How FinCen leaks expose London as a money-laundering hub

A few years ago when the Italian mobsters decided to register a company in the UK to move their illegal funds, they didn’t bother themselves with too much detail. 

They registered a company called Magnolia Fundaction UK and nominated  a director with an Italian name II Ladro di Gailline, which translated into “The Chicken Thief”. If that wasn’t enough, they mentioned his profession as a tuffatore, which means a ‘fraudster’. 

Another director registered his address in Italian that translated into “0, Street of the 40 Theives” in some fictional Italian city of “Ali Babba”.  

Over the years, journalists and NGOs have highlighted the ease with which people can register companies in the UK without drawing attention of the regulators. 

Take another example: Oliver Bullough, an investigative journalist, exposed the vulnerability of the system by registering a company named ‘Crooked Crook Crook Limited’. No one flagged the name and he received the relevant documents in 36 hours. 

The recently leaked documents of the Financial Crimes Enforcement Network (FinCEN), an arm of the US Treasury, has once again highlighted the role of the UK's financial system in helping money launderers. 

The leaks are based on Suspicious Activity Reports (SARs), which some of the leading global banks filed with FinCEN between 1999 and 2017. Banks file SARs if they suspect that a transaction can violate a law - especially the US regulations for sanctions.

More than 3,200 companies, which surfaced in the SARs were registered in the UK - more than any other country. 

Most of them are shell companies. A shell company is a fictitious entity, which basically exists on paper. Although some businesses use them for legitimate purposes, they also work as a conduit to hide ill-gotten wealth. 

Shell companies are often a way to obscure the source of money made from bribery, embezzlement, kickbacks and political donations. 

A joint study by the World Bank and the UN Office of Drugs and Crime analysed 213 big corruption scandals and found that shell companies had a role in 70 percent of the cases. 

That the UK has surfaced so prominently in the FinCEN leaks wouldn’t come as a surprise for experts who have been voicing concern over the lax British regulations for years. 

“The modern offshore system did not start its explosive growth on scandal-tainted, palm-fringed islands in the Caribbean or in the Alpine foothills of Zurich or Geneva. It began its life in the City of London,” Nicholas Shaxson wrote in his book the “Treasure Islands.” 

A 2017 study by Europol said most of the companies which are mentioned in suspicious reports generated by European financial institutions are based in the UK. 

According to the UK National Crime Agency, the amount of money laundered into the UK economy can go up to $115 billion a year - and that’s a conservative estimate. 

By moving funds through multiple shell company accounts in banks in thousands of back and forth transactions, criminals make it difficult for authorities to track where the money is coming from. Doing so through a company registered in the UK gives a veneer of legitimacy to their business.  

And there’s a whole industry of consultants in the UK which offers an array of services - from providing nominee directors to mailing addresses and even ‘self companies’ - companies which are already registered but are dormant.

According to the BBC, some 100 companies mentioned in the FinCEN leaks were registered to one address on suite 2B on the second floor of 175 Darkes Lane in Hertfordshire, just north of London. 

The UK is one of the easiest places to do business. It was ranked 8th in the World Bank’s Ease of Doing Business index in 2020. A company can be set up in the UK for as less as $63 and within a few days. 

Regulations make it easy to form Limited Liability Partnerships, which do not require real people to be owners. Companies based in a tax haven such as Seychelles can easily control a LLP. 

The UK has reform its companies registration rules over the years, making it a bit difficult to hide ownership of such companies. But there are plenty of loopholes, experts say. 

While regulators in the US introduced laws such as the Sarbanes-Oxley regulations in wake of the Enron scandal, nothing of the sort was introduced in the UK. 

Historically, the British central bank has allowed financial institutions to self-regulate. That’s in contrast to heavily regulated financial markets in the US. 

The City of London emerged as an “offshore island” after World War II as banks began dabbling in the Eurodollar market, which allowed them to avoid trading regulations as long as they did business in currencies other than the pound sterling.