Putin And Property: Why This Time Sanctions Really Will Bite
With 130,000 troops on its borders, Russian President Vladimir Putin seems ready to strike against Ukraine.
London has a well-established reputation as a laundry for Russian funds. The joke is that it is Londongrad or Moscow on Thames.
But this time sanctions against Russia, threatened by the U.S. and UK if war does break out, really could bite in ways the property business can feel. The property industry is in the front line of the Ukraine conflict.
It is not clear how much of the £100B invested in the UK by Russians over the last two decades is legitimate, how much criminal, and how you could tell the difference between the two. But it is clear a lot of it ends up in real estate.
Before the current crisis blew up, lobby group Transparency International identified 176 properties worth £4.4B in the UK that have been bought with suspicious wealth — over a fifth of which is wealth from Russian individuals. The group said that, since its calculations relied on open-source data, it was “likely to be just the tip of the iceberg.”
Yet according to the official figures, of the 573,085 suspicious activity reports generated by professionals to alert the authorities about dirty money in 2020, just 0.15% came from real estate agents. True, this is up from 0.05% in 2013-14, when Transparency International noted: “This figure does not match the risks posed by money launderers to the UK property market.” But it is still extremely small.
Parliamentarians are making it pretty clear that the property industry is expected to pull its weight, and would be well-advised to think of some new approaches before the government imposes them from above.
Baroness Kramer is an opposition member of the House of Lords. She is pushing for more controls on newly created freeports, deregulated UK free trade zones, to prevent them becoming a focus for money laundering. Freeports risk “opening our doors even further to Kremlin-linked oligarchs at the moment when we should be putting a stop to this interference,” she has previously said.
Speaking to Bisnow, Lady Kramer — a former Chicago-based vice president of Citibank — went one step further.
“I suspect it is a challenge for the [real estate] industry to go beyond doing whatever the law requires, but they have expertise government does not have, and the usual rule is that if an industry can clean itself up then the government won’t have to,” Kramer said.
"This is an area where we are increasingly unwilling to tolerate loopholes and the property industry would do well to make sure they were well ahead of government.”
Transparency International UK Investigations Lead Ben Cowdock is more explicit.
"The UK’s professional services sector is supposed to form part of the first line of defence against dirty money entering the country, but all too often we see firms facilitating the flow of suspect funds instead," Cowdock told Bisnow. "Whether this be carrying out the required checks but failing to spot red flags, or actively turning a blind eye to the source of their client’s wealth, more needs to be done to create a credible deterrent against poor practice.
"A radical overhaul of the UK’s anti-money laundering system is urgently needed to help prevent UK professionals from assisting — unwittingly or otherwise — those who have benefited from corrupt and repressive regimes."
There is clearly an issue to address: around one in 10 properties in the City of Westminster are owned by shell companies registered in secretive tax havens, according to Transparency International.
Bisnow approached leading figures in the discreet world of high-end residential, private client advisory in London, and the multitrillion-dollar world of private and family offices. Nobody was keen to talk on the record, given the sensitivity surrounding Russian capital flows, but it was widely understood that the issue has the capacity to embarrass the property business.
A New Cold War
The property industry will have to digest, and learn to work with, tougher-than-usual UK and U.S. sanctions regulations.
The toughness indicates a change of mood. This time sanctions are not an isolated attempt to rein in Russian power. It won’t be angry words, sporadic sanctions, then a slow return to normal as occurred after the assassination of Alexander Litvinenko in London in 2008, or Russia’s attempted assassination of Sergei and Yulia Skripal in Salisbury in 2018.
Both U.S. and UK governments have made it clear that hostility to Ukraine would mean a long-term reset in relations, akin to a return to the Cold War.
“We’re entering into a period of sustained, strategic competition with Russia, in which we need to make sure that Putin’s wider aims beyond any territorial aim he may have in Ukraine, but his wider aims about Russia’s role in the world, his wider aims around constraining Nato, that he fails to achieve those and that Nato shows its resolve within its own borders,” UK defence minister James Heapey said on Monday.
As a result, new UK sanction rules, released on Friday, draw a firm red line. You can read them here.
The regulations allow the government to take action against anyone involved in supporting or facilitating Russian action in Ukraine, but goes a lot further by allowing asset stripping from designated individuals “involved in obtaining a benefit from or supporting the Government of Russia”. This means any business with any part of the Russian government, or “carrying on business of economic significance to the Government of Russia … or in a sector of strategic significance to the Government of Russia”.
The list of sectors at risk includes financial services, information, communications and digital technologies, transport, energy, chemicals, construction, defence and electronics.
A list of designated individuals and organisations could come as soon as today (Monday 14 February).
U.S. sanctions are also expected to be severe. Proposals for a sanctions package, billed as the "mother of all sanctions," were introduced into the Senate in January.
“Administration officials insist any allied response this time will be much harsher than the sanctions imposed following Russia’s 2014 takeover of Crimea,” The Washington Post reported, with one analyst adding that sanctions weren’t meant to hurt the Russian economy, but to “blow it up”.
You can read the latest U.S. lists of designated individuals and organisations, and a summary of the (fast-changing) rules here.
Confidence is high that the UK government will not miss its targets, not least because Boris Johnson cannot afford to fumble at a time when he is politically weak.
The context is provided by three controversial years in which the effort to ramp up sanctions against dirty money seems to have stalled.
The UK government’s plans for an Economic Crime Bill were revealed in 2018 but haven’t gotten far in the years since. The plan would involve revealing the names of beneficial owners of the shell companies that often hold UK real estate on behalf of Russian (and other overseas) investors. Transparency on this level could make sanctions a more targeted, and more effective, tool. The beneficial ownership rule was supposed to be operational by 2021 but as yet, isn’t.
In January the Conservative-dominated House of Commons Treasury select committee published a report demanding action. The government is now under pressure from Conservative MPs like Tom Tugendhat but also from the Leader of the (Labour) Opposition Sir Keir Starmer.
That Starmer’s Labour Party has linked £1.9M in donations to Johnson’s Conservative Party to Russian donors, and that in turn is linked to slow progress on the Economic Crime plan, gives Johnson additional motives for action.
The shock of a major European war sent global stock markets into reverse on Monday.
That the Russian response to sanctions is likely to include cyberattacks on power systems and financial networks will mean a bumpy ride for everyone, markets included.
But U.S. and UK governments have no choice. Short of taking military action in Ukraine — which both the U.S. and UK are reluctant to do — sanctions are the only available form of action.
They come with serious downsides. Apart from the obvious loss of business, and loss of trust by other investors who may one day fall foul of UK and U.S. foreign policy, there is also a geopolitical risk. Crack down too hard on Russia and you help forge a stronger trade relationship between Russia and China.
Despite the drawbacks, sanctions are the only show in town. The property industry will need to show exemplary effort enforcing them.