Business

London is getting very cold for the very rich

The world is a very different place than it was a few weeks ago – how the war in Ukraine will unravel remains to be seen, but one thing is for sure, the global crackdown on Russian oligarchs will affect one place more than any other – London. 

The city has often been referred to as Londongrad, given the large contingent of wealthy Russians with houses/apartments in the city and surrounding areas. Many of them send their children to expensive English schools, frequent exclusive Mayfair clubs, and mix in the company of British elites. 

We are already seeing cases where Russian nationals with no links to the current Russian government and who are not “Politically Exposed Persons” are having bank accounts closed…

One of London’s most expensive residential areas, Belgrave Square, is nicknamed Red Square because of the number of Russians who own houses there. 

Because of the Ukraine crisis, the UK government is cracking down on Russians with links to the Kremlin and London. That crackdown will not only deter Russian wealth in the UK, but a considerable amount of other overseas individual and family wealth as well.

It suggests a sharp increase in dynamism compared to the latest attempt to bear down on laundered money in 2018 using so-called Unexplained Wealth Orders, widely viewed as ineffective.

In a raft of new legislation and policies, the one reform that will really discourage the very wealthy is the introduction of a register of beneficial ownership of property. As a result, many wealthy buyers of UK property set up offshore companies/trusts, so they don’t have to disclose their names when buying houses in the capital and other areas such as St George’s Hill, just outside London. 

The new legislation, long been in the making but brought forward because of the Ukraine crisis, will ensure foreign buyers of UK property will have to reveal their names publicly on a register. The legislation will also be made retrospective, so those who bought a property up to 20 years ago in England and Wales will also have to disclose details.  

Given the ability to use anonymous offshore companies to buy UK property was a big fillip for not just Russians but many other overseas buyers, the move will have significant consequences. The retrospective nature of the legislation is likely to see foreigners selling up their prime London accommodation.  

The beneficial ownership register is just one part of the government’s plans to crack down on potential money laundering in the UK. Plans are also afoot to strengthen company disclosure rules at Companies House, the register of UK-based businesses, and create a “Kleptocracy” cell-based in the National Crime Agency.

Talk has even emerged of going after so-called UK-based “enablers” of this wealth such as lawyers, accountants, and other professionals. 

That said, in the past, there has been talk of a tougher approach, only for little to be done. Groups like the National Crime Agency and the Serious Fraud Office have been underfunded and consequently ineffective in their efforts to crack down on suspicious individuals and groups. 

Unexplained Wealth Orders (UWOs), introduced in 2018 to crack down on laundered money, have been largely ineffective, say lawyers. Only nine so-called McMafia orders have been obtained up until February 2022. None have been obtained since the end of 2019.

“There is a disconnect between the government’s powerful anti-corruption rhetoric and the budgets which they set for the agencies, such as the NCA, which impacts their capabilities and effectiveness,” says Andrew Fremlin-Key, a senior associate in London at law firm Withers. “The investigations we are seeing are, generally speaking, inefficient, poorly targeted and wasteful.”

But new measures to empower groups like the NCA and make it easier for law enforcement agencies to pursue UWOs represent a seachange in the government’s efforts. Also, the government has ripped up the Tier 1 (investor) visa, the so-called “golden visa”, that offered residency to those investing £2 million or more in the UK.

The atmosphere is changing fast, says Fremlin-Key. “We are already seeing cases where Russian nationals with no links to the current Russian government and who are not “Politically Exposed Persons” are having bank accounts closed with limited options in terms of challenging the bank’s decision – regardless of what the government does. Banks/financial institutions are clearly and understandably spooked.”

Although loopholes will be found with all these new laws and policies, few lawyers will want to be associated with seeking them out at the moment – and maybe never again. 

Of course, all of this is likely to be immaterial if the war in Ukraine escalates…

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