Motley Fool Money - Money Laundering 101

Episode Date: June 26, 2022

Corruption is a trillion-dollar drag for investors. So why doesn’t it get more attention? Oliver Bullough is the author of “Butler to the World: How Britain Helps the World's Worst People Launder Money, Commit Crimes, and Get Away with Anything.” He joined Bill Mann, Maria Gallagher, and John Rotonti to discuss: - The “easy” process of money laundering - A look inside the business of corruption - Super yachts, volcanic islands, and opaque legal structures Hosts: Bill Mann, Maria Gallagher, John Rotonti Guest: Oliver Bullough Producer: Ricky Mulvey Engineers: Dan Boyd, Natasha Hall Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi everyone, I'm Charlie Cox. Join us on Disney Plus as we talk with the cast and crew of Marvel Television's Daredevil Born Again. What haven't you gotten to do as Daredevil? Being the Avengers. Charlie and Vincent came to play. I get emotional when I think about it. One of the great finale of any episode we've ever done. We are going to play Truth or Daredevil.

What? Oh, boy. Fantastic. You guys go hard, man. Daredevil Born Again, official podcast Tuesdays, and stream season two of Marvel Television's Daredevil Born Again on Disney Plus. And they exposed that the ownership of this super yacht, the Scheherazard, that it actually belonged to Vladimir Putin. It was previously the biggest super yacht in the world of unknown ownership.

And he got hold of the crew manifest. Every single person in the crew, right, was employed by the Russian equivalent of the Secret Service, people who protect the Kremlin. Everyone but one, the captain was a Brit. And that's the classic setup that you have these huge enterprises, you know, staffed by people, absolutely loyal to whoever the top dog kleptocrat is. And then at the top, you have the butler. I'm Chris Hill, and that's Oliver Bolo, author of the book, Butler to the World,

how Britain helps the world's worst people launder money, commit crimes, and get away with anything. Bolo recently joined a trio of Motley Fool analysts, Bill Mann, Maria Gallagher, and John Rotante, to talk about the surprisingly easy process of money laundering and how corruption affects investors. I just wanted to start by understanding, how you got into this line of inquiry, how you became interested in the super wealthy and how they

hide their money and how they use the laws of various countries around the world to protect themselves from the laws from various from other various countries around the world. I like a good weird hobby. I mean, the short version of that story is that I'm always been. fascinated by Russia in Eastern Europe. And I moved there after university in the hope that I would be witnessing the development of democracy and freedom. But, you know, spoiler, that isn't what happened. And so I spent quite a lot of time trying to figure out where everything had gone wrong. And it was quite clear that a lot of the answer is corruption, because you ended up with,

you know, a tiny number of people owning the whole country, right? But then it doesn't take long to look at corruption and how corruption works and where these very small number of people move and put their money to realize that this isn't a Russian problem, that this is a global problem, because the money is being taken from Russia and being spent in, you know, well, the UK or Switzerland or New York or wherever. So essentially, it's part of my quest to discover, you know, who lost Russia, as it were, how did it go wrong? I found myself increasingly fascinated by this kind of global corruption services industry that allows oligarchs to be so very, very good at being corrupt. And, you know, so Moneyland was about the kind of global nature of it. But every time you uncover one of these scams, it doesn't really matter how big it is,

how small it is. There's pretty much always a UK involvement in it. And this became so obvious and so sort of appalling that I thought I had to write a whole book just about the UK, because it's like the lead villain, really, in this kind of global corruption enabling industry. This isn't to say other places don't have a go, right? You know, Switzerland, the US, France, Germany. Estonia, they all try and be like big corruption enablers, but, you know, we are sadly very far ahead

of the pack. And the book, Butler to the World, is attempting to say, well, how did that happen? And why is this? And what does it mean? As I read Moneyland, I came away with it. I mean, we and, you know, as as a very proud American, it is difficult to say. But I came away from your research and thinking that we always think of the most corrupt countries in the world as being. Nigeria or Ukraine or Russia, Rwanda, it may well be, depending on how you measure it, that the two most corrupt countries in the world are the United States of America and the United Kingdom. The problem is it depends what you mean by corruption, because the way that we tend to define corruption is what happens in foreign countries, right? You know, the bit of corruption we define

is the taking of bribes. We don't talk about it as the giving of bribes. We talk about, you know, the stealing of money, not the laundering of money. You know, we're the countries who give bribes. We launder money. We accept stolen money. But we don't actually take the bribes ourselves. So if we only talk about that bit of it, then yeah, Ukraine, Nigeria, Russia, Azerbaijan, China, Venezuela, these places are the problem. But if you look at where the money ends up, it doesn't end up in Venezuela, obviously. I mean, what kind of fool would leave their money there? You want to be able to spend it on expensive things. It ends up in Florida, right? It doesn't end up in Russia. It ends up in London. And that's the challenge to confront because corruption is, it's always talked about

as something that afflicts poor countries, you know, which are inhabited by, let's face it, people who don't speak English, that tends to be how we look at corruption. But if, looking at how the money moves and where the money ends up, you do end up with a totally different picture. And it's actually very hypocritical the way we talk about it. And not just hypocritical, it's profoundly misleading. If we want to solve corruption, and corruption is like, you know, it's not just a sort of human rights catastrophe. It's a real national security issue, right? This is a, it's a system that allows the likes of Vladimir Putin to really weaponize his, you know, frankly not very big Russian economy.

So it's a real force multiplier for him. And if we need to deal with it, we need to understand it. And that means we need to recognize that we are at least as much part of the problem as he is because we are, you know, allowing him and his oligarchs, his people around him, to steal as much as they like and to move as much as they like and to keep as much as they like. And you don't commit financial crime if you can't keep the money, right? And we're talking about, you know, financial crime on a level which, which is almost unimaginable. A trillion U.S. dollars has vanished from Russia since Putin became, came to power.

A trillion. Yeah. If you settle down to count a trillion dollars, it would take you more than 30,000 years. It's an incredible amount of money. And that amount of money. And who's got that kind of time? Well, yeah. Well, maybe he could, he could probably employ someone to do it for him.

But, you know, but it's more. much money, it buys a lot of influence. It can really rot away at the fabric of our democracies and our societies. And it's really, we need to understand it. Butler to the world came out. I believe it was released in early March. March in the UK and actually today in the US. Today in the US. Yes. In the book writing world, you've been writing this for a while. I mean, it's been, it's been put to bed for a while. How incredible. I'm trying to phrase this. so it doesn't come off as, hey, here's what's great for you. But how incredible that Vladimir Putin has given us an object lesson for how important

this topic is. Yeah, I mean, it is, I think, a real silver lining in the big Ukraine-shaped, dark storm cloud that currently overhangs the global economy because it does, I think, mean that everyone's had this sudden realization of how bad it is to tolerate kleptocracy. as a sort of global, as a sort of system of government in so many places. Because, you know, what it means is you've had this entire class of oligarchs who've looted Russia to the endth degree. They've colonized their own nation. And they've been able to stash their money offshore in such a way that, you know, if the Russian economy collapses completely, they'll probably still be pretty much

okay, because most of their money is elsewhere, right? So you've got an entire class of people running a country for whom everything that happens in that country is a spectator sport. And this is why Vladimir Putin's able to take these insane risks that he's taken. I mean, you know, the invasion of Ukraine is by far the worse that he's done. But if you look at the other things he's done in the last few years, I mean, using chemical weapons to poison Sergei Scrip Allen Salisbury in the UK, you know, who does that? Using an atomic poison to poison Alexander Lipinianco in London, you know, invading Georgia in 2008, you know, sending spies to assassinate a Chechen in Berlin.

These are insanely risky things. No Western government would do these things in Russia. And yet he seems does it again and again and again. And I think the fact that he and his oligarchs have no skin in the game when it comes to Russia, if it collapses, it collapses, whatever, they can walk away from the burning building with all of their wealth intact. That means that he just becomes this insane risk-taker. And that is a product of the kleptocracy that he's created.

And the fact that more than half of Russian national wealth, according to the best estimates from, you know, the experts in these things, particularly Gabriel Zutman at the University of Berkeley, California, more than half of Russian national wealth is outside Russia. The equivalent figure for the US is about 4%. If the US goes down, the ruling class of the US goes down with it, they know it is in their interest to essentially maintain the US as a growing concern. If Russia goes down, the ruling class of Russia walk away with half of their wealth.

So, you know, whatever, toss a coin. And that's a real challenge for politics. policymakers to deal with. And it's something that I really don't think anyone appreciates. I feel like when we talk about money laundering, a lot of times people kind of just think, I don't know that the money is somewhere else. Could you explain a little bit more about the kind of cast of characters within real estate, lawyers, private equity, who's involved in the UK government, and the UK and the US and all of these nations that we don't associate with money laundering. So, I mean, the process of money laundering is a three-stage process. Obviously, the money is stolen,

and then the money is spent, right? The challenging bit is how the money is moved in the middle. That's the bit where the origin of the money and the movement of the money is obscured. And essentially that is a very complicated, deliberately, willfully complicated process involving multiple different jurisdictions, multiple shell companies, multiple channels. It changes all the time. It's very entrepreneurial and tremendously flexible. But in its basic principles, it's always the same, that it involves obscuring the

origin of the money by hiding it behind a shell company. Now, those shell companies can be from different places, but again and again and again, you see the involvement of British shell companies because they're very cheap, they look respectable, and they're incredibly hard to cut behind because there's no verification of the information you provide when you create one. So basically, I mean, in a real simplification of the process, you steal a fortune, you move it into a bank account, which is owned by a British shell company, which makes you look like an investment fund. And then you just use it to buy property on Central Park West or in Miami or in Los Angeles or in London or in Paris or in the south of France. And then your money is now in a really

safe, secure, robust asset. And the joy of it is that that asset which you've got in the US or the UK or another big Western economy, that is protected by the rule of law in the Western economy. So you're able to exploit the fact that there's no rule of law in your home country. You can exploit the weaknesses in the global financial system by using these shell companies to obscure the fact that you've stolen this money. And then you can exploit the fact that we have the rule of law to protect your money once you've stolen it. And particularly one of the big differences between the US and the UK is the fact that the UK, the enforcement agencies, the police agencies and the other investigative bodies are incredibly weak. They're very, very poorly resourced.

And we have no equivalent to the FBI or the Southern District of New York. We have no one who brings those kind of cases. There has never been a case against an oligarch in the UK. And that is, it's just a giant flashing green light for anyone with wealth to spend, because you can bring it here, and once it's here, it's safe. And that's the joy of this globalized system, and particularly the joy of the UK for these people. And once you bring it here, well, there's a whole system to protect them. There's lawyers who will help them settle their legal disputes. There are lawyers who will help them sue journalists who dare to write about them, whether that's defamation or data protection or whatever. There are schools at top, you know, some of the best schools in the world that will educate

their children, excellent universities, really very favorable tax regime for them so they don't have to pay much tax. It's a beautiful setup if you're rich enough to be able to afford access to them. My favorite example, so this has just occurred to me. And annoyingly, it's not in the book because it was exposed after the book came out. But that after the invasion of Ukraine, Alex St. Navalny's people, the anti-corruption activist in Russia, who is sadly vanished today, not quite sure where he's getting it up, but he has these amazing researchers. And they exposed that the ownership of this super yacht, the Scheherazade, that actually belonged to Vladimir Putin. It was previously the biggest super yacht in the world of unknown ownership. And he got hold of

the crew manifest. Every single person in the crew, right, was employed by the Russian equivalent of the Secret Service, people who protect the Kremlin. Everyone but one, the captain, was a Brit. And that's the classic setup that you have these huge enterprises, you know, staffed by people, absolutely loyal to whoever the top dog kleptocrat is. And then at the top you have the butler, the butler that, you know, the guy who's got all the mannerisms, who speaks all the right language and he can just come into the room, beautifully dressed, it's always a bread. The answer to this may be self-evident.

What's in it for the United Kingdom? Well, I mean, it's an interesting question. I mean, in its essence, it's a sufficiently profitable business for a sufficiently large number of people, that for a long time it hasn't really gone questioned. You know, the fact that the oligarchs were coming here buying mansions and incredible mansions, the second biggest house in London after Buckingham Palace. I want to come do your walking tour of the mansions, by the way. Folks, if you are ever, I don't know if you're still doing this, but I loved that so much in the same way that we go and do the Hollywood tour. Yeah, we do that. And we have a lot of targets.

You know, most of them we don't even know about. But we know, I mean, a tube station. We sold a tube station to an oligarchies. As far as I know, the only private owner of a tube station anywhere. I mean, that's an amazing thing to sell to someone. Absolutely extraordinary. You know, football clubs, soccer clubs, you know, whatever. You name it.

We sell it. And, I mean, there's a son of an oligarch is now in the House of Lords, the equivalent of the Senate here, because he, you know, he's good friends with Boris Johnson. So what's in it for the UK money? In short, it's profitable for people. I mean, in the long run, I think the effect is probably negative. It involves a rotting of the fabric of society, increasing inequality,

rots away at democracy. But in the short run, it's profitable for enough people that no one really wants to get in its way. And if you go all the way back to the origin of this butlering business, which is back in the mid-1950s, it's sort of what we did after the end of the British Empire. The British Empire collapsed and we were sort of left adrift. You know, what do you do if you're just a small island off the coast of Europe and you don't run the world anymore? You need a new business model.

business model we found was, okay, we couldn't be an oligarch, but we could help other people be oligarchs. We still knew how to do it. We just couldn't afford to do it anymore. So we had all the skills. So we just sold the skills that we previously used to run an empire to help other people run empires. And here we are with the HSBC Bank and Standard Chartered, and we have contacts from all over the world. And we know how to operate in places that are hard to operate. And so it became it became a natural cottage industry, I guess, is what you say. And there are all these little fragments of the British Empire, places like the Cayman Islands, the British Virgin Islands, Gibraltar, the Turks and Caicos, all places with whom we retain

very close relations because their former colonies like Malta, Cyprus, Singapore, Hong Kong, all of these financial centres all around the world, they're very, very similar legal systems. Lawyers can operate in multiple different jurisdictions simultaneously. So if Britain is just a little bit too honest, you can just do your work in the British Virgin Islands and then bring it back to Britain and that's absolutely fine. I mean, one of the most fascinating things about the book was researching how the British Virgin Islands became what it is now, this legendary tax haven. It used to be just a totally forgotten, you know, bankrupt archipelago in the Caribbean. But it was this joint venture between the local government, local lawyers and a US lawyer who realized that they had all the, these great treaties just sitting there unused, which would allow people to dodge taxes.

And if only they wrote the Shell Company legislation so it was incredibly obscure and opaque, then Americans could use it to dodge taxes, which is how it began. But then they thought, well, why should we only help Americans dodge taxes? We can help everyone doge taxes. Everyone's got taxes. Exactly. No one likes paying taxes, right? Not if they're wealthy. And so, and then you think, well, we don't only want to help people dodge taxes. What about if we want to help them dodge prosecution or any kind of legal proceedings. We can help them with that too. We can help you dodge scrutiny or transparency, anything. You might be running, you know, Angola and want to set up some kind of really crooked government contracts, a skim of for the

money for yourself. We can help with that. So essentially the business model is if you're rich and you've got a problem, we have an entire entrepreneurial class of enablers, what I call butlers, who will find a solution. They'll find a way to help you avoid scrutiny, avoid tax. avoid any kind of unwelcome interference in your business. The problem is as long as there's one place like Britain that does this, then there's also an incentive for everyone else to do it too. Because in a way, if Britain's doing it, that means the problem's never going to be solved till we stop.

So my sort of aim, you know, and it's a sort of if you come at a king, you better not miss kind of strategy, it's to try and limit the space available in Britain, because it seems to me if I can limit the space available in Britain for money laundering and this kind of illicit wealth-keeping problem, then it will have a far disproportionate effects on the global criminal economy. Because all these people, like the Russian oligarchs, the Ukrainian oligarchs, Angolan government ministers or whatever, they won't be able to launder their money anymore because the space

would be shrunk. That's what I would like to do. How aware is the U.S. government of this? And what does the U.S. government stance on this? Are they trying to block this off, trying to slow this down, or do they just let it happen? There is a growing awareness of the issue. There have been some reports in the US this year and towards the end of last year, which of course quite a storm over here because of this sort of recognition of how central London

is to the global criminal economy. As you probably know, the White House under Joe Biden has made tackling corruption an urgent sort of national security priority. And as a result, they have been attempting to engage not only with the UK, also with other big financial centers like the Netherlands and Singapore and so on, trying to engage with them to shrink the space. So I think the US is very aware of this. But the challenge is trying to manage this problem

in the sort of spectrum of other interests between the two countries. There's always a reason not to go large on something that might hurt someone's feelings, right? At the moment, there's the war in Ukraine, and the UK and the US obviously are cooperating to get a lot of weapons to the Ukrainians. say you don't want to annoy them. You know, there's always the ongoing relationship between our intelligence services and you don't want to annoy them because that might, you know, might derail some sensitive project or whatever it is. There's always a reason not to do something. The problem with corruption is though it kind of underlies everything. It underlies, you know,

Vladimir Putin's collectocracy. It underlies, you know, you know, disasters like in Nigeria with Boko Haram or the collapse of governance in the Middle East and so on. There's corruption behind everything. It's never the first rank problem. You know, it's never the thing that you will say we need to deal with right now. What we need to deal with right now is ISIS rather than corruption in the Iraqi government. You know, that's the issue. It's, I had a politician once described to me that it's always everyone's fourth priority. And that's the issue, I think, for the US, is though the White House recognizes that corruption is an urgent national security issue.

It's not the urgent national security issue. And unless it sort of becomes one or they can retain this consistent focus for a long time, then it's, hard to see how real change diplomatically can be achieved. This has to be sort of internally generated in the UK. And, you know, that's a difficult thing to achieve because, you know, a lot of lawyers, a lot of accountants make a lot of money out of it. John, I'm going to jump onto Oliver's side of the interview real quick and just tell a story that he told in Moneyland about about what happens when, say, the United States government subpoena is a company in Nevis, for example, which is a prime money laundering site. And, you know, in Nevis, they get the subpoena and they say, well, we don't,

we don't have to serve this. No, I mean, that's the point of Nevis. You know, I mean, the joy of, the joy of the Hamilton thing, that was pretty good. I mean, the joy of somewhere like Nevis, right, is, I mean, I highly, if you're looking for a nice place to go on vacation, I highly recommend Nevis. It is really gorgeous. It is a volcano in the middle of the Caribbean with beautiful beaches, lovely bars, really friendly, gorgeous people, you know, not many people, sort of 5,000 or so. And it has LLC, you know, legislation, which is every bit as opaque and obscure as Delaware or Nevada at their best. But the joy is that American courts have no jurisdiction there. And so these, the LLCs they have in Nevis designed by American lawyers, designed by the same

people who write the legislation for Nevada or Delaware. You know, they work in exactly the same way is an American fraudster can go to Nevis, set up a company that the legislation is totally familiar. Everything is immediately familiar. The language is English, but you've got the joy that American courts don't have a writ there, so you have to go and bring a separate proceedings. And just to bring a court proceedings in Nevis, this is before you pay a lawyer a single penny, you have to pony up $100,000 just to begin. That's the ante to get into the game. It's incredibly, incredibly well protected. And the thing is, if you go after Nevis, if you manage to cut through the shell company in Nevis and figure out who owns it,

chances are you'll figure out it's owned by a company in the Seychelles, and you have to go and do it all over again somewhere else. And as soon as they get close to cutting through the Seychelles, they can just keep adding shell companies behind all the way through. You can just keep, you can do it. It's like a Russian doll that's endlessly generated. It is incredibly easy to hide the origin of wealth because of these, you know, many, many loopholes. And these loopholes, you know, they are constantly being renewed, refreshed strength,

because there's an entire industry that benefits from this. But the industry, the ideas for it don't come from Nevis. You know, for all Nevis's many strengths, these are very, very complicated legal concepts. You know, the ideas for it are generated by lawyers in your fair country and in my fair country who then find a jurisdiction somewhere in the world and say, we've got this great idea. It will earn you some money. Why don't you just pass this law through your legislature, which then passes in a morning? And then, hey, Presto, you've got another wealth creation. object somewhere in a new jurisdiction. Why should we as citizens, as investors, how does this impact us?

It is an increasing problem in many countries around the world, and I suspect because of the crypto meltdown at the moment we will see it as an even bigger problem, that this explosion of fraud, which is happening everywhere, you know, these what we call push payment frauds, these, you know, frauds on online banking systems, you know, fraud on crypto exchanges. You know, all of this is happening all the time. Investors are losing money all the time through these sophisticated frauds, often run by criminal gangs out of the former Soviet Union or the Middle East or the Far East and so on. You know, these sort of scams, I tend to write about kleptocrats.

They're really big top of the tree. But the mechanisms they use are identical to the ones used by the fraudsters. You know, if a grandmother has been defrauded out of her retirement savings because, you know, someone got in touch with her and told her about a great stock she could invest in and double her money and she's lost $50,000, the mechanisms being used to move and hide that money are identical to those being used to hide a billion dollars stolen by a Russian oligarch. You know, it isn't just corruption and kleptocracy in sub-Saharan Africa or in Eurasia that's being enabled with these kind of scams. exactly the same scams are being used to defraud investors all across Europe and the US and Australia and everywhere else. So, you know, I find it very strange that fraud hasn't become a more politically salient issue in big Western economies because, you know, in many, I mean, certainly in the UK now, it is by far the most common form of crime, you know, and it has become so easy to defraud people.

It's just an open goal. I mean, we saw this during the COVID pandemic with the sort of state aid for businesses, just being defrauded. for a consent because it's so easy. So it's a drag on our economies and it's a drag on investors because, you know, someone has to pay for these frauds, right? Someone has to eventually pay for the police agencies to investigate them or pay the insurance premiums that cover them. And that's all of us. So, you know, and it's, it would be relatively easy to solve many of these problems. If we had proper transparency of ownership so the shell companies no longer existed, that would cut away a whole basis behind which fraudsters are able to hide.

If we had better regulated, better resource enforcement agencies, particularly in the UK, in the UK and the European Union, then there will be far fewer places where they can hide, far fewer places where they'd be safe. So, Oliver, if you are allowed to be the mayor of Earth, their earth has a mayor, not a, you know, not a great overlord. Not a president. Yeah, but you have, you have dictatorial powers. So you can snap your fingers and you can fix this problem. what is step one? What do you do? You get to be mayor of earth. So Nevis is no longer a problem, right? Okay. So, so, so step one is offshore. So shell company, opaque shell company's gone, right? All shell companies, the true owners, are publicly visible and available for anyone to see,

whether they are in Delaware, Nevada, Nevis, the UK, Luxembourg, you name it. They are all publicly available. That strips away the entire facade behind which criminals hide in a stroke. And I want to interrupt you for a second because I want to make sure because I'm not sure I understand. So I imagine that there are other people. When you say visible, what do you mean? Well, it means that if you want to know who owns a company, any company. So it's transparent, like the ownership is transparent. Straight away. I mean, it's crazy that they're not transparent, right? I mean, a company is the debts of a company are guaranteed by society. as a whole. It's like an insurance contract if your business goes bad. Having an anonymous

insurance contract is an invitation to commit fraud. That's what an anonymous shell company is. It's extraordinary that it exists anyway. So that would be step one. Step two is to resource all countries investigative bodies as well as the US bodies are resourced. So every country has an FBI, essentially, and a Southern District of New York and all the other bodies that have done so well to investigate financial crime and corruption in the US. That would be step two. And step three would be much better resourcing for the Welsh rugby team because they have really suffered in comparison to the Irish in the last few years. And while I'm bear, the mayor of the earth, right?

Yeah, right. I'm going to have to take that step because it seems like it would be a missed opportunity to get to the end of the day and not have done that. As always, people on the program may have interest in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy ourselves stocks based solely on what you hear. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.