When Russia intervened in Ukraine, the world’s attention focused on something I have researched and written about for nearly a decade: Britain’s role in laundering the Kremlin’s black money.
This is a big problem and it has financed an aggressive dictatorship that has killed thousands and displaced millions, and that is no small thing. Through this system, not only Russian citizens but also some of the richest and most criminal people in the world commit money laundering and these sums are huge.
A trillion dollars (yes! ten trillion dollars) is stolen from developing countries every year, and a large amount of it is channeled through London or its satellite tax havens. Is.
This is called offshore money laundering, but what does it mean? It may sound difficult but at a basic level it is based on a simple idea. It was invented by ‘The City of London’, a hub of economic activity, equivalent to New York’s Wall Street.
It is one of the most important British inventions in history. Without the concept of offshore, today’s world could be quite different.
How to avoid repeating mistakes
In 1944, the Allies were close to victory and planning for the aftermath of the war. He wanted to create a better global financial system to avoid a repeat of the economic crisis of the 1930s and the devastation of World War II.
The system was named after the small American complex where it was negotiated: Bretton Woods.
“This system set the rules for transferring money across borders,” says historian Vanessa Ogle of the University of California at Berkeley.
Any large transfer of money from outside or inside could create instability. This had happened during the wars as well. This meant stopping the payment or receipt of huge sums of money so that the country could stabilize its currency and secure its economy.
British bankers recognized a safe financial system in which their hands were tied. In this way the work of reconstruction of the world was done. This meant that the role of the City of London was hidden.
10 years later
However, The City remembered the days when it used to be the heart of a great empire. After the mid-1950s, bankers began to worry. A prominent banker said, “It is like driving a fast car at 20 km per hour.”
“Things started to improve,” Ogle said. The German economy showed signs of recovery and production.
“Bankers were alarmed by these measures and began efforts to not violate the Braden Woods principles but still operate legally.”
A small bank
Midland was one of several City banks that, despite being small, wanted to get ahead, but under the rules banks could not compete with each other for customers.
Midland Bank needed more money. In 1955, he had a brilliant idea that there was a bank nearby that had the opposite problem. The coffers of the Soviet Union’s state bank Moscow Narodni were full of dollars.
Ogle said that he was afraid that the money would be confiscated when it was transferred to America. It was the Cold War era, that’s why the money (of the Russian bank) was lying in London.
So one bank had a lot of money and the other had no money. All they had to do was find a way out of the governing principles.
Someone in Midland realized they didn’t need to buy dollars. They could also borrow, which was not subject to British restrictions on the purchase of foreign currency.
With these dollars they could buy British pounds which could be advanced as loans. In this way, the Russian bank not only remained out of the reach of the United States, but also began to earn a profit on its own money.
The details are very complicated but in simple terms it can be said that with this deal the Russian bank made money by avoiding US sanctions and Midland made money by avoiding British sanctions.
Things would have gone on like this had it not been for a startling news from the Middle East.
A great business opportunity
In 1956, the Suez Canal became an Egyptian asset, previously controlled by Britain and France. London and Paris sent troops, but the United States opposed it. It met with an embarrassing failure.
It was the fall of the Great British Empire, but out of the wreckage came a bad business opportunity.
Oxford historian Catherine Schenk points out that the Bank of England and the Treasury reduced international use of the pound, making the dollar more attractive because it was outside its control.
Banks in the City previously traded in pounds. With less access to the pound, they began to look to a new source of funding.
Other banks followed Midland’s path and began borrowing dollars for day-to-day business. That changed everything.
According to him, these dollars were exempted because they were not subject to the rules and regulations of the Federal Reserve Bank. In this way, despite the Bretton Woods system and existing restrictions in the country, the city banks got the opportunity to do business in a different way.
The City thus invented the most important financial method of the twentieth century.
The Euro-Dollar Concept
They called it the Euro-Dollar because it was and was not a dollar. It depended on what was more profitable at the time. Bankers were like pirates on a ship with a sea of money at their feet. Banks were making profits by ignoring the rules that everyone was following.
But were they about to reveal the legal loophole they had discovered?
He took a term from maritime law that states that if you are not within the boundaries of a country at sea, the laws of the land do not apply to you. So you are ‘offshore’.
According to Catherine, “it soon became an offshore interbank market beyond the reach of any country’s financial watchdog.” No one in the British government seemed to know what was going on.
But the leaders of the Bank of England knew it, and they loved it. After the end of a period of war and economic hardship, the engine of the City of London was finally starting to heat up.
Foreign banks immediately started setting up their branches in London to take advantage of this unsupervised market.
Over the next two decades money continued to flow from the City of London and the restrictions of the Bretton Wood system were ignored. Efforts to defend financial stability and living standards to protect remittances have failed.
A paradise
Thus money laundering method was introduced in which the money of the offshore market escaped external supervision but London was not the best place to hide money. The reason for this was the greatest enemy of wealth for the wealthiest: taxes.
If British bankers wanted to help their clients more, they had to find more loopholes in the law. They needed a place where these funds could be kept safely.
He was lucky that he didn’t have to go far.
Nearby in the English Channel was the island of Jersey, which had been under British rule for nearly a thousand years. It was not part of Great Britain but used the pound and had its own system of taxes.
John Christensen, a senior official in Jersey’s administration and later a campaigner against tax havens, says: ‘Until the late 1950s, there was a provision in the constitution that prohibited payments with interest and that the island was a resident-only island. was a tax haven.’
If the island had relaxed its rules, everyone could have made a big profit, and that’s what happened. Jersey politicians have cleared a major hurdle.
Bankers were already resorting to the City of London to avoid US restrictions on trading dollars. He also evaded British sanctions by transferring his money to secret bank accounts in Jersey.
With this measure, the tax levied on them was halved. In the 1970s, British corporate tax was over 50 per cent, compared to 20 per cent in Jersey.
“Jersey was also great regionally because he could travel from London to Jersey for meetings,” says Christensen. The flight departs in the morning and returns at night.
“Jersey gradually became a satellite tax haven for the City of London.”
Other banks from North America and Europe also opened branches in the island, and Jersey was just the beginning.
Provision for creating more paradises
As the British colonies became independent, the British Empire began to shrink on the map. British-controlled Bermuda, the Cayman Islands, the British Virgin Islands, Gibraltar and Anguilla were too poor and remote to become independent.
However, they had a connection with Britain in the national resource of exploitation. As in Jersey, politicians created loopholes in the law to remove restrictions on money coming in from other countries.
These areas also became tax havens with low taxes and client confidentiality so that the activities of customers could not be monitored.
According to Ogle, ‘one advantage was the common doctrine of common law in the British Empire, which made negotiations quite easy.’
There were also British citizens in these areas. If an American lawyer wanted to start a company registration business in the Cayman Islands, because of the lack of taxes, he could keep a small group of officials and thus local leadership could be celebrated. In this way, everyone becomes a shareholder of the tax haven business.
So how much of the money went to tax evasion and how much of it came from human trafficking, drugs, weapons, corruption and theft?
They used to bring suitcases full of money.
There is not much data from before 1980 but every now and then a door to the past opens and we get some information about this paradise.
“After the major crises in the 1960s and 1970s, there were occasions when money laundering was linked to criminals,” says Ogle. These were rare cases but in fact after investigation it always became clear that money from the underworld was always part of the success of the offshore business.
“Due to confidentiality measures and confidentiality rules, it was extremely difficult to trace where the money was coming from and what the main asset was.”
“All kinds of money came to Jersey,” says Christensen. There were also people who used to bring suitcases full of money on private ships.
He saw all this with his own eyes. I used to work in the trust management department of a large accounting firm. I started looking at who my clients were. I found people connected with all kinds of fields.
This is not only about tax evasion but also involved illegal party financing, illegal financial support and other activities. Every time the money that reached Jersey came to them from dictatorial states.
This money came from all over the world. After the money was transferred to Jersey, the offshore business was created which included trusts and companies under the law.
But how did Jersey and other tax havens remain hidden from UK financial institutions?
The best kept secret
According to Christensen, in the language of money laundering, there is a concept of leadership in which changing locations preserves a secret and makes it extremely difficult to trace the source of the money.
“London is at the top of the ladder, so it was not unusual for a corrupt ruler to find some traces of London on the ladder.”
So if the authorities in London want to find out what the real source of the money is, they will ask the authorities in Jersey and they will find that they have a trust there. No one will tell who the banfishery is behind it because it was not necessary to tell who the banfishery is in any country during registration.
‘Then you knew the trust had several companies in the British Virgin Islands and elsewhere.’
Christensen calls these companies “shell companies,” which in Spanish mean paper, ghost, or fictional companies. But what was the need of these shell companies?
The third and most important part of the washing machine
Graham Burrow, who specializes in shell companies, says, “It’s a company that has no commercial purpose.”
“He has some assets that are not necessarily illegal. It has no employees, offices, and sells nothing. But it can be used in other ways and there is no other reason for its existence.
Why are the British so helpful in money laundering?
“Britain is considered a low-risk place in terms of crime,” he replied.
If bank accounts and companies are established in these different locations, money transfer becomes easier. If these companies are British and their heads are British citizens, apparently the authorities thought that their operations would be conducted legally in another country.
These companies are easy to build. You can make them from anywhere in the world on a computer for £12. You can say you’re an alien living on the moon and build a company with that information.’
According to him, “You can create an entire identity that can send millions of dollars without having to reveal who you are.” You can hide behind others because there is no system to verify you.’
Lying to build a company is illegal, but the punishment for this crime is minimal. Those who want to hide their stolen money and move it from one place to another at will have been able to do so by using the British corporate system and keeping their identities secret.
“You’d be surprised how many companies are owned by another company, which in turn operates under another company,” says Bro. You may lose your mental balance investigating it.’
Every day more new applications are filed with Companies House, the registrar of companies in the UK. It does not have enough resources or power to verify every company’s information.
Usually around 3500 companies are added daily, with each company providing 15 to 20 data points. About one lakh data points are added to the system on a daily basis.
How can you monitor it all with limited resources and antiquated IT facilities? His answer was that it is impossible and the criminals are aware of it.
Several successive governments have tried to make the financial system fair and transparent in their own capacity. For example, measures have been taken in this regard in Jersey.
Christensen says the Tony Blair government from 1997 to 2007 began to put pressure on Jersey and other areas. According to him, many of the shortcomings of the system have been ironed out but there is a large list of legacy customers who settled in Jersey during the 1970s and 1980s. Their old accounts still exist and are reminiscent of the past when information was not so closely monitored.
Meanwhile, the City of London has a lot to do and it will take a lot of motivation.