Regulating Russia: why money laundering is the new global epidemic

Superyachts seized, banks sanctioned, and assets frozen. The Ukrainian conflict has shone a light on a problem bubbling under the surface for many years: Russian money laundering.

The wealth of Russian oligarchs is nothing new. London even has a 'Red Square' of real estate primarily owned by Russian billionaires. However, as each new sanction is imposed, the issue of money laundering in the UK becomes increasingly urgent. 

Although many Russian oligarchs and companies are now on the sanctions list, money laundering is not a problem that will go away anytime soon. As a result, banks, law firms, accountants, and real estate agencies need to use best-in-class methods to correctly ID and verify their clients to stem the flow of illicit funds. Cutting corners or missing critical parts of this process will not only enable criminals but could also result in heavy fines and unquantifiable brand damage.

The risks of missing money laundering

The usual way that oligarchs hide illicit funds is through shell companies. Given their secrecy laws, British Overseas Territories such as the British Virgin Islands and the Cayman Islands are common jurisdictions for these companies. These tax havens offer a direct route into the UK economy. Oligarchs then hire lawyers, bankers, advisors, and lobbyists to integrate these funds into the UK financial system, typically by acquiring assets such as property or shares.

Despite the UK being a renowned playground for Russian money, the government has historically turned a blind eye. Fortunately, due to recent events, the government has taken action with the reintroduction of the Economic Crime Bill as part of a broader package of legislative proposals to tackle illicit finance.

Whilst this is a step in the right direction, what are the risks businesses face now? 

For one, enforcement and fines for non-compliance are increasing. For example, last year, NatWest received a £264.8m fine after being convicted for various offences concerning anti-money laundering (AML) failures. Smaller firms are also increasingly targeted by regulators for inadequate compliance processes. On top of this, the damage to corporate reputation can directly harm the bottom line due to the risk of customer exodus. 

Ensuring processes are thorough 

A robust compliance framework is essential for all businesses covered by the UK’s money laundering regulations, as red flags can be challenging to detect. Criminals work hard to conceal their identity, so using technology alongside expert knowledge is crucial to uncovering the ultimate beneficial owners hidden in corporate ownership structures. 

Many technology solutions can complement an AML programme. For example:

• Those aimed at streamlining or automating Customer Due Diligence (CDD) checks (e.g. video KYC, device-led checks),

• Those aimed at strengthening anti-impersonation checks (e.g. biometric technology, use of third-party ID mechanisms)

• Those aimed at monitoring transactions for suspicious activities (e.g. machine learning/analytics activity)

AML technology can help identify risks and focus compliance efforts, but review and human input remain essential. For example, even in a technology-enabled regulatory environment, human actors must be relied upon to identify and assess any residual risks presented by new technologies. Combining the efficiency and accuracy of tech with human expert knowledge and analytical skills produces more robust systems that can effectively respond to AML requirements while being fully auditable and accountable.

The future of money laundering and Russian sanctions

Money laundering isn’t leaving the headlines anytime soon. We are entering into an era of increased scrutiny on the UK financial system, where people are already being judged by the court of public opinion whether they are on the right side of history. 

Fortunately, every business can act as a gatekeeper to the financial system to stem the flow of illicit funds - all they need to have is the time to ask the right questions and the right tools to get started.