Roman Abramovich and Britain's Next Crusade
(Bloomberg Opinion) -- As the owner of the triumphant Chelsea Football Club, Roman Abramovich’s absence from Saturday’s FA Cup (Football Association) final in London was incredibly conspicuous. What could have possibly kept away the Russian billionaire as his team won its 15th trophy under his ownership?
According to several anonymous sources, there were "delays" in renewing his investor visa, an explanation that immediately invited questions about whether the other shoe had finally dropped in the U.K.’s increasingly tense standoff with Russia.
After the poisoning of former Russian spy Sergei Skripal and his daughter in March, British Prime Minister Theresa May blamed Russia and expelled 23 Russian diplomats. That, she promised, was just the beginning. She also pledged to review Britain's investor visa regime, which allowed 2,000 wealthy Russians to obtain a route to citizenship.
Abramovich himself has generally avoided controversies that have enmeshed other Russians in the U.K., and there’s no sign that he’s done anything wrong. The delay may be due to a bureaucratic snafu, or the political equivalent of Russian jets buzzing U.S. ships. But other Russians with London properties -- and foreign investors from Russia, China, Saudi Arabia and other non-European countries -- will be watching closely just in case it’s part of May's promised crackdown. After all, even a well-justified backlash can claim innocent victims, and getting it right won't be easy.
The stakes are much higher than just Abramovich's ability to raise the next trophy. Britain is currently negotiating its departure from Europe, potentially endangering a large source of foreign investment in the process. Thanks to public and media scrutiny, it has become increasingly skeptical of an investment culture that has made the country -- and London in particular -- a highly attractive destination for tainted money as well as legitimate capital. That’s a lot for any government to juggle, let alone one as fractured as May’s.
The calls for action grew louder still on Monday, when a parliamentary report endorsed a wide range of countermeasures to Russian corruption. It was yet another sign that the mood in London had shifted dramatically since the aftermath of the financial crisis, when "light-touch" regulation held sway.
About half of the U.K.'s foreign direct investment stock of over 1 trillion pounds ($1.34 trillion) comes from outside the EU -- much of that from investors looking to gain access to the EU's single market. A paper from the Center for Economic Performance at the London School of Economics estimated that Brexit could lead to a 22 percent fall in FDI over the next decade, causing a 3.4 percent decline in real income. As Britain prepares to leave the European Union, its economy needs to hold on to as much foreign capital as possible.
While anti-money laundering measures have been strengthened in recent years, there is no question that Britain has a problem with dirty money and has lacked the will or the means to do anything about it. The U.K.'s National Crime Agency estimates that over 90 billion pounds ($120.84 billion) in illicit money flows through the U.K., much of it linked to Russian nationals. An estimated 4.4 billion pounds ($5.9 billion) worth of U.K property is linked to suspicious wealth, a fifth of it by Russian individuals, according to Transparency International.
Britain's Tier 1 investor visa scheme was introduced during the financial crisis to attract foreign investors and highly talented workers in the hopes of recharging a flagging economy. Investing two million pounds (in government debt or shares) gets you a path to permanent residency, which takes five years; 10 million pounds cuts the wait to two years. Before 2015, Britain's Home Office relied on the banks to vet the applicants' source of wealth and the banks took the Home Office's visa permission as a sign they had already been vetted; as a result, nobody did checks.
Rules were tightened in 2015 and the number of applicants decreased. But regulatory authorities still rely on the banks for vetting. The banks must satisfy themselves as to the source of wealth, but how they do that is up to them. Some may demand strict documentary evidence; others will tick the box with far less.
A new tool, the Unexplained Wealth Order, was introduced in January to force suspects to prove the origins of their wealth rather than leaving the burden of proof with authorities. It's a civil measure -- not a criminal one -- which puts a damper on the enthusiasm of authorities to invest the time and expense of targeting assets. A defendant can invoke privilege against self-incrimination or other defenses that can complicate attempts to prove ill-gotten gains. Plenty of Russian oligarchs now have sources of wealth that would withstand such legal scrutiny. It's not a dragnet for corrupt officials by any means.
The parliamentary report out Monday goes much further, both in detailing the obstacles to fighting corruption and endorsing more aggressive tactics. It notes the asymmetry between sophisticated money laundering methods and the lack of resources and expertise in the government agencies tasked with unearthing them.
The parliamentary report throws the kitchen sink at the problem, which is fine for a report. But there are better and lesser solutions. Given the problems elsewhere in the public sector and the challenges of Brexit, I don’t see, these agencies suddenly getting a significant funding boost. Putting pressure on offshore jurisdictions to enhance transparency and cracking down on the laundering that originates there seems a much better use of resources than going after public companies that list on London exchanges.
As for investor visas, many countries have them, including the U.S. These days an EU passport is pretty much for sale in Malta or Cyprus with less hassle. Some investors, including perfectly upstanding ones, will find easier routes. If Britain is serious about cracking down on dirty money, there will be some costs to adopting a new, stricter vetting culture. That's fine; Britain can afford to be picky -- provided it now works harder to attract real talent, as opposed to just wealth, post-Brexit. That is one door it cannot afford to close.
©2018 Bloomberg L.P.