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Britain’s second empire: how London became an oligarchs’ playground

The UK has been cultivating a reputation as a gateway to the offshore world since the end of its territorial empire.

By Kojo Koram

The horrors of Vladimir Putin’s assault on Ukraine over the past week have provoked a long-overdue discussion in the UK about the presence of Russian oligarch wealth. For years London was nicknamed “Londongrad” for its open-door policy to the kleptocrats who have reportedly bolstered Putin’s rule for the past two decades. But with the invasion of Ukraine sparking an unprecedented outpouring of global outrage against Putin’s regime, the UK has suddenly begun to look at its significant Russian oligarch community with some embarrassment. Actions that seemed improbable a month ago are now being implemented. The government plans to confiscate the assets of billionaires seen as having ties to Putin, with the Mayor of London Sadiq Khan calling for further seizures. And having been buried in a back office for years, the long-delayed Economic Crime Bill – due to include the creation of a new public register obliging overseas companies to declare who might have a secret interest in their property – has finally been introduced to parliament.

These steps mark some of the most aggressive actions that the UK government has taken against private wealth in decades. However, seizing assets now doesn’t explain why Russian oligarchs chose to settle in London over everywhere else in the first place. This is because, over the past half century, the UK has carved out a reputation as the global centre of excellence for offshoring wealth. In the 1960s, Britain’s closest ally, the US, feared for the future of its old mother country. The US secretary of state under President Harry Truman, Dean Acheson, worried that “Great Britain has lost an empire and has not yet found a role”. Acheson underestimated the depth of the legal and financial roots that British capitalism had spread across the world over the previous few centuries. If the end of Britain’s territorial empire meant that the country was no longer the “workshop of the world”, the legacy of that empire meant that the workshop could be converted into a launderette, taking in and cleaning dirty money from across the globe before redirecting it across the new offshore world for a fee.

This is what the journalist Nicholas Shaxson has termed “Britain’s second empire” – the matrix of remaining British territories across the world that continue to facilitate the secret movement of global money. And it is this second empire, stretching from London’s Square Mile to the beaches of the Cayman Islands, via a hidden processional line of shell companies, secrecy trusts and mailbox offices, that Putin and the oligarchs that surround him have found so hospitable to their interests.

Britain’s reputation for harbouring offshore wealth began in the 1950s with some innovative thinking from a scrappy Birmingham bank called Midland. After the Wall Street crash of 1929 and the chaos of the Second World War, postwar politicians and economists agreed that it was important to control the cross-border flow of money more tightly. Capital controls limited the foreign ownership of assets and restricted banks’ trading in foreign currencies. The 1947 Exchange Control Act was passed in the UK, and with the empire in terminal decline, it appeared that the sun was setting on London’s time as the world’s financial centre.

However, Midland Bank realised that, in the divided world that was emerging in the early stages of the Cold War, a lot of people living in the eastern bloc, and therefore officially enemies of the US government, would nevertheless want to keep their money in US dollars, which had firmly replaced pound sterling as the world’s reserve currency. Midland quietly started letting Soviet bureaucrats and diplomats leave their secret dollars in British bank accounts. No one knows how long this was going on for, but in 1955 the Bank of England noticed that Midland Bank was holding large amounts of dollars, seemingly not for the purpose of specific transactions. This degree of transnational financial exposure was exactly the type of scenario that the restrictions on the flow of money were put in place to minimise.

The Bank of England was faced with a dilemma: ignore Midland’s actions and undermine the system of exchange controls, or discipline the bank but chase away a lucrative new source of foreign money and, perhaps more importantly, signal to the world that the curtains really were closing on the City of London’s spell as the centre of the international financial system. The Bank of England decided to go with the first option: it raised no objection to Midland’s holding large deposits of “offshore” US dollars, giving implicit permission to other British banks to do the same.

By the start of the 1960s, there was a mountain of dollars being held in the City of London. The term “Eurodollars” emerged to describe these secretive stashes of dollars that were escaping “onshore” regulation. Other countries began to get in on the action but the UK remained the epicentre of the offshore industry. This was not only because of the strong property rights and secrecy protections written into English law but also because at that very same moment, some of the forgotten corners of the old British West Indies, with the support of Westminster, were responding to the end of empire by priming themselves to become leaders of the offshore world. British overseas territories such as the Cayman Islands did not follow neighbouring countries like Jamaica and the Bahamas towards independence but instead developed a model for attracting foreign wealth based on a promise to keep it safe from the covetous hands of new sovereign governments that were springing up across the world.

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In 2019, the Tax Justice Network revealed that the world’s three most corrosive corporate tax havens were all British overseas territories, with the British Virgin Islands topping the list, closely followed by Bermuda and the Cayman Islands. The term “tax haven” plays down their influence and appeal. The opportunities these islands offer go far beyond tax evasion: offshore financial centres allow wealthy individuals and companies to avoid corporate regulation, conceal the true owners and beneficiaries of property, and circumvent rules of transparency. These powerful secrecy protections for hidden pots of wealth are just as attractive as the low tax rates.

The overseas offshore territories became the ideal final resting place for the Eurodollars that were hiding in the City of London’s banks. By 1980, the Cayman Islands were home to around 30 billion Eurodollars. The combination of legal and financial expertise from the City of London and the protections offered by the offshore overseas territories began to corrode the system of the global control of money from within. When the Bretton Woods system of postwar financial controls collapsed in 1971, the New York Times termed London’s Eurodollar market “the villain of the crisis”.

A generation on, this history of protecting and “offshoring” private wealth made London the obvious choice for oligarchs who had profited immensely from the fall of communism. As inequality across the world went into overdrive, the global 1 per cent became even less accountable to the rest of us, and authoritarian leaders could more easily dismiss democratic pressures since they could rely on the support of a well-insulated, wealthy elite. This is how Putin built his own power base, through a working alliance with a small group of businessmen who profited from the chaos of Russia’s post-Cold War economy before filtering the money through the offshoring expertise of London and its network of overseas satellites. Leading economists Filip Novokmet, Thomas Piketty and Gabriel Zucman estimate that Russian offshore wealth represented about 85 per cent of its entire national income in 2015.

Attacking oligarch’s offshore wealth may substantially weaken Putin at home, but while seizing assets and cancelling golden visas is a start, the UK must do more to dismantle the reputation as a gateway to the offshore world it has been cultivating since the end of the British empire. Of course, it’s not only Russian wealth that is a problem. London has become a financial home-away-from-home for everyone from Nigerian billionaires to Saudi princes, driving up house prices beyond the reach of everyday people and lowering the amount of tax that is fed into public services both here and abroad.

The Economic Crime Bill is a first step, although it remains to be seen if its implementation will be a priority for the government in future months should Russia’s invasion of Ukraine fade from the headlines. And while the new register to record hidden interests in companies and property is important to increase transparency, a British government really aiming to signal that it will never again serve as an oligarch’s playground could go much further.

Britain could pressure its overseas territories to close tax loopholes and dissolve its secrecy protections. It could restrict offshore ownership of UK state assets, abolish the non-dom rule that can protect people resident in the UK from having to pay tax on foreign assets or income. It could reform Companies House and make greater use of digital technology in identity verification. It could properly fund and empower law agencies to monitor and crack down on financial fraud. It could push for global tax and transparency authorities to be under the control of all countries at the UN General Assembly, with stronger monitoring and enforcement mechanisms. Rather than trying to carve out loopholes in the proposed global minimum tax rate, it could use its international influence to push for it to be set at a higher level than the proposed 15 per cent, which is still too low to adequately compensate some of the poorer countries.

It should not have taken a tragedy like the war in Ukraine for the UK to finally face up to its post-imperial history as the centre of the offshore world. We must not wait until another crisis linked to the wealth stashed away in London emerges to see further progress.

Kojo Koram is a lecturer in law at Birkbeck College, University of London and the author of “Uncommon Wealth: Britain and the Aftermath of Empire” (2022), from which this article is adapted.

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