Two Ways the UK Could Fight Illicit Finance Just by Publishing More Data

The British government is looking for ways to end the country's notoriety as a haven for dirty money. In the lead up to this year's general election, now Foreign Secretary David Lammy promised that the Labour Government would take illicit finance more seriously, announcing a list of potential policy actions ranging from improving enforcement and reducing loopholes to increasing international cooperation.  

Making its economy less hospitable to illicit cash would not only burnish the UK's reputation, but it would make it a more effective development partner., It would, for instance, make it harder for public officials in developing countries to hide corrupt proceeds in British banks and real estate. And it would also bolster the credibility of the UK’s Foreign Commonwealth and Development Office (FCDO) as a champion of transparency and anti-corruption efforts in countries that receive UK aid, a role undermined by the UK’s inability to get its own house in order.  

To complement the longer term institutional reforms proposed by David Lammy, here are two immediate steps the UK government could take in the fight against dirty money, just by publishing more data. 

Illicit finance thrives on the information asymmetries created by national borders: it is very hard for a Zambian investigator or tax inspector to know what wealth their citizens keep abroad. Both of the steps I suggest would help shrink those asymmetries, enabling both foreign and domestic authorities to better fathom and combat transnational corruption and tax evasion. 

The FCA should publish data on wealth held by foreign public officials in British banks 

The easiest way to spot the public officials engaging in corruption is to observe those who are living beyond their means. Of course, corrupt public officials are keenly aware of this, so they often choose to both keep and enjoy their spoils offshore, away from the prying eyes of anti-corruption authorities and the media. While at home, your member of parliament may appear to live on a modest salary, they could very well be spending their holidays in a multi-million dollar villa in Dubai owned by a shell company that they control.  

To account for this, anti-money laundering  regulations require banks around the world to be on the lookout for account holders who have some connection to public office. While the definition varies by country, generally these "politically-exposed-persons" (PEPs) are those who currently hold a public role, did so in the past, or have a close relationship to someone who does. Even though PEPs have the same right to a bank account as the rest of us, financial institutions are obligated to keep track of them because there is a de facto greater risk that they could be engaging in financial crime or corruption. Famously, one of the purported reasons Nigel Farage was de-banked by Coutts was due to his status as a PEP. 

But while anti-money laundering obligations ensure that banks pay closer attention to PEPs, the current rules don't provide governments with enough information to fully guard against the risks that they pose. This is because banks will only report PEPs to the authorities when they spot suspicious behavior—and they are often seeing just a very tiny tip of a very large iceberg. In practice, financial institutions routinely miss many cases of obvious corruption until it is far too late: Isabel dos Santos (the daughter of Angola's former president who reportedly engaged in corrupt practices for years) was ultimately felled by a leak of documents rather than any action taken by a bank.  

If the British government wanted to better understand how popular the UK was with foreign PEPs, it could accomplish this through regular aggregated reporting by its financial institutions. The Financial Conduct Authority (FCA) already does this in a limited way through its REP-CRIM surveys, fielded by financial institutions every few years. The latest published report indicates that roughly 90,000 PEPs—a large share of whom are likely to be foreign—held financial accounts in the UK at the turn of the decade.  

The REP-CRIM survey should be adjusted in three ways to make it more useful to authorities both in the UK and abroad: 

1. Country Aggregation: Financial institutions should categorize PEPs by their relevant country, regardless of where they reside or hold other nationalities. For example, if the PEP is a member of the Peruvian congress, then they should be categorized as Peruvian, even if they live and pay tax in Ecuador. 
2. Account Balance Reporting: They should report the aggregate account balances of PEPs from each country. 
3. Ownership Type Distinction: Institutions should distinguish between assets held directly and those held indirectly via companies, to better identify structures which might be used to hide ownership from the authorities. 

The result, a public report on the aggregate financial assets held by foreign PEPs, divided by country and type of ownership, would have several benefits. It would allow both public and private British institutions to understand potential risk and vulnerabilities faced by the country's financial system, and whether its efforts to fight financial crime at home and abroad were bearing fruit. For example, if the FCDO was funding a new anti-corruption project in Nigeria, yet REP-CRIM survey data revealed that Nigerian PEP wealth in UK banks was on the rise, it would call into question the effectiveness of that foreign aid (and the UK's ability to stop illicit funds from being placed in its financial system).  

Such a report would also help foreign authorities who are serious about fighting corruption identify concerning patterns. If wealth held in British banks by Bangladeshi PEPs exceeded that which was reported in annual asset declarations by civil servants, that would be an immediate cause for alarm, and could be a basis for further investigation and request for assistance from British authorities. It would also allow developing countries, who— like their richer counterparts—routinely struggle to find the data they need to complete serviceable anti-money laundering National Risk Assessments.  

HMRC should publish data on foreign residents' wealth in UK financial institutions  

Since 2016, the UK has participated in a massive multilateral effort to fight offshore tax evasion devised by the OECD, known as the Common Reporting Standard (CRS). Every year British banks have to identify the ultimate owners of financial accounts held by residents of other countries, then send information on the size and income of those accounts to HMRC, who automatically sends it on to the pertinent foreign tax authority.  

This information can be invaluable for foreign tax authorities looking to curb tax evasion by wealthy individuals. But despite the huge upside, the poorest countries are largely shut out of the CRS: only around 15 percent of Low-income countries  and Lower-middle-income countries currently participate. This is because implementing the CRS requires relatively high levels of government capacity, particularly around data confidentiality, which many developing countries struggle to achieve.  

Rather than condemn them to a data scarce environment, the UK could act now to provide tax authorities in developing countries with a better sense of how much offshore wealth their citizens hold. Importantly, the UK has implemented what is known as a 'wider' approach to the CRS, which means that its financial institutions not only gather information on people from other countries that participate in the multilateral exchange, but on all those who are foreign tax residents.  

While at present, this additional information is not transmitted to HMRC, with a slight tweak of the legislation used to implement the CRS, the Labour government could adopt what is known as the "widest" approach. This would allow HMRC to receive nearly-comprehensive information on the financial wealth that foreigners hold. They could then publish an aggregate country-by-country breakdown estimate of both account balances and any income-earned, much in the same way that Australia has been doing on an annual basis since 2018. This would allow foreign tax authorities without access to the CRS to check and see if their taxpayers are reporting similar levels of offshore wealth or income in the UK as what is actually being held there, making it easier for them to understand whether implementing the CRS would be a worthwhile investment.  

A little data could go a long way  

Neither one of these efforts would win the war on illicit finance. But they are both low-hanging fruit that the UK government could seize to show that its aim to clean up the British economy is more than just rhetoric, and to give developing country governments interested in cracking down on corruption and tax evasion a clue of how bad the problem is.  

If other governments followed suit, policymakers who grapple with endemic dirty money would have many more pieces to the puzzle.