You're reading: How do super-rich from East still manage to bank in West?

Holding a bank account is a required step for anyone wanting to do business in the U.K. Even if the rest of one’s business is done through opaque shell companies, a bank account gives a person a real air of legitimacy.

However, banks operating in the world’s financial centers are required to perform due diligence before opening an account for a customer. The more money deposited, the more checks the bank is obliged to carry out to ensure the customer is not involved in corruption, organized crime or financing terrorism.

In the U.K., for example, there is already an impressive array of bodies (such as the Financial Conduct Authority), along with targeted regulations introduced in 2007 which makes it all the harder to understand how so many individuals manage to bank dirty money.

A case in point is the hundreds of politicians from the former Soviet Union, whose ownership of Western bank accounts was revealed by the Panama Papers leak, or by court freezes of their assets over the years.

One reason for this is that an individual bank is able to decide for itself whether to take on the “risks” revealed by the due diligence they’ve performed.

And while banks have a duty to report any money laundering suspicions they have, when a client is from a less transparent country such as Ukraine or Russia it is much harder to perform proper due diligence.

Risk assessment

Compliance departments in banks screen wealthy clients by assessing the truthfulness of the client’s declarations about the source of their wealth, as well as carrying out media checks.

If negative information is unearthed, compliance officers are tasked with considering “the source of the allegations and how reliable it is, and make a determination as to the level of risk posed to the bank,” says Dawn Fisher of the International Compliance Association, an anti-corruption business association.

Unlike in front offices, where relationship managers are employed specifically for their language skills and background, a typical external office of a bank (where the compliance teams sit) lacks the necessary knowledge of foreign legal and political systems, as well as languages. This means those sitting in London are unlikely to fully understand who they might be taking on as a client.

Convictions connected to fraud, corruption, organized crime or terrorism will mean the bank is very unlikely to take on the client, according to Fisher, although it’s still possible.

“Theoretically an institution could onboard a client with a previous money laundering conviction – but they would have to satisfy themselves that this person no longer posed a money laundering risk and document their decision making process accordingly,” said Fisher.

This is even more problematic if a client resides in a country like Ukraine, where selective justice and subjective media coverage is the norm.

For instance, before the Euromaidan revolution, credible journalists reported on the corruption being orchestrated by then Ukrainian President Viktor Yanukovych and his family. But he was neither investigated nor convicted for embezzlement of state funds, and several media outlets avoided mentioning any of the scandals. In this situation, what sources should, or would, a bank trust?

Insufficient deterrent

Banks can be fined and their compliance staff taken to court if they are found to have deliberately acted in bad faith. And this will be made all the more obvious if they have carried out due diligence.

In 2012, HSBC paid a record $1.9 billion fine to settle accusations from U.S. regulators that the bank was guilty of a “blatant failure” to implement anti-money laundering controls and flouted U.S. sanctions. At least $881 million in drug trafficking money was laundered by the bank.

On the other hand, Deutsche Bank, which corruption watchdog Global Witness discovered were helping former president and human rights abuser Saparmurat Niyazov of Turkmenistan siphon off state gas revenues, was never prosecuted.

At the time, Hanns Michael Hölz, Deutsche Bank’s sustainability compliance officer, said the Turkmen dictator had no control over central bank funds, although the bank’s governors were appointed by the president.

Overall, cases of prosecution and investigation have been few and far between, given the large flow of money coming into the West from high risk jurisdictions.

“In theory, due diligence can be a really effective tool at highlighting risk amongst customers. But there are issues about how this works in practice,” Steve Goodrich, Senior Research Officer at Transparency International UK, told the Kyiv Post.

“There is not a sufficient deterrent there at the moment to make sure people do their job properly,” said Goodrich. “And the UK government has recognized this.”

Significant questions

According to research carried out by TI, the system is flawed partly because most of the 27 anti-money laundering officers monitoring private sector checks in London have conflicts of interests. They are the lobbying arms of the industry as well as being its enforcers, said Goodrich.

Goodrich also highlighted a case revealed by the Panama Papers leak, in which a compliance officer at London law firm Child & Child had ticked a box declaring that the daughters of the Azeri president, Arzu and Leyla Aliyeva, had no political connections.

However, recent research carried out by TI into investor visas (the UK’s cash for residency scheme) found that applicants were deterred by new measures that require them to undergo due diligence checks. The previous measures stipulated that a minimum deposit of 1 million pounds would mean an applicant could apply for a residency within five years – and the more money the less time.

Between 2008, when the scheme was introduced, and 2014, the UK Home Office gave out visas to those applying, and the banks accepted those visas as proof of due diligence. Since 2015, when the deposit amount was doubled to 2 million pounds, and visas have only been given after a bank account has been opened, the number of applicants has “dropped off a cliff,” according to Goodrich. And it wasn’t the doubling of the deposit that caused that: for applicants in those wealth brackets a difference of 1 million pounds is negligible, according to TI.

But those who had taken advantage of the cash-for-visas scheme before the changes are still in the clear, for now.

“There are significant questions to be asked about who was awarded these visas,” said Goodrich. “(About) where their money came from, and what retrospective wealth checks have been carried out by the banks and by the Home Office.”