Wealthy foreign criminals may be actively targeting the U.K.’s hedge fund industry in an attempt to launder illicit proceeds, according to sources in London and Moscow.
The allegations follow increased scrutiny of the U.K. property market, which is expected to see tighter controls on foreign investments under a governmental plan outlined earlier this month by the Department for Business Innovation & Skills in response to allegations that criminals from Russia and other countries are funneling money into British real estate.
The agency said in a consultation paper that it may soon require foreign companies to obtain a unique identifying number and disclose their beneficial owners when purchasing property in England and Wales.
There are signs that Russian criminals may also be exploiting complex investment structures in the United Kingdom to launder their ill-gotten gains, according to a London-based individual with direct knowledge of potential abuses of hedge funds.
The person, who spoke on the condition of anonymity, declined to discuss specifics of the investigations but said the activity could draw further governmental scrutiny.
Britain’s hedge fund sector is attractive to criminals because it offers them a chance to reap additional profits in a jurisdiction seen as safe for investment, according to Oleg Kolotilov, a partner at Moscow-based law firm KK&P who said he was aware of criminal abuses of hedge funds but had not personally encountered them.
“You can’t bribe the judges [in the United Kingdom]. The state does not directly interfere. It has an independent arbitration process” unlike “wild west Russia,” said an individual at a European financial services organization who did not want to be named.
The United Kingdom’s financial sector included some 500 hedge funds controlling £335 billion of assets in 2015, according to the London-based Alternative Investment Management Association.
The funds, which are largely based in the Cayman Islands and other jurisdictions, are often operated in part by offshore administrators tasked with conducting anti-money laundering (AML) checks. The multijurisdictional nature can mean that the funds do not operate under a single regulatory regime.
“Money flows in and out of a fund in the form of new subscriptions and redemptions of investors’ interests (subject to the fund’s subscription and redemption terms) and the bank accounts of the fund may be held offshore, sometimes in jurisdictions with banking secrecy,” according to compliance guidance published in 2014 by the U.K.’s Joint Money Laundering Steering Group.
In most cases, the firms overseeing the operation do not know the identities of individual investors contributing to the fund, according to the group, which includes the Association for Financial Markets in Europe and the British Bankers Association as members.
Although some fund managers know who all of their investors are, in other instances investments are identified only by bank account numbers, said a London-based lawyer.
“Because of the money laundering rules, there is limited requirement to inquire behind a nominee account with an authorized bank on the grounds that, if the bank is regulated, it would probably carry out the verification process itself,” said the lawyer.
Asset management companies may have, in some instances, intentionally used offshore vehicles to avoid strict AML controls and transparency-related rules, said Mike LaCorte, director of London-based investigation agency Conflict International.
Russian money, in particular, has found a welcome home in the United Kingdom in recent years. Russian-controlled assets in the country jumped from £612 million in 2012 to £1.647 billion in 2013, according to the Office for National Statistics, which did not have estimates for the 2014 and 2015 totals.
Russians who may be facing domestic legal troubles know that the British government will likely turn down an extradition request from Russian authorities, and “and if they are not extradited, there is a good chance that their assets will not be confiscated in the U.K. either,” said Kolotilov.
A spokesperson for the U.K. Financial Conduct Authority declined to comment.
As featured on moneylaundering.com