February 2, 2022   6 mins

On Monday, Liz Truss warned Russia’s oligarchs that there will be “nowhere to hide” their dirty money in London. Which is pretty weird when you think about it, since the statement includes the implicit admission that the money is already here.

The menace of Putin’s kleptocracy seeped into Britain long before he started stacking up armoured divisions on the Ukrainian border. Yet the money has kept flowing, Britain has kept fencing his cronies’ stolen wealth, and repeated promises to tackle the problem have achieved nothing.

This failure is a national embarrassment, and has fuelled a mess of conspiracy theories: that the Tories are bought and paid for; that the Kremlin has kompromat to keep ministers in line; that the City of London has a special hotline into the heart of parliament.

The real story, however, is far more alarming, but requires some telling, because you can’t understand London’s love affair with Russian money without understanding the story of how the City was reborn as both a financial centre and the engine of our national economy. They are, in fact, the same story.

Once you understand this, you can see why government after government has been so reluctant to drive the oligarchs’ money away. They’re like doctors watching a cancer grow bigger and bigger in a vital organ: operating will cripple their patient, so they leave it in place, even though — eventually — it will kill him. But this choice can’t be postponed much longer. If we want to save British democracy, we need to take a scalpel to a tumour that was seeded all the way back in 1955.

Back then, the Soviet Union had a problem. Its great rival the United States had ended World War Two as the undisputed centre of the world’s economy; if the USSR wanted to trade with the world, it needed dollars. The global financial system was less globalised in those days. In order to secure democratic control over wealth, governments imposed limits on money in ways that are hard to comprehend now. They restricted how much money you could move across borders, for instance, or what interest rates you could charge on loans you made.

That meant that, if you had dollars, you kept them in the United States, where they were subject to the scrutiny of the Federal Reserve. But Soviet officials worried that, if Cold War tensions became more tense, and if their dollars were in New York, the US government might seize them, thus cutting Moscow off from international markets.

The City of London had a problem too, albeit a very different one. Britain was broke, with a huge hangover of debt left from funding its war effort. The capital flows that had sustained financiers’ incomes had shrivelled, and sterling had lost its role as the world’s leading currency. Banks were moribund, and ambitious young Brits preferred to work in academia, industry, or government.

The solution to the two powers’ problems came thanks to two banks: the Moscow Narodny (MNB), which was Soviet-owned but London-based, and the Midland, a scrappy challenger unable to attract the deposits it needed to compete with its more established rivals. MNB lent its dollars to the Midland, which used them to buy pounds, with which it could grow its UK business.

It may not sound like much, but these two banks had invented the most consequential financial invention of the second half of the twentieth century: the Eurodollar. By transacting with dollars outside of the United States, they kept the American currency’s upsides — its strength and convenience — while removing its downside: the heavy hand of the US government.

As sterling declined further, more London banks began to appreciate this new form of currency, which could move across borders unimpeded, could be traded easily, and was completely unregulated. They used pounds for domestic transactions, but kept different accounts for the Eurodollars, which they described with a word borrowed from maritime law to describe something outside the reach of government: offshore. Soon other banks noticed the innovation too, arriving from Japan, from continental Europe and from the United States to take advantage of the new discovery.

The Eurodollar could have appeared almost anywhere, and embryonic versions did appear in Canada, in Switzerland and elsewhere in Europe. But in those countries the governments recognised the threat that footloose currency posed to their sovereignty and snuffed it out. Memories of the Great Depression, and of the misery and war that followed it were still raw, and democratic politicians wanted to make sure they could always put people before wealth.

In the City, however, the Bank of England loved the idea of setting money free, so it did. “It is par excellence an example of the kind of business which London ought to do both well and profitably,” a Bank official wrote in 1963. “If we were to stop the business here, it would move to other centres with a consequent loss of earnings for London.”

At that time, the market was worth around $5 billion. Within four years, it was worth $13 billion. By the end of the Sixties, it was worth $40 billion. That was when other countries started to surrender, to scrap their own efforts to stop their banks from leaving, and the market really took off. Now, it’s the biggest in the world: all dollars are offshore, so are pounds, euros, Swiss francs and — with a few exceptions — pretty much every other currency in the world.

This business model did not stop there. Our financial professionals looked for countries whose governments were imposing limits on wealth that its owners found onerous, and undercut them. In the Cayman Islands, Americans found a ready haven for all the money they didn’t want to pay taxes on, and this once-obscure turtle-fishing archipelago is now a world class financial centre. In the British Virgin Islands, tycoons from China and criminals from Latin America found cheap, opaque shell companies to hide their ownership of assets behind. And in Britain itself, generations of oligarchs — from the oil-rich countries of the Gulf, from the ex-colonies of Asia and Africa and, of course, from the post-communist countries of Eastern Europe — found a warm welcome.

What we offer them is a haven: not just a tax haven, but an everything haven. They can buy property here and they don’t need to tell anyone about it, because they can hide their ownership behind a shell company. They can manage their liquid wealth here too, either in a discreet bank or a boutique private office. They can send their children to one of our world-class schools, buy their art at one of our auction houses, and meet their friends at a ritzy restaurant while their wives and/or mistresses shop at Harrods (because, let’s be honest, these oligarchs are pretty much all men).

If a business rival complains about them, they can settle the dispute in our commercial court, thanks to our world-leading legal sector. And if they want to keep an eye on how their adopted country is run, they can dine with a minister for not much more than they’d spend on a holiday. They can buy anything in London and, thanks to the way politicians have starved our enforcement agencies, no one with the power to do anything about it will ever know if the wealth was honestly acquired.

Politician after politician has stood up in parliament to insist there is no place for dodgy money in London. But then the lobbying starts. Every one of these sectors — finance, law, estate agencies, auction houses, education — starts arguing for exceptions and loopholes, and nothing gets done. In 2014, for example, after it was revealed that specific shell structures called Scottish limited partnerships had been used to launder money stolen from Moldova, politicians from the Scottish National Party campaigned for the law to be tightened. Not only did this not happen, but the Treasury actually deregulated the structures further, so as to protect the competitive advantage of the City.

This is a supercharged version of that same business model cooked up by Moscow Narodny and the Midland back in the Fifties. It is reliant on British regulations, enforcement and oversight being weaker than those of other countries, so wealth comes here, and we can earn fees from it. It is not just oligarchs that benefit from our offshore services, but corporations too: the City earns fees from any wealth, whether honestly or dishonestly acquired.

The risk is obvious. If it isn’t enough that Britain is depriving other countries of money they need, and driving down levels of tax and regulations everywhere by providing a haven for the wealthy, we are also acting like a giant Florida for an magnified version of Al Capone’s gangsters, and giving them a playground from which to threaten the world. We are privileging the interests of the few over the wishes of the many, whether those happy few are evil, naughty, or just publicity-averse.

This is not a revelation. Multiple parliamentary enquiries have revealed the seriousness of the problem in recent years, including the Intelligence and Security Committee’s (ISC) 2019 probe into Russian wealth in the UK. Truss should be commended for saying she will do something, but let’s wait until the laws are on the statute books before congratulating her. After all, Boris Johnson battled to prevent the ISC’s Russia Report being published at all — and that is not the action of a man looking to put democracy before money.

Oliver Bullough is a journalist and author from Wales. He has lived and worked throughout the former Soviet Union. His latest book is Butler to the World.