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According to this article checks on the source of the money coming into Britain were very lax, thus (at least theoretically) allowing for money laundering:

For seven years from 2008, checks on the source of the money coming into Britain under the scheme were lax, with the Home Office believing that the banks were checking it out, while the banks thought the Home Office was doing so. Since the safeguards were tightened up in 2015, the number of applications has dwindled to a trickle.

Their money leaves Russia to be laundered, (..) Thoroughly washed, it arrives in London to be invested in the property market, with Russians often prepared to pay well above the odds for a prestigious property.

In the specific case of Russia oligarchs, allowing them to invest so easily in UK seems strange since UK-Russia relations are quite hostile:

In the 2000s, especially following the poisoning of Alexander Litvinenko in 2006, relations became strained, and since 2014 have grown unfriendly due to the Ukrainian crisis and other activities by Russia such as poisoning of Sergei and Yulia Skripal, seen as hostile by the UK.

Question: Why did the UK have lax checks on the source of the money coming into the country?

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    more money => more income. Seems like an obvious incentive on lax checks.
    – user4012
    Jun 19 '18 at 15:42
  • Why would the UK care about the source of money in the first place is a far better question. Jun 19 '18 at 15:43
  • 1
    @user4012 - yes, but when billionaires from a country you do not have good relations with buy a lot in your country, maybe it is a good idea to limit this phenomenon. Also anti-money laundering EU policy requires "to report any suspicious or unusual transactions or activities".
    – Alexei
    Jun 19 '18 at 15:49
  • @Alexei - but they had a convenient excuse to not follow the policy. Seriously, if you had free money coming in would you do extra work trying to see if you should reject it?
    – user4012
    Jun 19 '18 at 15:53
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    Your quoted text already has an explanation: "with the Home Office believing that the banks were checking it out, while the banks thought the Home Office was doing so."
    – Brythan
    Jun 19 '18 at 17:02
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I think the UK has all the factors that are needed. It has a large financial industry in the City of London. It has overseas territories that are far enough to not implicate those participating in wrongdoing, but close enough to do business.

To elaborate on this, I'll quote part of an article by investigative journalist Nicholas Shaxson in The Guardian, dated January 2011, (I've only included what I think are the most important paragraphs, please note where the quote line breaks, I skipped something in those cases):

It is no coincidence that London, once the capital of the greatest empire the world has known, is the centre of the most important part of the global offshore system. The City's offshore network has three main parts. Two inner rings – Britain's crown dependencies of Jersey, Guernsey and the Isle of Man; and its overseas territories, such as the Cayman Islands – are substantially controlled by Britain, and combine futuristic offshore finance with medieval politics. The outer ring comprises a more diverse array of havens, such as Hong Kong, which are outside Britain's direct control but have strong links.

This network of offshore satellites does several things. First, it gives the City a truly global reach. The British havens scattered all around the world's time zones attract and catch mobile international capital flowing to and from nearby jurisdictions, just as a spider's web catches passing insects. Much of the money attracted to these places, and the business of handling that money, is then funnelled through to London.

The three crown dependencies in the inner ring are substantially controlled and supported by Britain but have enough independence to allow Britain to say "there is nothing we can do" when other countries complain of abuses run out of these havens. They channel very large amounts of finance up to the City of London: in the second quarter of 2009 the UK received net financing of $332.5bn (£215bn) just from its three crown dependencies. Jersey Finance promotional literature makes the point plainly. "Jersey," it says, "represents an extension of the City of London."

Just like the crown dependencies, the overseas territories have close but ambiguous political relationships with Britain. In the Caymans the most powerful person is the governor, appointed by the Queen. The governor handles defence, internal security and foreign relations; he appoints the police commissioner, the complaints commissioner, the auditor general, the attorney general, the judiciary and other top officials. The final appeal court is the privy council in London.

It is the world's fifth largest financial centre, hosting 80,000 registered companies, more than three-quarters of the world's hedge funds, and $1.9tn (£1.2tn) on deposit – four times as much as in New York City banks.

According to the article, one of the drivers behind the overseas tax havens has been the Bank of England:

In the archives, two schools of opinion emerge within the British civil service. On one side sits the Treasury, and especially its tax collectors in the Inland Revenue, who virulently opposed tax havenry and found the Cayman Islands especially obnoxious. The US authorities were clearly highly vexed too, and the British Foreign Office broadly opposed havenry, though its position was more nuanced.

On the other side sits the Bank of England, the most vociferous cheerleader for the new arrangements, and its far less influential supporter, the British overseas development ministry, which seems unperturbed by the possibility that local tax haven activities might foster massive capital flight from developing countries elsewhere. Battle lines were drawn; the exchanges become vigorous and even acrimonious.

The Inland Revenue was especially alarmed, while their mandarin bosses in the Treasury showed some, but rather less, concern. They put together a working party, whose report in 1971 said Britain should, in effect, stop encouraging tax havenry in its overseas territories, which in the case of the Caymans had become, as one internal memo in London put it, "quite uncivilised".

A letter marked secret from the Bank of England dated 11 April 1969 gives a better sense of the forces driving the changes in the Caribbean.

"We need to be quite sure that the possible proliferation of trust companies, banks, etc, which in most cases would be no more than brass plates manipulating assets outside the islands, does not get out of hand. There is of course no objection to their providing bolt holes for non-residents but we need to be sure that in so doing opportunities are not created for the transfer of UK capital to the non-sterling area outside UK rules."

The Bank of England's main concern at this time was that the new Caribbean centres were weak points: sources of financial leakage outside the sterling area. So in 1972 Britain shrank the area to Britain, Ireland and the crown dependencies, excluding the new havens.

The year the sterling area shrank, the British officials working against tax havens disappeared from the archive files. Their replacements seemed unaware of the 1971 report and only discovered it in 1977, sitting on the shelf, unimplemented. Again they expressed concerns – and again nothing was done. History repeated itself within and between the departments, all in less than 10 years. And, each time, the Bank of England fought the tax haven corner.


More recently, the subject has resurfaced with the Paradise Papers. And a BBC article dated november 2017 gives some insight into the Bank of England's role:

Hearing the banks' complaints in a series of meetings, the Bank of England agreed in late 1957 to allow the commercial banks to continue to lend and borrow to foreign clients on two conditions:

  • the lending had to be in a currency other than sterling, and
  • both sides of the transaction - the lender and the borrower - had to reside somewhere other than the UK

"The decision was momentous in all respects," says one of the leading experts in offshore finance, Prof Ronen Palan of City, University of London. "They simply deemed certain transactions as not taking place in the UK. Where did the transactions take place for regulatory purposes? Nowhere.

"I think it wasn't at all by design; it was a mistake. They didn't understand the implications. It was seen as an accounting device."

The so-called "Eurodollar" was born - a global offshore financial market, transacting in dollars and allowing unlimited sums to be borrowed and lent, but under the control of no single state. No act of Parliament (or Congress) sanctioned the decision. There was no thoughtful policy-making, no careful debate.

The article also shines a light on how it benefitted the UK:

The Treasury was at first left in the dark. But within years the implications were obvious - this could revive the City of London's fortunes.

"By the time the Treasury figured it out, they thought, 'this is good business for the City'," said Prof Palan.

Banks from all around the world could borrow and lend in dollars without being subject to US tax or banking regulations - making banking in dollars more profitable out of London than out of Wall Street.


Question: Why did the UK have lax checks on the source of the money coming into the country?

To answer your question, one might notice that most of the above refers to events in the previous century, while your example is fairly recent, spanning from 2008 to 2015. While these constructions have been used for decades, negative effects were only picked up widely with the release of the Paradise Papers in 2017. Indeed, the BBC article ends with:

Since those revelations, governments around the world have pledged to improve transparency with measures such as automatic information sharing and registers of beneficial owners of offshore companies.

Many of those measures are yet to be enacted or tested.

In the end, the "accounting device" "under the control of no single state" helped transactions of funds into the UK even when it would have been in the UK interest to scrutinize these transactions.

Or as the House of Commons Foreign Affairs Committee put it in its report entitled Moscow’s Gold: Russian Corruption in the UK:

The use of London as a base for the corrupt assets of Kremlin-connected individuals is now clearly linked to a wider Russian strategy and has implications for our national security

and

The role of the Overseas Territories and Crown Dependencies in illegal moneylaundering activity has come under increasing scrutiny in recent years, with the publication of the Panama papers data leak in 2015 and the Paradise papers in 2017. These investigations have demonstrated the key role that shell corporations, which can be used to disguise the real ownership of the assets that are transferred through them, play in funnelling dirty money into the UK.

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