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24 August 2022

Has the UK gone cold on Russian sanctions?

Six months after Russia’s invasion of Ukraine, enthusiasm for the economic war on Putin is hard to find.

By Emma Haslett

The Phi should be cruising the Mediterranean by now. At 58 metres, and with all the luxury touches expected of a modern superyacht – heated freshwater swimming pool, “infinite” wine cellar, outdoor cinema – the £38m vessel was designed to host the super-rich, who will pay €500,000 a week to charter it.

But Phi languishes on the murky waters of the Thames, just outside Canary Wharf, where it is overlooked by the occupants of the apartments in the residential towers that loom either side of it.

In December Phi was brought to the UK to have the finishing touches added to its interiors: fluted leather wall panelling; a table made of reeds hand-laid in a circle and coated in resin; marble worktops in the “family-style” galley, all laid out according to the principle of phi (pronounced “fee”) or the “golden ratio”, thought by the ancient Greeks to be the perfect ratio of beauty. After that, the yacht was due to head to its flag state, Malta, and on to the Med, to begin its time in service. On 29 March those plans were scuppered: Phi was boarded by officers from the National Crime Agency (NCA), who informed its crew it was being detained under rules imposed by the government after Russia invaded Ukraine. Later that morning Guy Booth, the vessel’s captain, was enjoying his morning coffee when Grant Shapps, the Transport Secretary, appeared on the quayside next to the vessel. “We watched him on the CCTV,” says Booth. “He was mincing up and down the quay taking selfies with film crews.”

Since its seizure, the yacht has been stuck – a floating trophy, physical evidence for the claim that in the battle against the oligarchs who took advantage of British hospitality to turn the capital into their money-laundering playground, the government has the upper hand. “We’ve turned an icon of Russia’s power and wealth into a clear and stark warning to Putin and his cronies,” boasted Shapps.

Except Phi isn’t owned by Vladimir Putin, or his cronies, or anyone the Russian president particularly cares about. The vessel appears to be owned by Vitaly Kochetkov, the owner of Motiv Telecom, a small mobile network in the Urals region of Russia. He isn’t on the UK’s sanctions list, or anyone else’s. The parent company of his mobile network has been the subject of a Russian criminal investigation into tax evasion – not a fate that usually befalls Putin’s cronies. “They’ve got the wrong guy,” says Booth. “But we were the only boat here. We’re big, we’re blue, we’re shiny, we’re brand new. We were low-hanging fruit for Mr Shapps.”

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Today (24 February) marks six months since Russia invaded Ukraine. As the tanks rolled in Boris Johnson vowed to “squeeze Russia from the global economy, piece by piece” and, to his credit, in the early days of the invasion the UK government took decisive action, introducing sanctions against dozens of Russian organisations and oligarchs, rushing the Economic Crime Act through parliament to crack down on money-laundering and vowing to improve enforcement.

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But the low-hanging fruit was quickly gobbled up, and now there is concern that when it comes to lasting, meaningful action, such as strict legislation and well-funded enforcement, the government may have lost its appetite. Now that a new prime minister is waiting in the wings and a cost-of-living crisis is threatening to engulf politics, does the government have the will to keep up the pressure on Russia?

[See also: Estonia dismisses Russia’s claim it was involved in Darya Dugina killing]

When Russia invaded Ukraine in February, many of the UK’s biggest transparency campaigners took the opportunity to reiterate criticisms of the government’s lax approach to money laundering. To get their cash out of Russia (and out of Putin’s eyeline), many Russian oligarchs had come to London, bought up its historic buildings, made use of its good schools, its courts and its accountants, washing £100bn a year of ill-gotten gains and earning the capital the nickname “Londongrad”. Transparency International has estimated that between 2015 and 2022 £1.5bn of property was bought by Russians accused of corruption or having links to the Kremlin.

In an effort to look as if it was doing something, the government hastily dusted off the Economic Crime Act, which had been dropped earlier in the year, and rushed it through parliament. The act included an overseas property register, tougher rules for unexplained wealth orders and wider scope for sanctions.

The problem is that, in the government’s haste, a lot was left out. “In the list of entities that needed to register, they just omitted trusts. It was not included in one of the definitions,” says Michelle Giddings, head of anti-money laundering at the Institute of Chartered Accountants in England and Wales. “They didn’t realise, until they started practically putting the overseas register into place. They had to go back and add it back in retrospectively.

“That’s a method of operation of this government. They lay primary legislation, and then they’ll use secondary legislation to do all sorts of things.”

The reason for that, explains Margaret Hodge, the veteran Labour MP who has campaigned against corruption, is that many of the lawyers charged with writing up this legislation are inexperienced. “We’ve hollowed out all the expertise in government, so when it comes to writing this legislation, they do it badly,” she says. “There’s a lot of 22-year-olds, they recruited them through Covid. They’ve lost that middle rank of skills that they had before.”

The Economic Crime Act was so rushed and missed out so much that a part two is planned, this time focusing on Companies House reforms. It’s long overdue: Companies House, the UK’s register of businesses and their directors, is famously so weak on information verification that Donald Duck and “Adolf Tooth Fairy Hitler” have been listed as directors of companies.

The second part of the act – known as the Economic Crime and Corporate Transparency Bill – is supposed to stop that: a white paper published by the government in February outlined plans to give Companies House powers to verify and challenge personal information, including information that’s already on the register. This legislation was announced in the Queen’s Speech in May and is being prepared by the Department for Business, Energy and Industrial Strategy, but the government has given no guidance about when it will go through parliament.

Even if the bill becomes law, Companies House will face the same problem of funding as the rest of the UK’s economic crime enforcement agencies: how will it ensure it has the budget to pay for all those new checks?

The awkward truth is that the UK’s reputation for under-investing in financial crime enforcement is, arguably, what brought the Russians here in the first place. In February the campaigner Bill Browder told me that “there is no enforcement regime… British law enforcement is in the bottom one or two of the 16 countries [I have worked with].” Although the government has claimed that the NCA’s budget “has increased by 32 per cent since 2019”, a report by the corruption campaign group Spotlight has found that in real terms, it decreased by 4.2 per between 2016 and 2021.

There is hope. In February Boris Johnson promised a “Combating Kleptocracy Cell” within the NCA, while Rishi Sunak has promised to “double” the size of the Office for Financial Sanctions Implementation if he succeeds in becoming prime minister next month. But both face a lack of enthusiasm when it comes to funding. In July the NCA pointed out that, per officer, it gets a third of the funding provided to the FBI by the US government, and that without a “substantial level of investment” it will struggle to keep seizing assets.

The same is true of the kleptocracy cell, suggests Oliver Bullough, an author and anti-corruption campaigner. “The funding which has been promised for it will run out at the end of this financial year,” he says. “After that, the National Crime Agency has to find the funding from within its own resources, so it’s kind of ‘tremble oligarchs, but only for nine months’.” A spokesperson for the NCA said: “The Home Office are supporting the NCA by providing additional funding for the Combating Kleptocracy Cell in the financial year 2022-23. Alternative funding arrangements for 2023-24 onwards are being explored.”

The Office for Financial Sanctions Implementation, set up in 2016, may now be suffering a similar fate. In the past few months the number of Moscow-related sanctions it is dealing with has risen from 220 to more than 1,400, but the organisation only has 70 staff to deal with constant inquiries from businesses. Staff numbers have risen, from 46 at the beginning of the year, and it says it plans to hire up to 100 by April 2023. Yet Tom Keatinge, director of the Centre for Financial Crime and Security Studies at the Royal United Services Institute, says it may not be entirely successful. “I question whether you’re going to get the talent that you need for the meagre salaries they were offering,” he says.

Salaries appear to be a problem across the UK’s sanctions enforcement regime. A senior sanctions lawyer, who spoke on condition of anonymity, recalls seeing a senior enforcement post at the Bank of England advertised on LinkedIn. “The salary they were offering is less than the salary we offer our newly qualified lawyers,” they said. That leads to a lack of expertise. “It’s churn, churn, churn.”

Bullough adds: “We don’t fund any of these agencies properly, we don’t have the kind of stability of investment over a long period, which means we don’t have really any of the specialists working for the government.”

For now, that means the Office for Financial Sanctions Implementation is doing what it can. “To be frank,” says the sanctions lawyer, “at the moment they are so inundated with licensing and other exemption queries and interpretation queries around the sanctions, that I think enforcement is probably not high on the agenda for them.”

There is a chance that September will come, the Conservative leadership election will finally reach a conclusion, and the government will return to waging economic warfare against Putin. But it’s unlikely: with most Russian oligarchs having fled the capital the immediate threat has gone, and now that the cost-of-living crisis is threatening to push household bills to record levels the government’s focus has shifted away from how it can punish Putin towards how it can protect those at home. “A politician once said to me that the problem with corruption is it’s everyone’s fourth priority,” says Bullough. “But to be honest, come this winter, it’s not even going to be fourth.”

Such a shift in priorities is short-sighted, and ignores the fact that the energy crisis is the creation of Russia’s kleptocracy. “It’s going to be difficult, I think, for anyone to try and persuade certain parts of government that actually, it’s not more important to deal with the energy crisis – but the two are directly interlinked,” points out the sanctions lawyer.

Hodge says a limpid approach to enforcement is a problem that goes beyond energy prices. “You’ll never have sustained wealth and prosperity on the back of dirty money,” she says. “It’s because we are a trusted jurisdiction that our financial services sector grew. And if we allow it to become maligned, and seen as the dirty money capital of the world, we lose that trustworthiness.”

The future for the Phi, which is racking up £10,000 a month in dockage fees, is uncertain. Since it was detained in March its crew hasn’t heard much from the government, apart from a curt response to a protest that Kochetkov isn’t on any sanctions list which said that the vessel is “detained on the grounds that it is owned, managed or operated by a person connected with Russia”. “Well, it is,” says Booth. “He was born there.”

But for Booth, who is not only captain of the Phi but has spent six years lovingly overseeing its construction, the detention makes him feel like a pawn in a game being played by people a world away. “There are 27 Russian players in the Premier League, 17 of them live in central London,” he says. “They have a big house, Bentleys, Ferraris. Why don’t we go and take their Ferraris?” He shrugs, and answers his own question: “Because it doesn’t make as good TV.”

[See also: How Global Britain props up Putin’s gangster state]