certain CBDCs.
6.5. Foreign CBDCs impacting UK security priorities is a matter of ‘when’ rather than ‘if’, with one possible implication being that standard-setting on CBDC technology initially develops externally to the UK. In this scenario, any notion that the UK can easily ‘catch up’ would be misguided and likely costly.
6.6. China’s first-mover advantage in CBDCs could have a disproportionately huge impact on the balance of global financial power. Hong Kong, Thailand, the United Arab Emirates, and China already have a partnership to develop a system to conduct real-time cross-border transactions. The accepted system for interoperability can impact UK security priorities depending on the level of oversight for financial transactions.
6.7. To assess the potential impact of CBDCs, the Bank of England and the HM Treasury formed the CBDC taskforce. The Bank of England has also engaged with the BIS to explore retail CBDCs.
Since its formation in 2014, RUSI’s Centre for Financial Crime and Security Studies (CFCS) has focused on matters at the intersection of finance and security in support of policy makers and operational agencies in the UK and in a range of countries across the globe, as well as undertaking extensive engagement with multilateral bodies charged with developing policy and operational responses to financial crime, such as the Financial Action Task Force (FATF), its regional bodies (FSRBs) and the UN Security Council.
 For more on this, see the work of RUSI’s Taskforce on a Transatlantic Response to Illicit Finance (TARIF). For example, Tom Keatinge & Isabella Chase, “Building the Basis of a Transatlantic Response to Illicit Finance: To achieve meaningful impact on illicit finance, the US and UK must first recognise their own shortcomings and strengthen the ‘home base’.”, 2021. Available at: https://rusi.org/explore-our-research/publications/ commentary/building-basis-transatlantic-response-illicit-finance
“UK Support to Summit for Democracy”, 2022. Available at: https://assets.publishing.service.gov.uk/ government/uploads/system/uploads/attachment_data/file/1055380/uk-support-summit-democracy.pdf
 Note that in 2020 and 2021, one member of the RUSI team was part of an Adam Smith International-led team that collaborated with HMG to respectively design and build ICE.
 The ‘Camden Asset Recovery Inter-Agency Network’ (CARIN) and its network of regional affiliates is a global network of judicial and law enforcement contacts coordinating work to trace, freeze and seize the proceeds of crime.
 Intelligence and Security Committee of Parliament, "Russia Report", 2020. Available at: https://assets. publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1055380/uk-support-summit-democracy.pdf
Home Office, "Legislation to Counter State Threats (Hostile State Activity) Government Consultation", 2021. Available at: https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data /file/1055380/uk-support-summit-democracy.pdf
 This gives ministers new powers to impose limits on the involvement of “high risk” suppliers in the UK’s telecoms network.
 This is a new regime for government scrutiny and intervention of investments for the purposes of protecting national security.
 For instance: Monerujo Android mobile wallet
 Hong Kong Monetary Authority, “Joint statement on the Multiple Central Bank Digital Currency (m-CBDC) Bridge Project”, 2021. Available at: https://www.hkma.gov.hk/eng/news-and-media/press-releases/2021/ 02/20210223-3/