Written evidence submitted by Dr William Vlcek (IEF0018)

Introduction

1)      Dr William Vlcek, Senior Lecturer in Global Political Economy, School of International Relations, University of St Andrews, Scotland.  My research over the past twenty years has explored questions concerning global governance initiatives for offshore finance, international taxation, money laundering and terrorist financing.  Academic publications covering these topics include two monographs, 12 book chapters and 26 academic journal articles; a third monograph is forthcoming in 2022.  I have consulted on reports covering the influence and impact of offshore finance on taxation in the European Union prepared for the European Parliament (2013, 2017) and the European Commission (2021).  Further information is available on my staff webpage in the School of International Relations (https://www.st-andrews.ac.uk/international-relations/people/wbv2/).

2)      In this submission I will speak to several of the points of interest identified in the Committee’s call for evidence from my perspective on the global governance of illicit finance and the United Kingdom’s capacity to contribute to that governance.  This perspective has developed over the course of twenty years research in this subject domain and discussions with practitioners, academic colleagues and students.  These observations address the need for effective collection of information on the owners of corporate vehicles (companies) and the need for investigation and enforcement agencies to be provided with sufficient resources to use the information gathered.  The significant contribution to be made by the United Kingdom is through the establishment of an adequately resourced investigation capacity to deal with illicit finance.

A gap in the international governance regime against illicit finance

3)      First, the question on the effectiveness of international governance regimes and remaining gaps in them.  Over the years the Organisation for Economic Cooperation and Development (OECD) and the Financial Action Task Force (FATF) have produced guidance and recommendations for dealing with illicit finance at the international level.  The difficulty is that the recommendations and associated guidance must be implemented at the national level, collectively by all countries.  Where any individual country has failed or only incompletely implemented the recommended measures then gaps continue to exist through which individuals and companies can conceal their conduct.  One significant measure to counter illicit finance is to collect and maintain ultimate beneficial ownership (UBO) information for all companies as part of the country’s register of legally incorporated companies.  National variations of company structures, incorporation requirements, and legal systems should not excuse any failure to establish a UBO registry.

4)      But more is required than simply setting up a UBO registry for companies.  The agency maintaining the registry must also verify the identity documentation provided to assure that it is accurate and valid, for the named individual ultimate owner.  Without a comprehensive, global implementation of UBO registries for companies with verified information on the actual owner there still will be gaps that permit illicit financial flows and conceal property ownership. 

5)      This situation is more than adequately demonstrated by an article published on the Financial Times website on 12 March 2022.  The article’s title explains it quite clearly, ‘Does Alisher Usmanov really own Sutton Place?’[1]  As explained by the article’s author, George Hammond, the two companies listed in the Land Registry as the owners of this estate are incorporated and registered in Cyprus.

6)      The situation for a UBO registry in Cyprus has been evolving over the past few years as legislation to transpose European Union Directive (EU) 2018/843 comes into force.[2]  The legislation in Cyprus transposing it is Directives (R.A.A 112/2021 and R.A.A 317/2021) for the Prevention and Suppression of Money Laundering and Terrorist Financing (Beneficial Owners) of 2021.[3]  Implementation of the legislation began with an initial period of information collection of UBOs to be completed by 12 March 2022.  From 12 March 2022 the UBO register will be publicly available with basic information on UBOs provided for a small fee.

7)      Public access to UBO registries serves to address a desire by public interest groups for access by anyone and everyone, ideally at no cost.  The objective is to allow individuals, acting in the public interest, to assist governments and regulatory authorities to seek out and identify possible illegal conduct.  Tax evasion is commonly the illegal conduct of concern, but potentially money laundering or terrorist financing also could be identified by these individuals. 

8)      Open public access is problematic, however, as it implies that the UBO of a company has fewer rights to privacy that the ordinary citizen simply because they are the UBO of a company.  Access by law enforcement agencies in the course of a criminal investigation is the rationale for creating a UBO registry.  Open public access, however, is a limitation on the privacy expected by a citizen in a liberal, democratic society.  Open access to the public means all of the public and it is not limited just to those people pursuing a public interest agenda.  The experience, for example, of individuals subjected to doxing, demonstrates the danger of a publicly-accessible registry.[4]

Digital assets and illicit finance

9)      The second topic of interest for the committee addressed in this submission is the misuse of digital assets for illicit finance.    The impact of distributed ledger technologies and digital currencies for money laundering and illicit finance is mixed.  Yes, it is possible to conduct illicit finance with digital assets but the same technology also can be used to expose this misuse.  The misuse of digital currencies for money laundering has been a concern of the FATF since at least 1997.[5]  Guidance for preventing the misuse of these digital assets has developed alongside the development of new technologies, including today’s distributed ledger technology.[6]

10)  Digital currency transactions are not truly anonymous in the way that a cash transaction can be anonymous.  The distributed ledger maintains a record of all transactions, and that ledger is publicly accessible by design.  This means that the user of digital currencies is effectively pseudonymous, as long as they are able to keep their identity disconnected from any transaction in the digital record.  Should a person’s identity be connected in any way to a digital currency transaction, other transactions in the digital record also may be identified and connected to that person. 

11)  That situation was the case in the United States for a couple accused of laundering $4.5 billion in stolen bitcoin.[7]  The seizure of these digital assets in February 2022 was possible because investigators were able to connect a digital transaction to digital accounts owned by the two accused along with their purchase and use of prepaid gift cards.  This seizure by the US Department of Justice is one of a number of investigations and seizures they have publicised in recent years.  In 2020, for example, the Department of Justice announced its seizure of websites and digital assets involved in terrorist financing.[8]

12)  These announcements by the Department of Justice reflect the investment made by the US government to build the capacity and capability to conduct detailed investigations into the use of digital assets for illicit finance.  Extensive resources are needed to counter the measures employed to obscure the illicit origins of digital assets.  These measures involve, for example, the use of multiple extraneous transactions to separate the final recipient from the initial illicit transaction by obscuring the trail of transaction records.

13)  Another measure, in keeping with FATF guidance, is that many countries are implementing regulations that require digital asset service providers to perform customer due diligence and maintain records of identity details for all account holders.  The implementation of customer due diligence procedures for digital assets will further reduce the pseudonymous nature of them and support law enforcement investigations.

Policy recommendations for the Committee’s consideration

14)  For the United Kingdom the government needs to provide Companies House with the resources to develop the capacity to verify all data, and specifically UBO data, on record for all existing companies.  Full verification of UBO data must be part of the process for registering a company in the United Kingdom.

15)  To counter the use of digital assets for illicit finance in the United Kingdom law enforcement agencies must to be provided with the resources needed to develop the capacity to investigate and analyse digital assets in pursuit of illicit finance.  If possible this capacity would be a national resource able to leverage the expertise of any organisation in the country involved in combating illicit finance.

March 2022

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