News 07th Jul 2022

Bottle Laundromat: How fake trades and British shell companies helped move $820 million of hot money out of Russia

Steve Goodrich

Head of Research and Investigations

Steve is Transparency International UK’s Head of Research and Investigations. He is responsible for managing TI-UK’s research unit and is our specialist on lobbying accountability, party funding and open governance. Before joining TI-UK in May 2015, Steve worked as a Senior Policy Adviser at the Electoral Commission. He has over five years’ experience working on political finance regulation, legislation and data.

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A new investigation by Transparency International in Russia, the UK and Czech Republic has uncovered a scheme that moved $820 million in suspect funds out of the Russian Federation between 2014 and 2016. The structure and nature of these payments were similar to the ‘Laundromats’ reported by the Organised Crime and Corruption Reporting Project – industrial money laundering operations that moved tens of billions of pounds out of Russia and Azerbaijan during the same period.

British shell companies played a central role, selling goods in a way that strongly suggests the transactions were fictional, and used to disguise illicit funds being moved out of the country – a process known as ‘trade based money laundering’. Many of the banks handling money from these deals have since lost their licences to due regulators’ concerns about their financial crime controls.

These revelations show how the UK plays a major role in enabling large-scale suspicious financial flows, potentially depriving the Russian people of funds while benefiting the rich and powerful there.

 

How did the scheme work?

Investigators at TI Russia uncovered a complex global network of around 130 companies that moved over three quarters of a billion dollars out of their country between 2014 and 2016.

Using trade data, they found 123 different transactions in which Russian firms claimed to have purchased bottle-moulding machines from businesses around the world, including those incorporated in the UK, Cyprus and Czech Republic.

These Russian companies bought the machines at grossly inflated prices, sometimes paying as much as 800 times the usual market rate. In some trades, the machinery does not even appear to have existed. The deals also benefited from Russian law, which saw no tax or customs duties paid on them, enabling hundreds of millions of dollars to cross the border while avoiding scrutiny from the authorities.

Analysis on the firms involved in these deals showed that they bear all the hallmarks of ‘shell companies’ – paper businesses used to hide their real owners and facilitate financial crimes. Key red flags included the companies:

  • being newly formed just before entering into the trade deals, and often closing shortly after the scheme had run its course
  • listing no financial history or assets in their accounts
  • being controlled by opaque structures using secretive offshore companies and nominees to hide their true beneficiaries

These factors are highly suggestive that the scheme was facilitating trade based money laundering – the process of disguising the proceeds of crime and moving these funds using fictitious or distorted cross border transactions.

 

Who benefited?

In some instances, investigators were able to trace the funds from Russia into the international financial system. Here, Russian buyers of the bottle moulding machinery would send money via their domestic banks to the Baltic accounts of the firms selling the devices.

Most of the Russian banks identified in the scheme have since had their licenses revoked due to regulatory breaches. For example, Transnational Bank, which processed tens of millions of dollars in the scheme, had its license withdrawn in 2015 after the Russian Central Bank accused it of a range of financial irregularities. One of the reasons given was substantial and ‘dubious’ overseas transfers by its clients.

The Baltic bank accounts receiving payments from the deals were often at institutions named in money laundering scandals. A bottle moulding machine sold by Ettore Textiles LP, a Scottish Limited Partnership, shows that it used Norvik Banka, a Latvian bank that was subsequently fined EUR 1.3 million by the authorities there in 2017 for anti-money laundering failings. Norvik later changed its name to PNB, but ultimately lost its banking license in 2020.

Ettore Textiles LP did not respond to our request for comment.

While the ultimate destination of the $820 million remains unclear, the transactions are similar to previous schemes used to benefit the rich and powerful. Scottish Limited Partnerships (SLPs) and UK Limited Liability Partnerships (LLPs), with accounts in Baltic banks, were a key feature of the Global, Azerbaijani and Troika Laundromats, exposed by the OCCRP. Beneficiaries of these include the godfather of Vladimir Putin's daughter, Sergei Roldugin, wealthy oligarchs and figures working for or connected to the Russian security services.

They also share a striking similarity to the ‘black cash’ operations described by Catherine Belton in her book Putin’s People, used by the KGB and its successor, the FSB, to siphon money out of Russia and into the West via networks of intermediary firms.

 

The UK connection

As is often the case in schemes like this, UK shell companies and those that help administer them played a leading role in moving the money. In total, 13 UK companies were involved in suspicious trades totalling more than $139 million. In most instances, the trade data lists the British shell companies as the sellers of machinery, while elsewhere it references them as parties to the sale of goods.

In one case, over the course of just six days in November 2014, Bexton Eurotrade Ltd, a UK private limited company only incorporated a year earlier, received over $61 million for four deals involving bottle-moulding equipment. Despite these massive trades, the annual accounts for that year showed the company had just £442 in the bank.

Who benefitted from these deals and where the money went remains a mystery.

Two years after these transactions, new transparency laws required Bexton to disclose its beneficial owner. Yet even then, it sought to hide this information by listing an opaque Cook Islands entity in these documents – a clear breach of UK company law. Unlike the UK, information about who controls companies in the Cook Islands is not publicly available.

Companies House struck Bexton off the UK corporate register in 2018. Loginet Hub Foundation, the Cook Islands foundation that claimed to control Bexton Eurotrade, is listed as the owner of 13 further UK firms, some of which also appear in Russian trade data.

The accuracy of data held by Companies House is largely reliant on those entering it. Our analysis found eight different formation agents managing the 13 UK companies named in this scheme. These financial service providers are supposed to register with an anti-money laundering (AML) supervisory authority, and comply with legal checks to help identify dirty money, such as background research on their customers.

Documents filed by three SLPs in the scheme – Commerce Trade LP, Exportum LP and Intersales LP – were all signed by “S G Cox”. We have identified him through associated notary documents as “Stephen Glen Cox”. He is a UK based businessperson who does not appear to be registered for anti-money laundering supervision – a potential breach of the UK regulations. Analysis of company documents show Mr Cox’s signature on incorporation forms for hundreds of SLPs.

We contacted Mr Cox with a request for comment but received no reply.

Three more UK companies identified as part of the scheme were administered by formation agents not resident or identifiably registered with an AML supervisor here, while the remaining six firms were formed and administered by company service providers overseen by HMRC.

None of the company service providers responded when provided with an opportunity to comment.

 

Implications

This exposé provides further evidence of how widely UK companies have been abused to move suspicious wealth, especially out of Russia. To date, we count over 2,250 used in corruption and money laundering schemes over the past 25 years. Yet even this may be the tip of the iceberg – analysis of Russian trade data reveals thousands of similarly suspect transactions involving UK businesses.

Government has recognised there is a problem. Corporate transparency reforms since 2016 have provided a step in the right direction, making it mandatory to declare who really owns companies here. Yet it remains all too easy for criminals to mask their activities by reporting false and misleading information without meaningful redress.

To prevent this from happening in the future and pursue more effectively those who willingly lie to hide criminality, ministers have proposed plans to increase the powers of Companies House. This would allow it to verify and query data it receives, improving the accuracy of the register in the process and providing less space for criminals to hide. Legislation is due before Parliament later this year, although the timetable and scope of reform is still unclear.

And reforming Companies House is only part of the problem.

As this investigation shows, company formation agents, who should be the first line of defence against money laundering, are all too often happy to help dubious clients hide their identities and activities. The UK’s patchwork of 25 supervisory bodies responsible for overseeing this activity is failing, and needs a fundamental shake-up to enable a clamp down on rogue agents. The Treasury recently consulted on reforms, and has pledged to review options in more detail, yet the pace of change is glacial, with little action since our review of AML supervision seven years ago.

The financial services industry is also evolving, and there are increasingly sophisticated ways to move cash across borders with little scrutiny. Our recent research found money laundering red flags in one in ten electronic money institutions – businesses that operate similar to banks but with less regulatory oversight. Many of these had links to the Baltic banking sector, which helped facilitate this bottling scheme.

Ministers have been keen to show the UK is willing to stand-up to Russia’s aggression against Ukraine, yet as this story shows, it needs to do more to tackle Britain’s role as a key conduit for dirty cash.

Additional reporting from Meduza, Novaya Gazeta Europe, The Insider and Eesti Päevaleht.