The UK is getting tough on the proceeds of foreign corruption at a time of heightened tensions with Russia. With the enforcement of new laws, Downing Street will be keen to limit any international fallout and tread a fine line with Moscow. It will likely follow the Singapore model and target properties and not the individuals themselves. Even so, an overzealous approach here risks landing the UK government in a political and economic quagmire.
Adamescu and the oligarchs
Two weeks ago, a UK court ruled Romanian tycoon Alexander Adamescu could be extradited to face charges of bribery. The ruling is notable because of Adamescu’s attempts to resist extradition both in and out of the courts. A media blitz did garner sympathy from prominent Eurosceptic politicians. Nevertheless, the online petition calling to end Adamescu’s ‘persecution’ eventually fizzled out. Ultimately it was the court’s discovery that Adamescu had forged a document in his extradition proceedings that landed him in prison.
Seemingly, Adamescu’s extradition reflects a shift in government attitude towards suspicious funds (black money) brought by wealthy foreigners into the UK. Since the introduction of the Criminal Finances Act 2017 (CFA), the government has given itself sweeping powers to investigate those involved. This includes Unexplained Wealth Orders (UWOs), introduced February this year, which require recipients explain property purchases which far exceed their reported income.
These are all positive steps to undo the impact of black money on London and reimpose lagging standards of compliance and due diligence. They serve to warn the Russian oligarchs who, like Adamescu, have set up shop in London to escape corruption allegations back home.
However, arguably Britain has nothing to risk and everything to gain from extraditing Adamescu: he is Romanian, and his country is not in an economic and political stand-off with Britain. How the UK government handles oligarchs from Russia entails a different set of economic and political risks entirely.
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The British government has ample reason to suspect many UK-based Russian oligarchs did not acquire their wealth honestly. More than a few were reportedly civil servants who used their positions and connections to take advantage of a weak Russian government.
A dominant narrative in the international media is that additional pressure on UK-based Russian elites would serve President Vladimir Putin’s interests by encouraging wealth repatriation. To be sure, notable Russian oligarchs residing in London live in exile after falling afoul of Putin’s regime.
Many of the rest, however, retain significant ties to the Kremlin and have moved their money with Putin’s tacit consent. In doing so, they have brought Russian and international issues to London’s doorstep. UK-Russia relations are already strained, but a concerted crackdown on the oligarchs, using the CFA’s provisions, would seriously impact several of Putin’s allies.
With Russia’s economy labouring under sanctions, Moscow’s narrative of defiant resistance to economic pressure has become a key pillar of maintaining public support within Russia. The breakdown in relations after the poisoning of Sergei and Yulia Skripal has already seen mutual expulsions of diplomats and tit-for-tat recriminations. If Putin’s allies find themselves targeted, the need to project a strong public image may pressure Putin to retaliate against British and other Western firms operating in Russia.
Lessons from Singapore
To limit such international fallout, British lawmakers will be looking to follow an example set by Singapore.
Much like London, much of the opaque capital parked in Singapore has wound up in real estate acquisitions from rich Singaporeans and foreigners. The city-state has long been a regional hub for black money, particularly for Chinese billionaires flush with cash from the mainland’s economic boom. Attracted by Singapore’s comparatively low tax rates, such individuals took up residence.
In land-scarce Singapore, where residential property comes at a premium, public discontent grew as ordinary people were priced out of the market. This spurred the government to take action, even if indirectly, against black money and the individuals bringing it in. The government introduced the Additional Buyer’s Stamp Duty (ABSD), a cumulative tax which takes into account the buyer’s properties owned, residential status and legal personage.
That duty, by targeting purchases instead of individuals or their funds, is a useful model for London. Much of the Russian oligarchs’ wealth is concentrated in luxurious London properties.
An ulterior motive
Targeting property purchases is useful as it helps the UK government be seen to address the ongoing housing crisis. As with all national crises, foreigners represent an easy scapegoat. Downing Street will likely appreciate the opportunity to deflect criticism by claiming that wealthy Russians are playing an outsized role. (Naturally, that is not really the case as the average citizen lives in property that is largely disconnected from these luxurious neighbourhoods.)
In comparison, targeting individuals and/or their funds becomes more risky as the UK government lacks jurisdiction to prosecute as well as the extrajudicial investigative capabilities. It would also look like the government had deliberately armed itself with extraordinary powers simply for the purpose of persecuting Putin’s cronies. Given the current state of tensions and that $1tn of Russian money is at stake, that approach would not go down well. It might force a desperate Russia to consider the use of more extraordinary options in response.
Moreover, from a purely financial point of view, Russian wealth contributes a great deal to the UK economy and may in fact be a boon in this uncertain, transitional period before Brexit. An overly aggressive response raises the risk of capital flight not only from wealthy Russians but other international business tycoons.
Russia reluctant, Britain hampered?
Ultimately, the onus is on the Russian government to do its part. Much of the eventual cooling of Singapore’s property market came as a result of the Chinese government’s crackdown on capital flight. Notable measures included Beijing’s ban on the use of an electronic payment network (UnionPay) in Singapore casinos.
Russia’s own recent anti-corruption ‘crackdown’ was by comparison intended to burnish Putin’s image and settle political scores in the run-up to the March presidential election. Russians themselves do not take the Kremlin seriously. Last year, an independent poll conducted by the Levada Center found that four out of five Russians believed corruption had either ‘significantly taken hold’ or ‘fully permeated’ the Russian government.
The more dominant trend is for Moscow to go after those who expose high-level corruption, like Alexei Navalny – a Russian lawyer and political activist. Unfazed, Navalny has volunteered advice to the British government on stripping his wealthy compatriots of assets and visa privileges. However, UK Prime Minister Theresa May will be under pressure to tread a fine line.
Clamping down on Russian wealth is a drastic measure that, given the current state of tensions, will likely be used as a last resort where all other options have failed or become unfeasible. Considering the entrenched nature (and subsequent value) of Russian economic influence, the government will likely view targeting isolated Russian properties as an important strategic compromise.
