Putin’s invasion of Ukraine has created a new-found resolve among the world’s financial centers. They are now committed to seizing the money Putin and oligarchic cronies have stolen from the Russian people and hidden in their territories. Given the enormous media attention on where it is stashed (examples here, here, and here), that may sound straightforward.
It is not. Even bad guys have rights, and as Radha Ivory reminds, that includes the right to their property. To confiscate the assets Putin and cronies have squirrelled away outside Russia will require proof that (a) no matter what ownership records show, the assets really do belong to one of them and (b) the assets were acquired with the proceeds of corruption or other criminal activity.
London has been one of the premier destinations of dirty Russian money. James Mather, a barrister of the U. K’s Serle Court, explains below what the British government must do to fulfill its pledge to confiscate every shilling of stolen Russian money hidden in its territory.
The gloves have come off in the United Kingdom’s effort to cleanse itself of ‘dirty money’, or so we are told. To signal its commitment, the UK government has sped up new legislation, but its contents seem unlikely to advance matters very far. There is amendment of the legislation for Unexplained Wealth Orders (totemic but misunderstood powers that are of quite limited practical use) and new requirements to register the beneficial ownership of property (as always easily evaded by clever structuring or simple lies). What has really been lacking all these past years is harder to legislate for: the adequate enforcement of the asset recovery laws that exist.
If the government really does now mean business, what could be done to tackle the enforcement deficit? This seems likely to be debated extensively in the coming weeks and months, but here are some preliminary thoughts.
– It is one thing to impose political sanctions (including asset freezes) on Putin’s cronies. It is quite another permanently to seize assets. That needs to be done on a legal basis established through the courts, meaning in the case of the UK’s civil recovery powers that the assets are shown, on the balance of probabilities, to be proceeds of crime (and, where the criminality took place abroad, proceeds of conduct that is unlawful under both the UK’s and the foreign jurisdiction’s criminal laws). To put it bluntly, there will be no sufficient justification for seizing (rather than just freezing) property merely because it is owned by an oligarch well-connected with the Kremlin: the criminality of the source needs to be rigorously and specifically evidenced and, if disputed, proved at trial. That is as it should be. The task is all the harder because the ownership of such assets is nearly always concealed behind webs of complex transactions and shadowy holding structures. Nor would it reflect well on the rule of law in the UK if the clean-up efforts were narrowly focused on Russian assets, rather than the full house of kleptocratic wealth which London notoriously hosts.
– To make a real dent will therefore require a hugely scaled-up effort of investigation and litigation, with the aim of recovering large multiples of the paltry c.£10m of annual receipts from civil recovery orders achieved over recent years (which is to be set against the NCA’s own estimate that £100 billion is laundered through the UK each year).
– It is difficult to imagine the government agencies acquiring the capacity to undertake that task any time soon. The government has talked of creating a new ‘kleptocracy unit’ within the National Crime Agency, presumably with a nod to the Kleptocracy Asset Recovery Initiative of the US Department of Justice. The capabilities of UK law enforcement agencies with regard to international corruption cases, however, do not come close to matching their US counterparts. The reasons are cultural as well as financial and even a large increase in funding and staff numbers seems unlikely to transform performance in the short term.
– Yet in the private sector, the UK boasts world-leading professional services firms who routinely pursue complex asset recovery and fraud claims in the civil courts on behalf of, among others, foreign governments and state-owned entities. They could instantly supply the increased enforcement capacity that is required by the UK’s own government agencies, whilst also ending the tendency for the government to be outgunned when those same firms are hired by defendants. The grounds on which the use of this capacity has been resisted in the past – principally, its higher costs – have always been hollow when the alternative has been to fail to pursue claims effectively or at all. Now, the full costs of inaction, including the nourishment of tyrannical regimes that threaten national security, have become impossible to ignore.
– It is therefore well past time to move to a mixed economy of asset recovery. The prosecuting agency will always need to direct its cases, but much more of the day-to-day work in pursuing them can and should be done externally. This is the norm for commercial parties – no large company seeks to conduct its litigation with in-house solicitors as the NCA does – and large civil recovery claims are, in essence, commercial litigation, for all the wider public purposes that they serve. Moving to this approach would, of itself, enable an immediate and large increase in capacity and effectiveness.
– To give the new approach real impetus, the government should create a Kleptocracy Asset Recovery Fund. Adopting such a model would achieve far more to spawn the dynamism that is desperately needed than yet another new ‘unit’ within the NCA. It would require some level of finance to prime the pump, but with the expectation that a substantial portion of proceeds obtained from cases would be reinvested in pursuit of further recoveries and in that way would become self-financing. It could also be used as a vehicle for risk-sharing with the private sector, through conditional fee arrangements and potentially third-party finance, though would remain an effective model even if entirely publicly financed.
– These measures would improve the government’s own pursuit of civil recovery claims under the UK’s Proceeds of Crime legislation, but the standing to bring those claims should also be broadened to other parties such as approved NGOs, relevant victims or other specified private parties. It is anomalous that whilst private parties can bring a criminal prosecution and even make use of criminal confiscation powers, only particular state agencies may bring civil recovery claims. That is especially strange given that the controversial features of private prosecutions seem less relevant to recovery claims. Actors beyond the state, such as investigative journalists and anti-corruption activists, have played a remarkable role in bringing large-scale corruption cases and their proceeds to light in recent years. The capacity of such actors to ensure that information is translated into enforcement action ought to be strengthened, subject to the authorities’ power to intervene where the public interest requires.
– Furthermore, the war on dirty money should be fought not just with the proceeds of crime legislation but with the civil law at large. The main obstacle to civil actions in corruption cases is apathy or hostility on the part of the foreign states who are the primary claimants (combined, all too often, with complicity of the victim government in the corrupt acts). The UK government should review the law in this area and legislate if necessary to ensure that such claims need not await a regime change. This could be achieved by a derivative mechanism by analogy with corporate law, enabling appropriate parties such as affected citizens from the victim state to step into their government’s shoes where it is failing to act. This would be a further means of drawing on the knowledge and resources of civil society and victims and, in effect, broadening asset recovery capacity beyond public sector agencies.
– The concept of dirty money conjures up images of Knightsbridge mansions and superyachts: it is a particular affront when such ostentatious wealth is derived from the plundering of public wealth. Yet corruption often gives rise to losses far in excess of the amount that the kleptocrat or corrupt official has actually gained. The effort at asset ‘recovery’ also needs to encompass more extensive use of the law of damages and compensatory remedies to obtain justice for victims of those losses. This may serve, as well, as an indirect means (via enforcement of a damages judgment) to lay claim to kleptocrats’ assets that cannot themselves be shown to derive from crime or other wrongdoing.
In conclusion, if the task of recovering dirty money remains a narrow monopoly of the public agencies to the extent it has been, new powers, new units and even substantial new money are unlikely to shift the dial by very much. The public and private sectors, as well as civil society generally, need to explore new ways of joining forces to achieve the rapidly increased scale of action which the political consensus is rightly calling for.