Written evidence submitted by the Foreign, Commonwealth and Development Office (IEF0031)
FAC INQUIRY: RESPONDING TO ILLICIT AND EMERGING FINANCE
Introduction – Russia/Ukraine context:
Illicit finance funds organised crime groups, terrorists, and other malicious actors. It undermines good governance and faith in our economy, fuels conflict and instability, and tarnishes our global reputation by allowing corrupt assets to be held in the UK. Driving dirty money, including from Russia, and money launderers out of the UK is a global security priority.
The UK has one of the world’s largest and most open economies, and London is one of the world’s most attractive destinations for overseas investors. These factors make the UK attractive for legitimate business, but also expose the UK to money laundering risk. Money obtained through corruption or criminality, including that linked to Russia, is not welcome in the UK.
We recognise that dirty money and kleptocracy are at the heart of the current Russian government, which is why this Government is taking active and assertive measures to tackle Russian illicit finance that enters the UK. Following Russia’s invasion of Ukraine, the Government has taken bold and direct action to clamp down on Russian illicit finance, including through the passing of the new Economic Crime (Transparency and Enforcement) Act on 15 March that has:
- Strengthened our ability to crack down on Russian dirty money in the UK and on corrupt elites by making reforms to Unexplained Wealth Orders (UWOs) that remove key barriers to their use. This includes increasing the time available to law enforcement to review material provided in response to a UWO and protecting them from incurring substantial legal costs if they act reasonably in a case that is ultimately unsuccessful. Furthermore, UWOs will be more effective against those who hold property in the UK via trusts and other complex ownership structures.
- Approved plans to create a new register requiring overseas companies owning or buying property in the UK to reveal their beneficial owners to Companies House. Entities which refuse to reveal their ‘beneficial owner’ will face tough restrictions on selling the property and those who break the rules could face a fine of up to £2,500 per day or up to 5 years in prison. The Act will provide for more information for law enforcement agencies to help them track down those using UK property as a money laundering vehicle.
- Introduced new powers to impose sanctions more quickly. The Government has new powers to immediately designate individuals and entities already designated by our allies under an urgent procedure, while evidence is gathered to sanction them under our own standard procedure. Since the invasion began, the UK has sanctioned over 1200 individuals and businesses. This includes 75 oligarchs and family members with a combined net-worth well in excess of £150 billion.
- Strengthened HM Treasury’s ability to take action against financial sanctions law-breakers. Changes to the legal test for imposing civil monetary penalties of up to £1 million or 50% of the total value of a breach (whichever is greater) will enhance the effective enforcement of UK financial sanctions. Civil monetary penalties will be enforceable on a strict liability basis, as is the case in the US, now that the requirement to prove knowledge or reasonable cause to suspect will be removed. In short, the UK’s Office of Financial Sanctions Implementation (OFSI) will more easily be able to impose monetary penalties, which can be significant (e.g. OFSI issued a £20.47m penalty to Standard Chartered Bank in 2020).
- HM Treasury will also be able to publicise breaches of financial sanctions, even where no penalty has been imposed, to censure, deter breaches and improve compliance. Furthermore, the Government can now amend secondary legislation to authorise greater information sharing with HM Treasury from across government.
In addition to passing the Economic Crime Act, the Government has:
- Led the international Russia sanctions effort, cutting off whole sectors of the Russian economy by targeting its defence companies, its trade and transport sector, and by working with allies to exclude Russia from the SWIFT financial system. We have sanctioned over 1200 individuals, businesses and subsidiaries since the invasion of Ukraine. We have cut off Russian banks with global assets of £500 billion as well as the central bank in Moscow. Over 3 million Russian companies are now barred from raising money on UK capital markets.
- Established a ‘Combatting Kleptocracy Unit’ in the National Crime Agency (NCA), increasing the operational capability for combatting serious and organised crime to achieve three key outcomes: i) target corrupt elites through their assets in the UK; ii) target the key enablers of these corrupt elites; and iii) support, alongside other Agencies and Departments, criminal cross-HMG sanctions delivery and enforcement.
- Published a detailed White Paper outlining fundamental reform of Companies House critical to clamping down on money laundering and fraud in the UK. The proposed reforms will mean that anyone setting up, running, owning, or controlling a company in the UK will need to verify their identity with Companies House. Companies House will be given the power to challenge information that appears dubious and will be empowered to inform security agencies of potential wrongdoing. And company agents from overseas will no longer be able to create companies in the UK.
Further legislative measures will be introduced as part of a wider bill later this year to safeguard and support the UK’s open economy, whilst cracking down on people abusing that openness. As well as reforms to Companies House outlined in the White Paper, additional legislative measures will include reforms to prevent abuse of limited partnerships; new powers to seize crypto assets from criminals; and reforms to give businesses more confidence to share information on suspected money laundering.
We are also bolstering our already strong relationships with our partners. Firstly, with the private sector, including the financial sector, we will be stepping up our future ambition on jointly tackling economic crime and illicit finance through the publication of the next Economic Crime Plan later this year. Secondly, we are working in close alignment with international allies to join up our domestic and upstream approaches to tackling illicit finance.
We will continue to bring the full capabilities of law enforcement and our economic crime public-private partnership to bear against serious criminals and corrupt elites, and their assets.
Global Order and International Standards:
What are the pressures affecting the global rules-based economic order and how might illicit and emerging forms of finance affect these?
Pressures affecting the global rules-based economic order:
- As exemplified by recent Russian aggression against the Ukraine, the Government’s assessment of the strategic context to 2030, outlined in the Integrated Review, predicts a move towards a more competitive and multipolar world. The four overarching trends which will be of particular importance to the UK and a changing international order are: geopolitical and geo-economic shifts, systemic competition, rapid technological change, and transnational challenges.
- The realistic optimal scenario is an international order in which these trends can be managed effectively, with nations coming together to revive multilateral cooperation, strengthen global governance, and harness opportunities for growth and prosperity. We must also prepare for the possibility that the post-COVID international order will be increasingly contested and fragmented, reducing global cooperation, and making it harder to protect our interests and values.
- We cannot be certain what effect these pressures will have on the global financial system, but the likelihood is that geopolitical and technological changes will continue to favour the dominance of central banks, and strong interdependencies between countries are likely to favour the emergence of a slightly different, but stable, multi-currency order. Heavily sanctioned regimes and ungoverned spaces will continue to act outside a consensus global order, as is true now. Possible emerging dominant trends could include:
- Cryptocurrencies and cryptoassets. Cryptocurrencies are distributed ledger technologies with no central control, and thus have the potential to enable unregulated international transactions which both allow the illicit economy to flourish and could destabilise domestic macroeconomies. However, for this very reason, it is unlikely that central banks (and hence governments) will come to allow unmitigated international commerce using crypto. It is likely that pressures against international crypto payments will increase, which may prevent them from becoming too destabilising. The exception to this is heavily sanctioned economies where the state has exactly the opposite incentives. We may therefore see crypto becoming the trading currency of sanctioned states.
- Diversification of the international reserve currency. Geopolitical power shifts could lead to the coexistence of multiple reserve currencies, albeit with strong pressure for rival payment systems to interoperate.
- Another important factor in the intensification of geostrategic competition between nations is the rise of authoritarianism that is resulting in the formation of competing economic blocs of influence. This often entails authoritarian states using a range of tools to undermine open and democratic societies and shape global governance and the economic order in line with their values. Of particular importance is the use of economic tools such as illicit finance to hide and grow illegitimate wealth, and to make strategic investments that seek to undermine the economic and security interests of democratic states.
On how illicit and emerging forms of finance might affect these pressures:
- The UK’s open and outward-facing economy, with its world-leading financial and professional services sectors and access to deep capital markets, means that UK businesses and banks create relationships and provide services across the globe. These same factors that make the UK attractive for legitimate businesses also expose the UK to money laundering risks from overseas illicit actors and criminals alike.
- The scale of the threat is becoming more complex, as criminals adapt to our response and exploit advances in technology to hide themselves and their activities. This threat extends to terrorist financing as well, where we must continue to bear down on the possibility for terrorists to support dangerous organisations or to use funds in support of harmful attacks. Cross-border flows of illicit finance continue to facilitate serious and organised crime, enabling state threats and terrorism, and undermining regional stability, especially in post-conflict zones. Tackling illicit finance is therefore critical to reducing threats to the UK, protecting and promoting the UK’s integrity as a global financial centre, and reducing the destabilising impacts of illicit finance on the wider world, particularly developing countries.
- The UK’s response to these threats is based on a comprehensive and mature understanding of risk. The UK has published three National Risk Assessments (NRAs) for Money Laundering and Terrorist Financing to drive a shared understanding of risk, and more recently published its first ever national assessment of WMD proliferation financing risk (PF NRA). The NRA represents a public facing stocktake of our collective knowledge of money laundering and terrorist financing risks in the UK, underpinned by sensitive assessments and evidence submitted by law enforcement agencies, as well as evidence from government departments, supervisors, firms, and non-governmental organisations, and other published evidence.
- The UK’s 2020 NRA found that high-end money laundering and cash-based money laundering remain the greatest areas of money laundering risk to the UK, but new risks continue to emerge, such as crypto-assets. The 2020 NRA also named specific jurisdictions assessed to be particularly relevant to the varied cross-border money laundering risks faced and posed by the UK. This section noted some of the money laundering vulnerabilities that these jurisdictions face domestically which, alongside the UK’s vulnerabilities, may be exploited to enable illicit financial flows to and from the UK. To address the international dimension to money laundering, the UK will continue to work to progress the necessary domestic reforms that will lead to an improvement in both our operational engagement and our standing as a global partner in the fight against international illicit financial flows and economic crime. And the UK will continue to work with key global partners to help strengthen their own respective responses to illicit finance, and better tackle shared threats.
How effective are existing international governance regimes and other measures to tackle illicit finance, and what gaps remain?
- The Government works closely with the world’s major financial centres at the Financial Action Task Force (FATF). As the global money laundering and terrorist financing watchdog, FATF sets the global standards for anti-money laundering, counter terrorist financing and counter proliferation financing, ensuring that these standards remain robust and responsive to emerging threats and are fully implemented around the world. The FATF standards and peer review process drive countries around the world – including the UK – to make meaningful and tangible reforms in anticipation of and following assessment by their peers. Today over 200 jurisdictions worldwide are implementing the FATF’s comprehensive standards for tackling illicit finance and regularly undergo peer reviews to identify where they must strengthen their implementation of the FATF’s standards. HM Treasury leads the UK delegation to the FATF and works closely with the G7 and G20 to drive forward the FATF’s agenda in support of the UK’s security and international objectives.
- Given the FATF’s role as international standard setter, the UK will with the rest of the FATF membership ensure the FATF develops and remains fit for purpose to guide national efforts to tackle illicit finance in a constantly changing strategic context. In 2018-19 the UK supported changes to the FATF standards to require anti-money laundering and counter terrorist financing regulation and supervision of virtual assets, including cryptocurrencies. The UK similarly drove forward efforts at the FATF to expand the FATF’s standards for counter proliferation financing in order to further prevent UN-sanctioned persons obtaining nuclear weapons. And the UK was at the forefront of work at the FATF to strengthen global standards for transparency of company ownership which now require all countries to establish registers of company beneficial ownership and assess the money laundering risks posed by foreign ownership, building on the UK’s well-established global leadership in this area.
- Other relevant international governance regimes are the UN Convention against Corruption (UNCAC), the only legally binding anti-corruption instrument, and the OECD Convention on Combatting Bribery of Foreign Public Officials in International Business Transactions. UNCAC’s far-reaching approach includes a chapter on asset recovery, aimed at returning assets to their rightful owners, including countries from which they had been taken illicitly. The vast majority of United Nations Member States are parties to the Convention. The UK Government believes that UNCAC’s provisions are wide-ranging enough to tackle corruption but that implementation needs to be strengthened. The UK and allies have advocated increased transparency and civil society participation in monitoring implementation of UNCAC commitments. Additionally, the UN Sustainable Development Goals, which all countries have signed up to, include a target on reducing illicit financial flows and corruption under Sustainable Development Goal 16, on Peace, Justice and Strong Institutions.
- The Government also coordinates with international partners in other major international fora and with key multilateral bodies to further support global implementation of the FATF standards and to tackle illicit finance. This includes multilateral initiatives at the G7, G20, the IMF, the World Bank, the OECD, and at the UN. For example, the UK has long supported efforts by the IMF to ensure transparency in the use of emergency financing programmes, and has collaborated with international partners at the OECD to tackle tax evasion.
- The Government also works closely with key international partners including the US, other G7 partners, and the UAE, on a bilateral basis to tackle common challenges, to exchange best practice, and to share intelligence. In 2021, the Prime Minister and President Biden reaffirmed in the renewed Atlantic Charter their shared commitment to working together to tackle illicit finance. The Prime Minister made ambitious commitments to strengthen the UK’s response to illicit finance at the US’s Summit for Democracy which saw 58 countries make similar commitments. This commitment recognised the well-established, deep, and productive relationship between the UK and the US to tackle illicit finance. Numerous agencies from across the UK and US Governments cooperate regularly on operational, policy, and strategy matters.
- Last year, the UK and the UAE launched the Partnership to Tackle Illicit Financial Flows. The Partnership is part of the Partnership for the Future launched by the Prime Minister and Crown Prince of Abu Dhabi Mohammed Bin Zayed. The Partnership to Tackle Illicit Financial Flows, led at ministerial level by the Home Secretary and the UAE’s Minister of State Ahmed Ali Al Sayegh, brings together government departments, regulators, and law enforcement agencies from across the UK and UAE to progress a jointly agreed strategy for achieving yet stronger cooperation, collaboration and exchange of best practice, given our common positions as financial centres exposed to international risks and shared threats.
- At home, the Government’s overall strategic approach to tackling illicit finance is through the delivery of the Economic Crime Plan, which is underpinned by seven strategic priorities, one of which is to deliver an ambitious international strategy to enhance security, prosperity, and the UK’s global influence. This approach to tackling international illicit finance includes a range of multilateral and bilateral workstreams led jointly by departments and agencies across government, aimed at driving up implementation of international standards, improving our understanding of the risks we face from international illicit finance, and ensuring that work to counter these risks delivers broader UK objectives, including foreign and security policy objectives.
How effective are the UK’s sanctions regimes on corruption and human rights?
- The UK is committed to using our autonomous sanctions to send the clearest possible message that the UK is not a safe haven for those involved in serious corruption or human rights violations and abuses. The UK has established sanctions regimes to counter corruption and human rights violations and abuses, namely the Global Anti-Corruption (GACS) and Global Human Rights (GHR) sanctions regimes, which provide Government the powers to impose asset freezes and travel bans on individuals and entities in response respectively to serious corruption, and serious violations or abuses of human rights around the world. The Government has designated 27 individuals involved in serious corruption since GACS’ creation in April 2021, and 81 individuals and entities under GHR since its launch in July 2020.
- The UK has also imposed sanctions in response to human rights violations under a range of other sanctions regimes, Libya, Myanmar, Nicaragua, Syria, Zimbabwe, and Belarus. The UK’s Libya sanctions regime also gives the UK the power to impose sanctions for the misappropriation of Libyan state funds.
- On corruption specifically, the purpose of the GACS regime is to prevent and combat serious corruption around the world. The activities covered are bribery and misappropriation, plus a range of different kinds of involvement in such bribery or misappropriation. For example, a person can be sanctioned if they conceal or disguise – or facilitate the concealment or disguise of – serious corruption or its proceeds, or transfers or converts any proceeds from serious corruption.
- GACS has enabled the UK to target individuals involved in corruption cases recognised as some of the most serious internationally: for example, those involved in the misappropriation of $230m of Russian state property through the fraudulent tax refund scheme uncovered by Sergei Magnitsky (a whistle-blower who later died in Russian state custody); Ajay, Atul, and Rajesh Gupta and their associate Salim Essa for their roles in serious corruption in South Africa, involving the misappropriation of property; and ‘Al Cardinal’, for his involvement in the misappropriation of significant amounts of state assets in South Sudan.
- The Global Human Rights sanctions regime gives us a powerful tool to hold to account those involved in serious human rights violations or abuses. The rights included are: an individual’s right to life; right not to be subjected to torture or cruel, inhuman, or degrading treatment or punishment; and right to be free from slavery, not to be held in servitude, or be required to perform forced or compulsory labour.
- Under the GHR sanctions regime, the Government has sanctioned those involved in some of the most serious human rights violations or abuses worldwide. This includes: 20 Saudi intelligence and government officials involved in the brutal murder of Jamal Khashoggi; two DPRK entities involved in the forced labour, torture and murder that takes place in North Korea’s gulags; and four Chinese officials and one entity involved in serious human rights violations in Xinjiang.
- Civil society is an important partner on both the GACS and GHR regimes and FCDO officials regularly engage with leading NGOs in the fields of anti-corruption and human rights. We have published policy notes setting out factors that are likely to be relevant to the consideration of designations under GACS and GHR, as well as Information Notes aimed at helping support NGOs engage with Government on GACS and GHR.
- These sanctions send a clear message that the UK is not a safe haven for those individuals and entities involved in serious corruption or serious human rights violations or abuses, including those who profit from such activities. UK nationals and companies, wherever they are in the world, are prevented from dealing with funds or economic resources in relation to anyone who is designated. If they wished to do so in future, designated individuals would not only be barred from entering the country, they would also have their assets here frozen and be prevented from having unfettered access to any funds and economic resources.
- The freezing of financial assets of persons involved in serious corruption provides a deterrent to those involved. Protecting the integrity of the UK financial system is a fundamental interest of the UK. It is, furthermore, in the interests of the UK that persons who have been involved in serious corruption outside the UK should not be permitted entry to the UK, nor should the financial capital of such persons or financial capital that might have been accrued from such activities be held or invested in the UK.
- Those involved in corruption often value their ability to travel abroad and move money across borders, including to the UK. In preventing corrupt actors’ ability to enjoy access to the UK in these ways, targeted sanctions can reduce incentives to engage in corruption, in particular but not limited to those who have a valued connection to the UK.
How could sanctions be used to greater effect in countering illicit finance?
- The UK has taken unprecedented sanctions action in response to Russia’s invasion of Ukraine. We have worked in partnership with our allies to introduce the largest and most severe economic sanctions that Russia has ever faced, including asset freezes on major banks, a prohibition on clearing for Sberbank, and the removal of selected banks from SWIFT. We have cut off Russian banks with global assets of £500 billion as well as the central bank in Moscow. Over 3 million Russian companies are now barred from raising money on UK capital markets. As of 24 March, the UK has sanctioned over 1,200 individuals, entities and subsidiaries. This includes 75 oligarchs and family members with a combined net-worth well in excess of £150 billion.
- As the ‘Moscow Gold’ report highlights, sanctions are most effective when allies work together to target an individual’s wealth spread across multiple jurisdictions, to constrain their ability to carry out unacceptable behaviour, or to send a political signal that such behaviour is unacceptable. This is why international cooperation remains at the heart of UK sanctions policy. For example, in December last year, we imposed our fifth tranche of Belarus sanctions in coordination with the US, EU and Canada. The UK also recently welcomed Australia’s modernised autonomous sanctions regime and committed to increase sanctions collaboration bilaterally. The UK’s new urgent designation procedure will enable the closest possible international response. The announcement of the Russian Elites, Proxies, and Oligarchs Task Force is another important step forward in ensuring the effective implementation of financial sanctions on Russian elites and oligarchs that will further drive collective efforts to tackle Kremlin-linked illicit finance.
- We are working through the G7 to coordinate our approach to imposing economic sanctions. The G7 represents over half of global net wealth, giving us huge economic power and leverage, and many of the world’s major liberal democracies. The 24 March G7 Leaders statement announced new trade measures to hold Russia accountable for its continued assault on Ukraine and deny it access to the rights and benefits of WTO membership via its MFN (Most Favoured Nation) status. This unity is integral to the UK’s approach to sanctions.
- In 2018, the Financial Action Task Force gave the UK the highest possible rating for its work promoting the implementation of financial sanctions against terrorism and the proliferation of weapons of mass destruction. The US is currently the only other country in the world to achieve these ratings. The report also commended the UK’s Office of Financial Sanctions (OFSI) for its “extensive outreach” and issuance of “useful guidance”, as well as noting that the introduction of powers to impose monetary penalties has had “a substantial deterrent effect”.
- OFSI has, since 2017, imposed a number of monetary penalties, including a £20.7m penalty against Standard Chartered Bank following breaches of Russia sectoral sanctions. OFSI regularly reviews its processes and structures as part of its continuous development and engages with UK firms and international partners to improve its effectiveness and to strengthen implementation of financial sanctions in the UK.
What other measures beyond sanctions can counter illicit finance, including bilateral and multilateral approaches?
- Sanctions are just one tool that the UK has at its disposal. The impact of sanctions will be greatest when used as part of a broader approach in support of foreign policy and national security objectives, and as part of a country’s wider national framework for tackling illicit finance.
- Broader measures to tackle illicit finance beyond sanctions include: understanding risk at national and sector level and setting national policies to tackle identified risks; preventive measures such as regulation and supervisory systems to create regulatory perimeters and reduce criminal access to the financial system; intelligence sharing measures to improve sharing of financial information and intelligence between and amongst the public sector and the private sector; and criminal justice measures to pursue criminals domestically and overseas and confiscate their ill-gotten gains wherever they are located.
- The UK’s entire anti-money laundering and counter terrorist regime, covering each of these measures mentioned above, is jointly overseen by HM Treasury and Home Office, and is designed to work as a cohesive whole.
- Recognising the international nature of illicit finance and the UK’s international presence and exposure, the UK complements its domestic efforts through engagement with other jurisdictions, including: strategic engagement with key countries to share best practice and agree common strategies for addressing shared threats; and bilateral operational cooperation such as the provision of mutual legal assistance and law enforcement information exchange. For instance, the Overseas Territories (OTs) and Crown Dependencies (CDs) cooperate fully with the UK authorities and are committed to meeting international standards on taxation, fighting financial crime and countering terrorist finance. The OTs and CDs share confidential information on company beneficial ownership and tax information on corporate and legal entities incorporated in the OTs and CDs with UK law enforcement bodies and tax authorities to support investigations in almost real time under the Exchange of Notes Arrangements. A statutory review in 2019 highlighted the value of this cooperation and found the arrangements are working well. Information provided by the OTs has enabled the seizure of illicit funds, including information to support the NCA’s first Unexplained Wealth Order.
- We recognise that the use of shell companies and complex corporate ownership structures is a key enabler of the circumvention and contravention of sanctions and enabler of illicit financial flows. This is why we have prioritised bringing greater transparency to the ownership of corporate entities in the UK. The UK was the first country in the G7 to implement a public register of people with significant control over companies. Royal assent of the Economic Crime Act on 15 March has paved the way for the introduction of a new register requiring information about overseas companies owning or buying property in the UK. This will reveal the true owners of property to Companies House and provide more information for law enforcement to help them to track down those using UK property as a money laundering vehicle. Further legislative measures will be introduced later this year that will deliver fundamental reform of Companies House to clamp down on money laundering and fraud.
- All of the OTs and CDs have agreed to introduce publicly accessible registers of who ultimately owns companies registered there. The Government welcomes this action; it is an important step and demonstrates that the CDs and OTs are responding positively to the changing UK and global norms on corporate transparency. The Government expects all OTs to have the registers in place by the end of 2023; in doing so these commitments will exceed Financial Action Task Force standards and put them ahead of most jurisdictions. This is in line with the Government’s call to make beneficial ownership transparency a global norm by 2023. The FCDO provides technical support to the OTs to roll out publicly accessible registers of beneficial ownership, part of which includes support delivered through Open Ownership.
- The UK’s National Crime Agency (NCA) also draws on the use of asset denial tools to counter illicit finance, and has successfully used civil and criminal powers to target illicit finance relating to corrupt ‘politically exposed persons’ (PEPs). For example, Account Freezing Orders (AFOs) were used in two separate cases involving Azerbaijani PEPs to freeze money in bank accounts. Both interventions ultimately led to the successful recovery of money (£5.6m and £4m respectively). Both of these cases involved the laundering of funds via the ‘Azeri laundromat’, whereby the ‘recovered funds’ were laundered via complex networks of shell companies that operated bank accounts in Estonia and Latvia. In addition, the NCA’s new ‘Combatting Kleptocracy Unit’ will grow the operational capability combatting serious and organised crime, by: targeting corrupt elites through their assets in the UK; targeting the professional enablers of these corrupt elites; and supporting criminal cross-HMG sanctions delivery and enforcement.
- The NCA has also used Unexplained Wealth Orders (UWOs) on two occasions as an investigative tool to establish the provenance of assets believed to have emanated from corrupt PEPs. However, these tools, as with AFOs, are still relatively new, and the unsuccessful outcome in NCA versus Baker and Others, where the UWO was discharged by the Court, highlights some of the risks in these cases. Building on this, the Government is bringing forward legislation this year that will enable more corrupt oligarchs to be handed UWOs.
a) What is the potential impact of new distributed ledger technologies and digital currencies (both cryptocurrencies and central bank digital currencies)?
b) On illicit finance and money laundering?
c) On the UK’s international relations and economic security?
d) What steps has the Government taken to assess this potential impact and determine the most appropriate UK response?
Overview of distributed ledger technologies and digital currencies:
- A distributed ledger is a database that can be shared across a network of multiple sites, geographies or institutions. It is ‘shared’ because all participants within a network have their own identical copy of the ledger (database), without any one participant holding the master copy. It can potentially be used for documenting and transferring financial, legal, physical, or digital assets peer to peer. Security and accuracy are maintained cryptographically using ‘keys’ and signatures to control who can do what within the ledger, and fingerprints of the data to prevent changes to the shared history. Many proposed applications exist for distributed ledger technologies (DLTs). Common examples include financial and legal transactions, and there are also prototypes tracking goods or aid disbursements.
- DLTs also underpin most virtual currencies (e.g., cryptocurrencies or cryptoassets), which are defined as a cryptographically secured digital representation of value or contractual rights. Virtual currencies can be transferred, stored or traded electronically. Cryptoassets use cryptographic processes (such as blockchain) to secure and authenticate transactions, rather than a trusted central authority like a bank or a payments clearing service. Cryptoassets continue to grow in value, and ownership of DLT-based cryptoassets has notably broadened since 2019, including both widespread low-value speculation by private individuals, and large value holdings by financial institutions.
Answering sub-question 1 (“What is the potential impact of new distributed ledger technologies and digital currencies… on illicit finance and money laundering?”) and sub-question 3 (“What steps has the Government taken to assess this potential impact and determine the most appropriate UK response?”) together:
- The UK’s 2020 National Risk Assessment (NRA) for Money Laundering and Terrorist Financing found that the risk of money laundering through cryptoassets increased between 2017 and 2020, with criminals increasingly using and incorporating them into their money laundering methodologies. The NRA also found that the infrastructure supporting cryptoasset use has expanded considerably in recent years and remains vulnerable to abuse by criminals seeking to clean funds through the purchase and exchange of cryptoassets. The 2020 NRA thus increased the level of risk of abuse of cryptoassets for money laundering from low to medium. Given the rapid pace of development in this sector and the growing use of new technologies to launder criminal finances, the Government is paying close attention to the crypto sector. The NCA’s current view is that the use of cryptoassets to launder money has increased across several crime types, and that broader adoption of cryptoasset technology by mainstream financial services will potentially provide a larger market for criminal exploitation and movement of criminal funds.
- To address these emerging threats, the Government has taken a number of steps based on international standards agreed at the Financial Action Task Force (FATF). From January 2020, we brought cryptoasset exchange providers and custodian wallet (a digital wallet in which the private keys to the cryptoassets are held by an individual or third party) holders in scope of the UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 regulations. From this date, UK cryptoasset businesses (specifically, cryptoasset exchange providers and custodian wallet holders) were required to comply with the Money Laundering Regulations and register with the Financial Conduct Authority (FCA) as the anti-money laundering and counter terrorist financing (AML/CTF) supervisor for these types of firms.
- Cryptoasset firms in the UK must each conduct a money laundering and terrorist financing risk assessment, implement risk-based systems, policies, controls and procedures, carry out appropriate customer due diligence checks, and report suspicious activities to the authorities. As of January 2021, existing cryptoasset firms which had applied before 16 December 2020 have been granted temporary registration to continue trading until 31 March 2022. New businesses (which began operating after 10 January 2020), are required to obtain full registration with the FCA before conducting business.
- In order to properly assess whether a cryptoasset firm meets the requirements for registration set out in the Money Laundering Regulations, the FCA is required to assess whether a firm and its officers, managers or beneficial owners are “fit and proper” with regard to the risk of money laundering or terrorist financing. In order to ensure that an applicant meets this test it has been necessary, in some cases, for the FCA to request additional information from the firm, as many applications contained insufficient supporting information and evidence.
- The FCA has published a list of unregistered cryptoasset businesses on its website and is considering further interventions on such firms. The FCA advised customers of cryptoasset firms which should have applied to the FCA, but had not done so, to withdraw their cryptoassets or money before 10 January 2021.
- We know that we must go further to strengthen our response to the illicit finance risks presented by cryptoassets. HM Treasury is currently considering responses to a consultation on a specific set of amendments to the UK’s Money Laundering Regulations, which include proposals to implement the Financial Action Task Force’s ‘travel rule’, and will publish a response in due course. The travel rule extends the information sharing and record keeping requirements that apply to bank transfers to transfers of cryptoassets (to require the exchange and storage of information on the originator and beneficiary of a virtual asset transaction), to assist in the prevention and detection of money laundering. The NCA also support current Home Office proposals to amend civil powers in Proceeds Of Crime Act (POCA) Part 5, to broaden the circumstances for seizure powers on cryptoassets, expand existing powers to enable officers to recover cryptoassets, and provide other technical provisions.
- The UK is also actively engaging in discussions to ensure a global response to the risks posed by cryptoassets at the Financial Action Task Force and bilaterally. This includes engaging with international partners on the use of cryptoassets as a method of payment in ransomware incidents. The UK is leading the illicit finance aspect of the US’s Combatting Ransomware Initiative, which has included discussions on public-private collaboration to improve understanding of the threat of ransomware attacks and sharing experiences in regulation and supervision of cryptoassets.
- The Government’s focus to tackle illicit finance in this area is enhanced by the National Economic Crime Centre (NECC), housed within the NCA. The NECC continues to help build a better understanding of the illicit finance threat to the UK, which informs the UK response. In the last year, the NECC has driven the response to two major cross-cutting threats impacting the UK: Cash Based Money Laundering (CBML) and High-End Money Laundering (HEML). Whilst the amount of money laundered in the UK is likely to have increased as a result of predicate crime increases, COVID-19 restrictions have made it harder to launder cash, accelerating the criminal use of other methods such as cryptoassets. Conversely, unlike cash based money laundering which is predominately linked to UK based criminality, albeit some with international links especially drugs, HEML often represents the proceeds of international criminality, particularly embezzlement by Politically Exposed Persons and grand corruption, as well as illicit financing linked to Hostile State Activity.
- The NCA’s view based on operational experience to date is that the following vulnerabilities present the highest HEML threat: cryptoassets; abuse of UK corporate structures; professional enablers; Trust and Company Service Providers (TCSPs); abuse of the banks and other financial institutions; trade based money laundering (TBML); abuse of Tier 1 investor visas; and money laundering through the capital markets and jurisdictions of risk. Additionally, further legislative measures will be introduced as part of a wider bill later this year to safeguard and support the UK’s open economy, whilst cracking down on people abusing that openness. Measures will include new powers to seize crypto assets from criminals.
Answering sub-question 2 (“What is the potential impact of new distributed ledger technologies and digital currencies…On the UK’s international relations and economic security?”) and sub-question 3 (“What steps has the Government taken to assess this potential impact and determine the most appropriate UK response?”) together:
- The impact of Distributed Ledger Technologies on international relations depends on how they are configured and used. For example, DLTs can help individuals to circumvent globally regulated systems, and enable anonymity, or they can help confirm identities and track ownership. Certain cryptoassets, which offer new ways to transact and invest, are part of a trend of rapid innovation in financial technology and are likely to grow in prominence in the future. For example, we recognise that Central Bank Digital Currencies (CBDCs) issued by other governments present both opportunities and risks for the UK.
- Under certain circumstances, CBDCs and other ‘stablecoins’ may offer some new benefits to users, such as a lower cost of payments. These benefits might encourage households and businesses to adopt a different currency than their own national currency in transactions, particularly in developing economies. This could also bring risks, including reducing the ability of national authorities to conduct monetary policy. However, stablecoins or foreign CBDCs seem unlikely to upend the strong network effects that maintain ‘dollar dominance’ in international transactions. Around 60% of foreign exchange reserve assets are denominated in dollars. Approximately 50% of global trade is invoiced in dollars. Many commodity markets, including the oil and gold markets, are principally denominated in dollars. HM Treasury and the Bank of England continue to maintain the integrity and stability of the UK’s monetary system. Along with the FCDO, they monitor risks arising from changing international currency patterns.
- The FCDO has been actively exploring DLT-based solutions in a range of international development use cases to learn more about how they could solve problems. There is potential for DLTs to improve trade facilitation and supply chain resilience. This in turn could improve supply chain transparency and help enforce sanctions and supply chain standards. There is an opportunity for the UK to lead in the development of these technologies, but this is a competitive space.
- In 2021, the FCDO ran a Regulatory Diplomacy campaign to better understand how countries are applying DLTs, and how they are regulating or governing the development of these applications. The FCDO also has a number of existing and planned pilots in this space, such as tracking UK aid payments through delivery chains to improve transparency of aid flows and better mitigate risks, and exploring ways to share aid worker credentials between employers to tackle sexual exploitation and abuse in the aid sector.
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?
- The UK and its allies face continued and wide-ranging hostile activity from foreign intelligence agencies and others, who seek to compromise our national security. When it comes to investment, we are seeing novel means to undermine the UK’s national security that go beyond traditional mergers and acquisitions, such as structuring deals to obscure who is behind them. Such behaviour, left unchecked, can leave sensitive UK businesses vulnerable to disruption and espionage.
- The National Security and Investment (NSI) Act 2021 updates and strengthens the Government’s powers to investigate and intervene in potentially hostile investment, including from foreign states. Acquisitions are dealt with on a case-by-case basis. No one country or company is designated as ‘high-risk’. Ultimately the UK will continue to act where any economic actors threaten our national security, and we will continue to work closely with our allies to do so.
- The Government uses immigration powers to protect the UK from a range of national security threats, including the threat posed by illicit finance. Where appropriate, this includes depriving individuals of their British citizenship and excluding foreign nationals from the UK whose presence here would not be conducive to the public good.
- On 17 February, the Home Secretary closed the Tier 1 Investor visa route to all new applicants from all nationalities with immediate effect. It has been under constant review, particularly because some cases had given rise to security concerns, including people acquiring their wealth illegitimately and being associated with wider corruption. Changes were made to the route in 2014, 2015, and 2019 to reduce the exposure of the route to illicit finance, but the evidence suggests those reforms did not go far enough to ensure our approach to investment within the migration system was safe, and sustainable, and provided genuine value to the UK economy.
- On Russia specifically, we are well aware that individuals with links to the Russian state may seek to further their reputation and influence within the UK through strategic investments. We continue to look in close detail at the nature of these relationships; the intentions of these individuals; the ‘professional enablers’ (individuals or entities) facilitating corrupt elites; in addition to what that money can be and is being used for within the UK. Separate from NSI Act, the package of sanctions rolled out by the UK Government in response to Russia’s invasion of Ukraine represents the strongest economic measures the UK has ever enacted against Russia, hitting banks, companies and oligarchs at the heart of Putin’s regime.
- The UK is balancing its response to these risks against the opportunities. As set out in the Integrated Review, while the UK will maximise the contribution of foreign direct investment (FDI) to economic growth across the UK, we will intervene where necessary and proportionate in FDI transactions to protect national security, under the NSI.
How, and how effectively, does the FCDO co-ordinate with other UK government departments and agencies to respond to illicit and emerging finance?
- The FCDO is part of well-established cross-departmental governance for tackling illicit finance and economic crime, centred around the Economic Crime Plan. FCDO Ministers are invited to the Ministerial Economic Crime Strategic Board, inputting to the international dimensions of the agenda. Senior FCDO officials are part of the cross-government Economic Crime Delivery Board. Underpinning that, the FCDO co-chairs the International Illicit Finance Working Group, alongside the Home Office and HM Treasury.
- Across the FCDO network, there are counter illicit finance advisors posted to priority jurisdictions to coordinate the UK Government response to international illicit financial flows and to identify emerging trends and opportunities to engage with likeminded partners. The FCDO works closely with the National Crime Agency (NCA), including working on joint assessments and previously seconding staff into the NCA’s National Economic Crime Centre (NECC) to ensure closer engagement on shared priorities.
- The FCDO also works closely with the Joint Anti-Corruption Unit (JACU) in the Home Office. JACU has a remit to coordinate HMG on both domestic and international anti-corruption issues. JACU leads the UK’s Anti-Corruption Strategy 2017-2022, which provides a framework for HMG action to tackle corruption internationally and domestically. The Government has announced it will develop a successor to the current strategy.
To what extent does the FCDO participate in multilateral forums such as the Financial Action Task Force?
- On FATF issues specifically, HM Treasury leads the UK delegation to the Financial Action Task Force (FATF) and is responsible for HMG’s FATF strategy and policy. The UK’s delegation regularly includes AML/CTF experts from across departments and agencies and meets key decision makers in the world’s major financial centres – largely from other finance ministries – at the FATF to ensure that its standards for anti-money laundering, counter terrorist financing and counter proliferation financing remain robust and responsive to new and emerging threats and are fully implemented around the world. HM Treasury is supported by the FCDO in addressing FATF issues, including by the FCDO providing insights from UK overseas missions on relevant illicit finance developments and engaging with authorities in host countries responsible for tackling illicit finance. HM Treasury and the FCDO also work together in the provision of technical assistance to help support fuller implementation of the FATF standards worldwide; FCDO missions have supported HM Treasury’s new technical assistance unit to establish new programmes.
- On anti-corruption, the FCDO works closely with JACU to develop and deliver UK objectives in relevant multilateral and international fora, including the Conference of State Parties to the UN Convention Against Corruption, OECD, G7 and G20. FCDO officials have been part of the UK delegation to the Conference of State Parties to UNCAC, delivering progress on issues critical to illicit finance such as beneficial ownership transparency and asset return. The FCDO played a leading role, along with JACU, in G7 commitments on illicit finance and anti-corruption in the UK’s G7 Presidency in 2021.
What skills and expertise does the FCDO need to respond to the challenges and where are these lacking?
- In 2019 DFID established a small team of illicit finance experts based in priority countries and emerging global financial centres. These experts come from a range of backgrounds bringing operational expertise on illicit finance, international development, international engagement, law enforcement and policy development. They work closely with development experts, governments, private sector, civil society and international donor partners to identify threats to UK interests (domestic and international), and opportunities for engagement with key partners, and to coordinate support for priority countries from across government.
- This network works hand in hand with ‘SOCnet’, the UK’s Overseas Serious and Organised Crime Policy Network. SOCnet is jointly owned by the FCDO and the Home Office, and promotes a coherent international community response to SOC and illicit finance, addressing underlying enablers and drivers by bringing together UK diplomatic, programmatic, and strategic operational work. The network includes a cadre of illicit finance experts, based in global financial centres across key jurisdictions. From 1 April, SOCnet, previously funded by the CSSF, will be administered by the FCDO, working closely with the Home Office. The illicit finance cadre come from a range of HMG backgrounds bringing policy and operational expertise on illicit finance. They work closely with governments, the private sector, civil society, and NGOs in country to ensure a holistic response to illicit finance through partnership working, and strengthening the knowledge base on illicit finance which feeds back into central government.
- The FCDO has integrated illicit finance as a priority for the overseas diplomatic and development network – increasing the reach and coherence of the Government’s offer on illicit finance by building a stronger international political consensus for tackling illicit finance, promoting a strategic HMG approach to multilateral influencing, and enabling cross-Whitehall access to policy expertise on international illicit finance – through staff expertise and use of programme resources. The FCDO will continue to work to strengthen its response on this agenda, with a view to ensuring that the requisite skillsets for addressing emerging digital and crypto technologies are used in order to address their role in facilitating illicit finance and corruption.
What skills on illicit finance has the FCO merger with DFID brought, and how are these skills being exploited?
- The FCDO merger has brought together the skills and expertise of former-DFID and former-FCO in addressing transnational and cross-border corruption. The UK has led internationally on addressing corruption and illicit finance for many years, for example at the London Anti-Corruption Summit in 2016. The UK pioneered an international approach to corruption and illicit finance, recognising the importance of its own domestic policies as a global financial centre, and the need for action by rich countries to avoid providing a safe haven for proceeds of corruption from other countries.
- FCDO inherits the world-class skills of the UK’s diplomatic service, the internationally respected advisory cadres from former-DFID and geographic and thematic research analysts from the FCO. The advisory cadres consist of specialists embedded in country and headquarter teams and provide FCDO with specialist knowledge and advice on a wide range of technical areas. Of most relevance to anti-corruption and illicit finance is the governance cadre, not least because the evidence is clear that corruption and illicit finance are political, as well as technical, problems. The combined political expertise of the diplomatic service and this cadre equips the FCDO with the necessary skills to analyse and develop politically smart strategies to tackling corruption and illicit finance, and to demonstrate leadership in joint action, both internationally and in priority countries. Other FCDO cadres with specialist knowledge relevant to the complex areas of illicit finance and anti-corruption include the conflict, economic and private sector cadres. In addition the FCDO Office for Conflict, Stabilisation and Mediation holds a Civilian Stabilisation Group roster of about 30 skilled illicit finance experts it can draw upon to assist HMG in responding to the impact of illicit finance on conflict and instability. The FCDO merger has strengthened our ability to exploit the comparative advantages of these skills and ensure they work together as a coherent whole. We actively deploy this expertise to collaborate with, and enhance, wider HMG activity on illicit finance, at country, regional and central levels.
- FCDO has considerable skills and expertise in research and evidence, drawing on the former DFID’s research and evidence investments and expertise, and the knowledge, skills, and long-term institutional memory of former FCO research analysts. These skills and capabilities continue to play a critical advisory role in the FCDO. DFID was one of the major international funders of research and evidence on anti-corruption, a legacy that is continuing under the FCDO. For example, the flagship and internationally respected Anti-Corruption Evidence programme continues to generate a large body of influential evidence on what works to tackle corruption, both internationally and in countries. In addition, teams within FCDO Research and Evidence Directorate regularly commission external research on corruption and illicit finance, working closely with the research analysts and advisory cadres to amplify evidence uptake and impact. All this work is informing both policy and programmatic responses to tackling transnational corruption and illicit finance.