As the UK government fast-tracks sanctions, the Isle of Man has warned its companies there has ‘never been a more important time’ to be vigilant to prevent Russia-linked individuals and entities from evading the measures.
The UK’s new Economic Crime Act, which received assent on 15 March, aims to boost anti-financial crime measures and make sanctions easier to enforce. But campaigners say it will not stop international money launderers using offshore financial centres such as the Isle of Man to hide illicit cash. They claim there are still significant loopholes that criminals could use to evade sanctions.
The UK’s overseas territories, including the Isle of Man, have agreed to set up a public register of beneficial owners of companies – but not until the end of 2023. Campaigners say this gives criminals plenty of time to restructure their assets before they can be frozen under government sanctions. As one campaigner put it, “the government can’t freeze assets if they don’t know where they are.”
According to The Independent newspaper, anti-corruption organisation Transparency International is calling for the government to strike emergency deals with its offshore dependencies to gain full access to their records and prevent the sale of assets bought with ‘dirty money’ from Russia and elsewhere. Transparency International also called on offshore centres to proactively provide immediate, open access to company data for law enforcers.
Meanwhile, Isle of Man regulator the Financial Services Authority (FSA) wrote to companies telling them to be highly vigilant for Russia-linked customers attempting to move funds, and change ownership or company structures, as it could be an attempt to evade sanctions.
The FSA is aware some businesses have Russian customers or connections and said it has “never been more important” for AML compliance officers to understand the risks in their customer base and have in place the appropriate mitigation controls and procedures.
Since Russia invaded the Ukraine, the Isle of Man has also been in the spotlight because of its aircraft registry. According to the International Consortium of Investigative Journalists (ICIJ), the super-rich use this registry to avoid taxes elsewhere.
According to The Guardian newspaper the island reacted quickly to events by deregistering 18 Russia-linked private jets and helicopters, including aircraft believed to be ultimately owned by sanctioned Russian oligarchs. The BBC also reported that the island has deregistered two Russian-linked superyachts.
Until now, the Isle of Man government has mirrored the UK’s sanctions in response to the Ukraine war. But the island said it was going further by delisting any vessels connected with Russia, including those linked to people sanctioned by the EU, G7, and UN.
The Isle of Man struggled with its reputation on AML up until five years ago, but has since made dramatic improvements.
In 2016 and 2017, the island featured prominently in the Panama and Paradise Paper leaks, highlighting its role in a complex web of offshore finance structures. In 2017, the Financial Action Taskforce (FATF) also highlighted several large deficiencies in its AML regime.
The island responded quickly and a 2020 follow-up reported significant improvements with a remaining large deficiency in only one of the FATF’s 40 recommendations, which related to the need for an independent audit function.
This year, the Isle of Man Cabinet Office is seeking input and feedback in relation to the draft Isle of Man Anti-Bribery and Corruption Strategy. This will set out the framework for its response to the threats posed by bribery and corruption, noting that these are closely linked to money laundering.
Recent events suggest the Isle of Man still faces pressure from multiple angles.
In 2020, the ICIJ accused the island of continuing to help super-rich private jet owners avoid European taxes, three years after the Paradise Papers first revealed the practice. It highlighted evidence suggesting complex and opaque structures that enabled clients to avoid huge tax bills.
In February 2022, Transparency International said £830 million (€989 million) worth of property in the UK’s Crown dependencies were linked to people close to Putin’s government, or to Russians accused of corruption.
Meanwhile, there is intense pressure to close loopholes in the Economic Crime Bill and boost its powers. According to The Independent, the pressure group the Tax Justice Network said it was dismayed the latest legislation does nothing specific to address offshore territories.
“It still allows oligarchs to hide behind opaque corporate structures,” said a representative. “I expect a lot of it is done through overseas territories and Crown dependencies.”
Campaigners called on the government to demand these territories provide full access to company records this year. They also called on the government to crack down on so-called enablers of financial secrecy such as accountants, estate agents, and lawyers. MP Margaret Hodge said, “you need to make them properly accountable… create criminal offences. That’s the only way you will stop it.”
In response, UK home secretary Priti Patel said there will be a second Economic Crime Bill in June or July because ministers cannot get all the measures in right now. This would be part of a wider legislative package to tackle illicit finance.
Keeping up with the rapidly changing situation
The mounting pressures on compliance officers in offshore centres means that, more than ever, they need to take a proactive, stance to AML.
Amidst a rapidly changing situation, companies need to accelerate compliance processes, such as screening and in life monitoring, with a truly risk-based approach.
Flexible, scalable, and auditable technology is now available that helps explain the logic behind each know your customer (KYC) and AML decision. This helps compliance officers maintain an efficient and effective process, while keeping ahead of the fast-moving compliance environment.