oDR: Analysis

These are the changes the UK must make after the Pandora Papers

Exclusive: After leaked offshore data exposed secrets of the ultra rich, experts accuse British government of not doing enough to tackle illicit finance

Thomas Rowley
4 October 2021, 1.26pm
The City of London
(c) Dominic Lipinski/PA Wire/PA Images. All rights reserved

Most of us already knew the ultra-rich lived according to their own rules, swaddled from scrutiny and anger by an industry of lawyers, accountants and other middle-men.

What we didn’t know was the ever-expanding scale of it – and how exactly the UK facilitates attempts to hide and launder their funds.

This is what comes out of the Pandora Papers, the latest revelations from the International Consortium of Investigative Journalists. Now we know, for example, that the ruling family of Azerbaijan owned, at their recent peak, £429m of property in central London. The Aliyevs later sold part of that property empire to the Crown Estate for £67m.

If you’ve ever felt uncomfortable walking through the centre of the British capital, conscious that it was owned by another class entirely, the Pandora Papers are an unsettling reminder that our country’s ruling class has long mingled with their international counterparts. It’s no longer a surprise that Roman Abramovich, the Russian oligarch, is currently using the same law firm as the Queen to sue a journalist in the High Court.

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“The Pandora Papers have to be a moment where the UK government is asked: are you serious about tackling illicit finance or not?”

Our country’s imperial structure has discretion and secrecy baked into it. But what needs to change in the UK in order to stop this? The UK government has sought to provide some technical measures, including draft legislation for an overseas property transparency register, Unexplained Wealth Orders and draft reform of Companies House, the UK’s corporate registry. Yet none of these ‘fixes’ appear to be a priority.

In 2018, the UK government published draft legislation on setting up a register of overseas entities and their beneficial owners – in response to the lack of transparency on owners of UK property and its potential for money laundering.

But since then, it’s lain dormant, says Steve Goodrich, lead researcher at Transparency International UK, who argues that “heel-dragging in Whitehall” has left the UK’s housing market open to “criminal wealth”.

“It’s been five years since the UK government committed to shining a light on who owns UK property via secretive offshore companies, yet this reform is yet to move beyond a draft bill,” Goodrich said. “Although the UK talks a good talk on tackling illicit finance, these words ring hollow without delivering action.

“We see no reason why an overseas property transparency register shouldn’t be before Parliament by Christmas,” he said.

The draft register may require further work, says Richard Smith, who researches abuse of corporate entities around the world. He believes the draft register risks repeating existing problems with UK legislation on beneficial owners for companies – such as powers of verification of beneficial owners. The draft overseas register, Smith says, provides for companies themselves to be owners of UK property, skirting the need for individuals to reveal their assets.

“There is currently nothing to stop an overseas entity being owned by a UK company or Scottish Limited Partnership,” Smith said. “The whole thing is built on sand.”

A London address listed as belonging to Zamira Hajiyeva, the wife of the former chairman of Azerbaijan's largest bank. Haijyeva was the first high-profile recepient of an Unexplained Wealth Order
(c) REUTERS / Alamy Stock Photo. All rights reserved

Likewise, Companies House currently has no means of verifying who owns UK-incorporated companies, and relies on what is often referred to as an ‘honesty box system’: companies declare beneficial owners, but in certain cases these turn out to be nominee directors or, indeed, holding companies. The UK government has promised to reform Companies House, including awarding it investigatory and verification powers, but there is currently no timeline set for it.

Smith also points to the fact that, under the proposed overseas property register, a beneficial owner has to meet a threshold of 25% control – this means, he says, it’s possible for ownership to be “sliced up” between companies, avoiding an individual having to declare ownership.

“If the overseas property register is enacted without significant changes to the definition of beneficial ownership, it will also fail,” Smith said.

Unexplained Wealth Orders (UWOs) were also introduced in 2018, and are designed to help the UK authorities identify assets purchased with illicit funds. But while there were initial loud applications for UWOs – for example, over the sources of the wealth of Zamira Hajiyeva, the wife of a jailed Azerbaijani banker – there have been no new UWOs since July 2019.

Susan Hawley, executive director of Spotlight on Corruption, says that while there were initial successes with UWOs that “highlighted the UK’s dirty money problem”, the individuals targeted have been “incidental”, i.e. people out of political favour or deemed easier targets.

On UWOs, Goodrich says that while it’s clear “the UK isn’t quite tough enough to take on those with serious money”, it’s also an issue of stretched resources for UK law enforcement.

“Using an UWO is also a tactical decision for law enforcement,” he said.

“The UK isn’t quite tough enough to take on those with serious money”

Perhaps most pressingly, the Pandora Papers have highlighted the role of lawyers, bankers, accountants and other corporate professions that service the ultra rich – and the lack of real oversight for them.

A review in September 2021 by the Office for Professional Body Anti-Money Laundering Supervision (OPBAS) highlighted potential failings by the professional bodies meant to supervise the UK’s lawyers, accountants and related professions. OPBAS is part of the Financial Conduct Authority, and was set up to strengthen the UK’s anti-money laundering powers.

Though the review said the sectors’ were “generally compliant with the technical requirements”, it noted some potentially alarming trends.

For example, OPBAS noted that 81% of professional bodies in the sector did not have an “effective risk-based approach to supervising their members”, and that 50% of them “failed to ensure” timely action on correcting gaps in their members’ anti-money laundering practices.

Beyond this, Hawley, from Spotlight on Corruption, notes that somewhere around a third of professional bodies in the sector suffers from a conflict of interest – they have failed to separate their advocacy functions from their regulatory powers – which lessens their ability to maintain standards and ethics for their members.

“Ideally, OPBAS would be a supervisor of all supervisors, including HMRC and the FCA, and one that would actually name and shame when supervisors are not pulling their weight, including taking disciplinary action,” said Hawley.

It’s also a resource issue, said Hawley: there are 25 different professional bodies that cover professions with anti-money laundering requirements. The UK government is considering how to consolidate anti-money laundering functions across the sector into a single professional supervisor – and the latest revelations could provide stimulus to this idea.

“The Pandora Papers have to be a moment where the UK government is asked: are you serious about tackling illicit finance or not?” Hawley said.

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