The Laundromat is closing – everybody's sick of it. The US and the UK to counter Russian money laundering

How the Laundromat Works
Unlike other European countries, Britain, for political reasons, has not yet been involved in the exchange of tax information with Russia, making it one of the most attractive destinations for Russian capital, especially in connection with the closure of such well-recognized tax havens as Cyprus and Latvia. According to the statistics published by the Central Bank of the Russian Federation, tens of billions of dollars in foreign direct investment have been funneled to the United Kingdom over the past 10-12 years, with record figures in the region of $2.5bn in 2018 and 2019. Experts say tens of billions of dollars have been amassed by British offshore companies.

As is customary with prudent financiers, the money has been put to work: The City of London «laundromat» handles billions of dollars annually. The money is then used in financial and stock markets, in investment projects, and once those involved in the process in London (investment bankers, financial consultants, bankers, stockbrokers, and so on) are well taken care of in terms of salaries, bonuses and profits, it returns to the financial system of the post-Soviet kleptocracy as clean capital earned in Western markets. By that time, it is beyond suspicion, its 'dirty' origins no longer provable.

“The West claims the post-Soviet countries do not fight corruption. But at the same time, the West doesn't question the money's origin and allows them to keep their profits in order to continue to serve the interests of kleptocrats, buy politicians, buy media space, support oligarchs and bribe the regulators. We are largely responsible for corruption in many ex-USSR countries”, says Timothy Ash, senior emerging markets sovereign strategist at the investment firm BlueBay Asset Management.

Money for Propaganda

However, not all earned profits return to their historical homeland. Some of the funds remain in Great Britain and other Western countries, where they have been put to work for the benefit of the Russian authorities in other «useful» areas: the money is used to buy influence, respectability and connections. Unlike other countries, representatives of whose ruling elites also make money in the City of London, it is primarily Russia that uses its capital to openly interfere in political processes in the Western countries, first of all in Great Britain. Here, the Kremlin has been actively using dummy donors, social network trolls, propaganda media, advertising, shell companies, fake organizations and other similar tools.

Expert Josh Rudolph, malign finance specialist at the Alliance for Securing Democracy, operating under the auspices of the German Marshall Fund, estimates Russia's share of the total foreign funds used for political influence in the West at about 80%. He notes that the amount of cash injections has been growing exponentially over the last decade and especially after the annexation of Crimea in early 2014.

In his report “Covert foreign money. Financial loopholes exploited by authoritarians to fund political interference in democracies” he studied the flows of dirty money in 2010-2019, including those coming from Russia. In addition to more widely studied tools such as cyberattacks and disinformation, authoritarian regimes such as Russia and China have spent more than $300m interfering in democratic processes in 33 countries over the past decade, he says. The study says the frequency of such financial attacks grew from two or three annually before 2013 to nine in 2014. A typical case involves a regime-connected operative funneling $1m to a favored political party, although buying influence in a major national election costs more like $3m to $15m.

According to Rudolph, Russian money laundered in the West was most often used to support separatists in Eastern Ukraine or various political activities in the West, such as multi-million-euro loans to Marine Le Pen's National Front party in France. Around the same time, Russian government-connected foundations funded numerous NGOs that promoted Kremlin propaganda in the Baltic states using various methods. The expert's report goes on to say:

Many Western observers still viewed all this Russian hostility as an Eastern European problem that would remain focused on Russia’s borders, a more aggressive extension of its 2008 invasion of Georgia. But the 2014 burst of activity turned out to be the leading edge of a global wave of malign finance that came fully into view with thirty new cases in 2016.

Among these cases, the document mentions Russia's campaign against the US election, financial ties to the Brexit donors, funding political parties and an attempted military coup in Montenegro, gifts of debt repayment for the Czech President's pro-Russian economic advisor, backing ethno-nationalists in Germany and Sweden in 2017, interfering in twenty elections on the African continent in 2018-2019. Russia's main interest in Europe remains in the UK.

Spires of Great Britain

Last summer, the Intelligence and Security Committee of the British Parliament released a report on Russian interference. It describes, among other things, the enormous influence that Boris Johnson's «friends» of Russian descent with British passports have gained in the Conservative Party.

Then, in the fall, the BBC wrote about donor support to the Conservative Party from British citizens of Russian origin. The corporation referred to the leaked reports of suspicious banking activities – the so-called FinCEN (Financial Crimes Enforcement Network) files of the US Treasury's Financial Intelligence Unit. In particular they mentioned Lyubov Chernukhina, who donated 1.7m pounds to the Conservative Party of Great Britain. The problem is that her husband, Vladimir Chernukhin, is a former deputy finance minister in Putin's government. The Chernukhins emigrated to London in 2004. In 2016, according to FinCEN, Chernukhin received $8m from a company registered in the British Virgin Islands and linked to the oligarch Suleiman Kerimov.

Nor did Britain forget about the poisoning of father and daughter Skripal using the Novichok nerve agent in Salisbury, the interference in the British 2019 parliamentary elections, the attempts to influence the outcome of the Scottish independence referendum or the hacker attacks on laboratories and pharmaceutical companies developing the coronavirus vaccine. British experts call ex-KGB officer's son Yevgeny Lebedev's introduction to the House of Lords as unprecedented.

“Compare Russia with Nigeria, Kazakhstan, China... There is a lot in common - money is earned mainly from energy resources, there is a high level of corruption in those countries, a lot of funds that come from there are clearly dirty. But there is a difference - Russia is trying to attack our system of liberal democracy. It has taken things to a completely new level. I don't think China is trying to change our system of government. But Russia is, by using the cornerstones of our values and belief system ​​to achieve its goals,” says Timothy Ash, a strategist at BlueBay Asset Management.

In Great Britain, modern Russia is perceived not as a developing country but as a political force hostile towards the West. Western experts on both sides of the Atlantic have been increasingly comparing the current situation to the Cold War. As Josh Rudolph put it, «they are still as well organized in Russia as they were then, only now they are not communists but rather kleptocrats keen on filling their pockets».

It is important for the West today to remember 1947, when two major political leaders of the allied countries took upon themselves the responsibility to openly and loudly proclaim that the USSR, with which they had formed a united front during the war, was no longer an ally but an ideological adversary, says James Sherr, Associate Fellow at Chatham House and Senior Fellow at the Estonian Foreign Policy Institute (ICDS): «We need a modern-day Harry Truman and Winston Churchill to say: our relations with Russia have become antagonistic, which means that our response to dirty money should be in the same vein.»

According to Sherr, Britain will not be able to win this fight simply by tweaking laws. If London seriously wants to counter the flow of dirty money and the influence it wields, new laws will have to be adopted clearly outlining the responsibilities of lobbyists, agents of influence, political donors and the capacities of media organizations funded by foreign governments.

“The corrupt power of Russian money can undermine the rule of law in Great Britain, which was built over the past three hundred years, in a decade,” says Timothy Ash. «We should by default consider Russian oligarchs, most of whom made their huge fortunes through siding with the Russian authorities and/or criminals, agents of influence of the Russian government, and a threat to our security».