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Roberto Saviano - Dirty Money in London event

May 31, 2016

On Wednesday 25th May I hosted an event in Parliament with best-selling author Roberto Saviano, and Luke Harding, an award-winning foreign correspondent for The Guardian who has reported on Russia, Ukraine, the Panama Papers, Edward Snowden and Wikileaks.

 

Roberto's outstanding work has exposed the realities and corrupt operations of organised crime ranging from the business of the Camorra (Naples mafia) to the international cocaine trafficking business.

 

On this occasion Roberto travelled to Parliament to talk about corruption and 'dirty money' in the London property market in a speech entitled "What if we were to ask ourselves where the capital of dirty money is?".

 

The full transcript of the speech is below (translation by Claudia Colvin):

 

If we were to ask which country is the most corrupt in the world, the first answer to come to mind would be dictated by the perceived level of corruption. Perhaps one might think of Mexico, of South American countries, of African countries, of the Middle East or Italy. But the most corrupt is the UK. It’s not a type of a corruption that concerns civil servants, policemen or mayors; it’s a type of a corruption that is consubstantial to economic system.

The British economic system feeds itself on corruption. And in the midst of this, the British government and its citizens have not woken up to the plight that their country is going through. A plight greater than earthquakes, greater than terror attacks.

 

Last year the National Crime Agency published a report that declared that “hundreds of billions of US dollars of criminal money almost certainly continue to be laundered through UK banks, including their subsidiaries, each year”. It added that the scale of the laundering of criminal proceeds “is a strategic threat to the UK’s economy and reputation” [1].

 

Soon after, Prime Minister David Cameron was to announce his commitment against corruption and money laundering, declaring: “There is no place for dirty money in Britain. (…) London is not a place to stash your dodgy cash”[2]. But that’s not quite how things went.

 

A very interesting report on the London property market as a refuge for secret assets and dirty money – published in March 2015 by Transparency UK – spoke of money coming from corruption or corrupt individuals, without ever mentioning the word “Mafia”; nor did it ever mention “organised crime”. The reason is simple: with the exception of a few very rare cases, in the UK the mafia is not something that you can see or hear. There aren’t dead bodies on the streets, or shootings. In Mexico or in Italy, between corpses, blood and drug seizures it’s impossible to think that the Mafia doesn’t exist. In Italy and in Mexico Mafia is loud and it smells of blood. In London, as in Paris, it exists, but it’s quiet, it acts in the dark. And most of all it doesn’t have the pungent smell of blood, but the reassuring smell of money. It’s not true that money doesn’t smell, it does smell indeed, but you definitely can’t rely on your sense of smell to identify criminal money. 

 

A 2012 Universidad de los Andes’ investigative report put together by two Colombian economists, Alejandro Gaviria and Daniel Mejía, revealed that 97.4% of drug trafficking profits in Colombia is laundered by European and US American banking networks through a number of different financial operations. Hundreds of billions of dollars, turned into electronic funds transfers and passed around from country to country through a “Chinese boxes” scheme – a matrioska-style mechanism whereby a larger company/its owner hides within it a number of smaller owners. By the time this originally dirty money arrives in a different continent, it’s pretty much clean, and most of all, untraceable.

 

If they weren’t able to launder the proceeds of their illegitimate activities and reinvest them into legal networks, criminal organisations would be poorer, less powerful, and therefore less influential. Their profits would not multiply, would not bear fruit, would not transform into new activities, new income and new money, this time clean. Without laundering, the Mafia’s money would be lifeless proceeds. And yet these proceeds must keep moving: criminal organisations’ problem is not making money, but laundering it.

 

According to data published by the UN Office on Drugs and Crime, in 2009 the dirty money resulting from crime worldwide was equivalent to 3.6% of the global GDP (2.7 trillion dollars), while it was estimated that amount of money laundered globally was equivalent to 2.7 of the global GDP (1.6 billion dollars). According to more recent IMF data, money laundering is worth 5% of global GDP. And only 1% of the money laundered globally gets spotted.

 

As far as Europe is concerned, the overall turnover of dirty money’s holding is of 600 billion Euros. In the UK, according to NGO estimates, 57 billion pounds are laundered each year.

 

Unlawful revenue which, after being conveniently cleaned, is then reinvested within the legal economy: polluting it, corrupting it, forging it, killing it. Whether it’s reinvested in the London property market, in Parisian restaurants, or in hostels on the French Riviera. Drug trafficking money will buy homes that honest folk can no longer afford; it will open shops that will sell at more competitive prices than legitimate shops; it will start businesses that can afford to be more competitive than clean businesses. But one thing must be clear: these businesses are not interested in being successful; the main purpose for which they were created was to launder money, turning money that shouldn’t even exist into clean and usable money. In silence, illegal assets are moving around and undermining our economy and our democracies. In silence. But it doesn’t stop here; organised crime is providing us with a winning economic model. Organised crime is the only segment of global economy to have not been affected by the financial crisis; to have profited from the crisis, to have fed on the crisis, to have contributed to the crisis. And it’s in the crisis that it finds its satellite activities, such as usury, gambling, counterfeiting. But the most important – and most alarming – aspect of this issue is that it’s exactly in times of crisis that criminal organisations find their safe haven in banks.

 

The city of London, together with Wall Street, is the world’s biggest “launderette” of drug trafficking’s dirty money. It’s in British banks, or in British branches or foreign banks, that criminal money gets laundered. And banks, in turn, are profiting by moving around and investing these huge amounts of liquid assets. Liquidity is what they’re after, especially in times of crisis. And liquidity is what criminal organisations have. All banks need to do is to lower their monitoring standards, their anti-laundering standards, and the job is done.

 

The scandals concerning the relationship between banks and drug trafficking that emerged in the past few years are a proof of this. The HSBC case is an example. Europe’s first credit institute in terms of market capitalisation, one of the biggest banking groups in the world, has laundered drug money. A US Senate enquiry revealed that HBUS, the American branch of HSBC, was offering correspondent banking services to HSBC Mexico, treating its Mexican branch as a low-risk client despite the fact that it is located in a country where laundering and drug trafficking are a massive problem. Between 2007 and 2008 the Mexican branch transferred 7 billion dollars in cash to HBUS, overtaking all other Mexican banks. A part of this money came from the Sinaloa Cartel (at least 881 million narcodollars were laundered through HSBC branches). The Guardian also reported that since the money deposited in Mexico was in cash, some branches had their windows widened so that their cashiers could accept larger boxes of cash. At the end of 2012, HSBC accepted to pay a record fine of 1.9 billion dollars to US authorities for having exposed the financial system to the risk of money laundering, and funding of drug trafficking and terrorism.

 

One of the United States’ largest banks, WACHOVIA, has also let its guard down. Martin Woods, an anti-money-laundering agent in the bank’s London offices, is rummaging through some clients’ documents in 2006 when he notices that something isn’t quite right with the numerous travellers cheques issued in Mexico: they don’t add up to the sums usually needed by a tourist. Then his eyes fall on the serial codes, oddly sequential. And finally, he notices that the signatures are very similar. It mainly concerned cases that involved cases de cambio, Mexican exchange bureaus. Martin files numerous Suspicious Activity Reports (SARs), which fall on deaf ears, until he receives an internal communication informing him that his control radius does not extend to Mexico or the United States.

 

Martin gets slowly isolated on the workplace, until he has a nervous breakdown. But before leaving his office, in 2007 he takes part in an event in Scotland Yard where he meets a US DEA delegate, and he tells him what he suspects. US Office of the Comptroller of the Currency started analysing Martin’s reports and found out that as of 2004, several billion dollars had gone from the Sinaloa Cartel’s “safes” to Wachovia’s bank accounts through the casas de cambio. The casas de cambio in Mexico would receive the cash. They would then open bank accounts managed by Wachovia’s Miami branch, from which they would wire the money into Wachovia accounts in the United States, to buy either stocks or goods. Despite the risks involved in offering this kind of service to a country like Mexico, between 2004 and 2007 Wachovia did not respect the anti-money laundering procedures while transferring over 378 billion dollars from Mexican casas de cambio. It was verified that 110 million of these 378 billion came from drug trafficking, laundered through Wachovia and entering international banking networks from there. 13 million went through Wachovia bank accounts to buy planes used for drug trafficking, on which over twenty tons of coke were seized. The laundered money was generating more money. On March 16th, 2010, Wachovia sealed a deal with the American authorities: 110 million dollars for going forward with transactions linked to drug trafficking, thus violating the anti-money laundering regulations, plus a 50 million dollar fine. A huge sum, but laughable if compared to the earnings of a bank like Wachovia.

 

Most of the world’s money laundering would not exist without the support of banks, who, in order to hide their account holders’ and investors’ identity, exploit the Chinese boxes scheme: shell companies controlled by in turn by other shall companies based offshore, run by legal firms through trusts, in an infinite series of steps that make it impossible to track down the true account holder.

 

The functioning of tax evasion through tax havens was well-explained, and simplified, by Nicholas Shaxon in his book Treasure Islands, through the banana example. Let’s say that a multinational corporation in Ecuador wants to sell a 1000-dollar container of bananas to a supermarket in France for 3000 dollars. If it sells the bananas directly, it will have to pay tax on the 2000 dollar earnings it has made. If, on the other hand, the corporation opens three companies, one in Ecuador, one in a tax haven, and one in France, what happens is that the company in Ecuador will sell the container to the offshore company for 1000 dollars. There will be no earnings, and therefore no tax. The offshore company will then sell that same container for 3000 dollars to the French company, and the French company will then sell it, again for 3000 dollars, to the French supermarket: and here again, no earnings, no tax. The only company to have made a profit is the one in the tax haven, but because it’s in a tax haven, it doesn’t pay tax. This is how a company is able to generate revenue without having to pay tax anywhere.

 

In tax havens, boundaries between what’s legal and illegal become very blurred. The recent leak on the Panama Papers revealed how international leaders, celebrities and businessmen from all over the world were using offshore companies to avoid making their assets public and, in some cases, potentially to dodge tax or hide illegal activities. Panama is where criminal capitalism and legal capitalism become one. The money of South American Narcos has always found a way to be laundered and inputted into legal networks to be reinvested (in the early 80s the leaders of the Cali Cartel ended up buying most of the shares of Panama’s First Interamericas Bank to launder the dirty money gained from the sale of coke in the USA). Today in the heart of Panama you can still find the money of Mexican Narcos and major European businessmen. Different origin, same advantages.

 

But the problem is that the boundaries of tax havens themselves can become very blurred.  

 

London is an international financial system that sees trillions of dollars from all over the world go through it each year, and that offers the most sought after financial services. This alone would be enough to make this city a desired anchorage for those looking to launder and reinvest unlawful funds. But there is more; besides this, the British capital is at the heart of the world’s most important offshore system. Much of the international capital passing through British Crown Dependencies (such as Jersey) and Overseas Territories (such as the Cayman Islands) – tax havens par excellence – is then channelled towards Banks in the City and by the time it gets to London it has already been cleaned up, even when it was originally dirty. In the Tax Justice Network’s Financial Secrecy Index – which ranks countries according to their secrecy level and to the scale of their offshore financial activities –Switzerland is in first place, obviously, and the UK is ranked 15th. However, a specification in the report clarifies that “Overall, the City of London and these offshore satellites constitute by far the most important part of the global offshore world of secrecy jurisdictions. Had we lumped them together, the British network would be at the top of our index, above Switzerland.”[3]

 

As revealed in a 2013 by research based on antimafia inquiries undertaken by Transcrime (Milan Università Cattolica’s research centre on transnational crime), all the biggest Italian Mafias are in the UK, doing business. In London, Cosa Nostra controls gambling; also in London, the ‘Ndrangheta has its hands on the property market; the Camorra has found its Scottish fortress in Aberdeen, and has been doing very well in public work, in wholesale, in the property market and in restaurants.

 

Have you ever asked yourselves why Mafias from all over the world are constantly opening restaurants, cafes or shops? Because this type of commercial activity has huge amounts of cash coming in. A Mafioso businessman’s number one priority is not to make money, but to hand out receipts in order to justify money that he already has. In Italy, where tax avoidance is extremely high, we know that when a shopkeeper is reluctant to give you a receipt he or she is almost definitely committing an offence, but almost definitely not a Mafioso. Businesses run by the Mafia will always give you a receipt.

 

And the Russian Mafia, in the years of the wavering ruble, safely stored away its money in London’s luxury homes, fuelling London’s property bubble with dirty money.

 

The fictitious buying and selling of property is one of organised crime’s favourite ways of laundering money. Let’s say that a Mafioso buys a house in London for £100,000. Then he opens an offshore company, for example in the Cayman Islands, he puts it under a fake name, and uses it to deposit the income generated from his unlawful activities. At this point the Mafioso, perhaps after some renovation work, sells the house in London to the offshore company for £500,000. The contract of sale will testify that the Mafioso has earned £500,000 through a seemingly clean transaction, when in reality what he’s done is laundered his dirty money, which is now ready to be reinvested in lawful activity, perhaps even in the UK.

 

Research undertaken in 2015 by Transparency International counted 36,342 properties owned by shell companies in an area of 6 square km in London. And 75% of property currently under investigation in the UK for corruption-related crimes is registered in tax havens. In London, 90% of property owned by foreign companies belongs to companies registered in tax havens. Often it’s the bankers, accountants and estate agents themselves who act as mediators and consultants, enabling individuals who want to hide the origin of their money to buy in the dark.

 

This is how entire neighbourhoods in London are becoming unoccupied, turning into investments’ empty spaces. Money moves in, and people move out. British press finally became aware of this de facto financial squatting of its city: a few days ago the Guardian’s investigative piece on St. George Whaft Tower, London’s tallest residential tower, got people talking. The tower is a 50 storey cement breadstick whose 214 luxury apartments are mainly owned by foreign tycoons when they are not owned by offshore companies. A fully-serviced tower block that is empty for most of the year, whilst most Londoners can barely find an affordable place to rent in London.

 

Houses in London are not being used as homes, but as concrete safes, looking after (often laundered) money.

 

In one month’s time, the UK will be asked to vote for the Brexit referendum, to have its say on whether it should leave or stay in the EU. Motivations and results aside, it is fundamental to keep in mind that there are certain areas – such as security and justice – in which it is not possible to act in isolation. There is no such thing as boundaries as far as organised crime, terrorism and drug trafficking are concerned. We would be delusional to think this. It’s not a coincidence that, for example, we speak of international terrorism, international drug trafficking. How is it possible to think one can tackle with national means a problem that is by definition international? For the UK, leaving the EU would mean allowing Qatari companies, Mexican cartels and Mafias from all over the world to gain even more power in its territory. If the UK left the EU, it would be eaten up by dirty money.

 

The EU still doesn’t have a proper, joint anti-money laundering law. With the exception of a few shared agreements, each European country independently decides its own laws. Just think about the fact that Austria opposed renouncing bank secrecy for 6 years, as Europe was requesting since it believed this to be a key element in the fight against tax avoidance. (Now, finally, Austria and Luxemburg have removed their veto and Austria, as of 2018, will comply to the new regulations).

 

What we need is a shared legislation to counter money-laundering and organised crime; we need more collaboration amongst different police forces; we need to make it easier to share financial and banking information.

 

The UK cannot pretend nothing is happening. It has the data; it has the results of research; it has received warning signals from authorities and experts. Now is the moment to take action, do to something about criminal money before criminal money buys up the whole of the UK.  

 

Further reading

  • National Strategic Assessment of Serious and Organised Crime 2015, National Crime Agency, June 23, 2015, http://www.nationalcrimeagency.gov.uk/publications/560-national-strategic-assessment-of-serious-and-organised-crime-2015/file

  • UK national risk assessment of money laundering and terrorist financing, HM Treasury – Home Office, October 2015 https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/468210/UK_NRA_October_2015_final_web.pdf

  • Financial Secrecy Index 2015, Tax Justice Network http://www.financialsecrecyindex.com/introduction/fsi-2015-results

  • Narrative Report on United Kingdom, Financial Secrecy Index 2015, Tax Justice Network http://www.financialsecrecyindex.com/PDF/UnitedKingdom.pdf

  • “Property in the UK: a home for corrupt money”, Transparency International, March 4, 2015 http://www.transparency.org/news/feature/property_in_the_uk_a_home_for_corrupt_money

  • “Unmask The Corrupt”, Transparency International UK, http://www.ukunmaskthecorrupt.org/

  • “Combating Transnational Organized Crime: International Money Laundering As A Threat To Our Financial Systems”, Jennifer Shasky Calvery Chief Assest Forfeiture And Money Laundering Section Criminal Division, US Department of Justice, February 8, 2012 https://www.justice.gov/sites/default/files/testimonies/witnesses/attachments/02/08/12/02-08-12-crm-shasky-calvery-testimony.pdf

  • “HSBC Exposed U.S. Financial System to Money Laundering, Drug, Terrorist Financing Risks”, The Permanent Subcommittee On Investigations, July 16, 2012 http://www.hsgac.senate.gov/subcommittees/investigations/media/hsbc-exposed-us-finacial-system-to-money-laundering-drug-terrorist-financing-risks

  •  “Treasure Islands: Tax Havens and the Men who Stole the World”, Nicholas Shaxson, Bodley Head, 2011

  • “Políticas antidroga en Colombia: éxitos, fracasos y extravíos”, Alejandro Gaviria and Daniel Mejía, Ediciones UniAndes, Bogotá, 2011.

  •  “Drug money saved banks in global crisis, claims UN advisor”, Rajeev Syal, The Observer, December 13, 2009, http://www.theguardian.com/global/2009/dec/13/drug-money-banks-saved-un-cfief-claims

  • “How a big US bank laundered billions from Mexico's murderous drug gangs”, Ed Vulliamy, The Observer, April 3, 2011 http://www.theguardian.com/world/2011/apr/03/us-bank-mexico-drug-gangs

  • “HSBC's record $1.9bn fine preferable to prosecution, US authorities insist”, Dominic Rushe and Jill Treanor, The Guardian, December 11, 2012 https://www.theguardian.com/business/2012/dec/11/hsbc-fine-prosecution-money-laundering

  • “Dark money: London’s dirty secret”, Tom Burgis, Financial Times, May 11, 2016 http://www.ft.com/intl/cms/s/2/1d805534-1185-11e6-839f-2922947098f0.html

  • “'Tower for the toffs': UK's tallest skyscraper and playground of the rich”, Robert Booth, The Guardian, May 24, 2016, http://www.theguardian.com/society/2016/may/24/st-george-wharf-tower-london-luxury-pads-emblematic-housing-crisis

  • “The London skyscraper that is a stark symbol of the housing crisis”, Robert Booth and Helena Bengtsson, The Guardian, May 24, 2016 http://www.theguardian.com/society/2016/may/24/revealed-foreign-buyers-own-two-thirds-of-tower-st-george-wharf-London

     

[1] http://www.nationalcrimeagency.gov.uk/publications/560-national-strategic-assessment-of-serious-and-organised-crime-2015/file

 

[2] http://www.bbc.co.uk/news/uk-politics-33684098

 

[3] http://www.financialsecrecyindex.com/PDF/UnitedKingdom.pdf

 

 

 

 

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David Lammy

From Tottenham. For Tottenham.