‘Reputation launderers,’ disinformation campaigns hinder sanctions and financial crime compliance efforts | Thomson Reuters Regulatory Intelligence and Compliance Learning

“Reputation launderers,” particularly public relations and law firms, and their role in promulgating disinformation increasingly hinder sanctions and financial-crime compliance teams’ ability to conduct enhanced due diligence and make accurate judgments about risks customers pose, according to policymakers and researchers. The services such professionals provide permit kleptocrats, oligarchs and politically exposed persons (PEP) to layer their wealth into Western economies where it is difficult for compliance staff and law enforcement to detect and, ultimately, to disentangle.

Reputation laundering is a growing industry of lawyers, accountants, public relations firms, and image consultants who guide and advise kleptocratic actors and PEPs through a process of rebranding, from despot to debutante. Often this process involves giving large sums to charities, universities, and political parties, buying citizenship through “golden visa” schemes, inviting politicians onto their company boards, as well as placing flattering articles about themselves in showcase publications.

Such public relations and marketing companies, operating behind the scenes, offer their clients a shield against accusations and notoriety, officials said.

“It is this rebranding of an unsavoury past that is the essence of reputation laundering. By minimising and obscuring evidence of corruption and authoritarianism in their home country, reputation laundering enables kleptocrats to enjoy their spoils freely around the world. It also allows authoritarian governments to manipulate public perception, sometimes even by undermining the functioning elected representatives in national and international institutions,” wrote Tena Prelec, a research fellow at the Department of Politics and International Relations at the University of Oxford in March.

That ability to manipulate public perception by sowing social media with disinformation, and to create a “plausible deniability” over sources of tainted wealth, distorts these actors’ sanctions and financial crime risk profile. Once reputation launderers have transformed their clients’ social and business image, it is difficult for compliance professionals to differentiate between legitimate and illegitmate activity, or to effectively screen for negative news.

While London has come under fire as a haven for kleptocrats, academic research and the International Consortium of Investigative Journalists’ ( ICIJ) Pandora Papers show that enabling activity is common, with the United States, France and Portugal among the countries leading the offerings of reputational laundering services. Governments have been slow to address the enabler problem, and enforcement bodies lack the staffing and resource to enforce the rules that do exist, officials said.

Disabling enablers

Lawmakers internationally have been reluctant to clamp down on kleptocrats’ enablers despite increasing concerns about the influence these individuals and their enablers wield in the spread of disinformation aimed at undermining democracies and justifying Russia’s war in Ukraine.

The United States is among the less than 10% of countries that are non-compliant with FATF recommendation 22, making it one of 11 nations that do not require enablers to look out and report dirty money, said Josh Rudolph, fellow for malign finance at the Alliance for Securing Democracy (ASD) at the German Marshall Fund think tank.

In October, the U.S. Congress introduced the Establishing New Authorities for Business Laundering and Enabling Risks to Security ( ENABLERS) Act to force lawyers, trust companies, real estate brokers, accountants, art and collectibles dealers, public relations firms, and third-party payment service providers to conduct due diligence on source of funds.

For the ENABLERS Bill to be a success and become law, legislators must overcome stiff resistance from what Rudolph calls the “Four Horsemen” — the legal profession, company formation agents, accountants as well as covert public relations and marketing companies, whose skills can be hired in the service of reputation laundering.

“Legal professionals are the single-most important enabler sector to regulate because they are the most useful to oligarchs and kleptocrats looking to secretly funnel dirty money through law firms’ bank accounts. Lawyers are the most obstinate and organised group in their resistance to AML rules. The American Bar Association has spent a quarter century in this war of attrition with the FATF. The legislative strategy very carefully scoping the statutory language, as this bill will do is important and has to be accompanied by political strategies to divide and conquer the ABA,” Rudolph told the UK’s Royal United Services Institute ( RUSI).

It will be important to track this legislative initiative, because if Congress fails to pass such legislation, the U.S Treasury cannot address these enablers. It would instead be forced into playing “small ball” perhaps by repealing some of the enabler exemptions in the Bank Secrecy Act, Rudolph said.

Lack of political will

In the UK, a lack of political will has been the primary an impediment to a more stringent legislative and regulatory response to economic crime and its enablers. While accountants, lawyers and real estate are in scope for UK anti-money laundering rules, compliance and enforcement is poor.

For example, in the UK there are 25 professional body supervisors for accountancy and legal bodies overseen by the Office for Professional Body Anti-Money Laundering Supervision; however, its most recent report in September 2021 found “significant” weaknesses in effectiveness in meeting the UK’s Money Laundering Regulations 2017, ineffective governance structures, and gaps in enforcement frameworks to name but a few shortcomings identified.

Kleptocrats have meanwhile enjoyed huge influence in UK society and politics, in part thanks to enablers and reputation launderers.

“There is an extraordinary hypocrisy in British society particularly. We have this amazing mixture of snobbery combined with greed where it’s possible to turn up with money obtained in an unclear or outright dodgy way and basically buy your way into polite society. Hiring the right law firm and the right PR firm you can gradually build — sort of lily pad — you hop from one little bit of respectability to another,” Edward Lucas, a non-resident senior fellow at Centre for European Policy Analysis, journalist and Liberal Democrat parliamentary candidate for London & Westminster told RUSI.

Oligarchs’ influence has put the government in the uncomfortable position of having to pass an economic crime bill it hoped to delay to reign in some abuses that enabled money laundering by kleptocrats and to sanction Russian individuals connected to President Vladimir Putin. The government’s promised kleptocracy taskforce touted as a key part of the National Crime Agency’s economic crime fight has been branded by sanctions and money-laundering experts as little more than a new cell on an organization chart.

Lords on boards

“Lords on Boards” is the UK term for borrowing respectability and legitimacy to kleptocrats’ companies by literally putting a peer or another well-connected person on the board. It is commonplace. One example is Michael Peat, a former private secretary to Prince Charles, who joined oligarch Roman Abramovich’s Evraz Plc board in 2011. His company, Peat & Co., counted other Russian oligarchs as business partners and enabled their deal making, according to a recent Bloomberg report.

The UK government imposed sanctions on Abramovich in March over his ties to Russian President Vladimir Putin, which Abramovich has denied.

“[T]here are scores of enablers who are willing to advise and support the crooked and the kleptocratic to stash their dirty money [in the UK]. It is the same greed that led to the financial crash that is now central to this money laundering crisis. While prudential regulation in the financial services sector has been strengthened since the crash, regulation for economic crime has yet to catch up,” wrote Dame Margaret Hodge MP (Lab) and chair, APPG on Anti-Corruption & Responsible Tax in her recent paper ” Losing Our Moral Compass: Tackling Sleaze and Dirty Money” published by the Policy Institute at King’s College London.

A group of MPs, including Treasury Select Committee member Kevin Hollinrake (Con) and Dame Margaret, this month launched an economic crime manifesto calling on the government to go further in its new economic crime bill. The manifesto asks for more regulation to hold accountable enablers who facilitate and profit from dirty money as well as more resource for law enforcement agencies to address economic crime.

Paris and Lisbon deemed EU hot spots for enablers

The European Union’s Sixth Anti-Money Laundering Directive ( AMLD) classifies all types of financial institutions, accountants, lawyers, real estate agents, virtual assets such as cryptocurrencies, virtual asset service providers such as digital wallets and high value art traders as obliged entities. It does not, however, extend to public relations and marketing firms and their actions that can enable reputation laundering and the spread of disinformation.

The German version of “Lords on Boards” sees Gerhard Schröder, former Chancellor, as chair of Nord Stream, the joint German-Russian pipeline, as well as holding senior positions at Rosneft being nominated to Gazprom’s board of directors. Schröder has been criticised for his ties to President Vladimir Putin.

However, Paris and Lisbon are viewed as hotspots for enablers thanks to their colonial ties to Africa. Some French legal firms, banks and public relation agencies offer reputation laundering while oil-rich Angolan elites have made a “thorough penetration of Portuguese elite circles,” write Corentin Cohen and Ricardo Soares de Oliveira, research fellow and professor, respectively, at the University of Oxford’s Department of Politics & International Relations.

“In recent years, reputation services have shifted, blurring the boundaries between private and public actors and occurring on many different levels across the political ecosystem. Boutique business intelligence firms are on the rise, and a growing number of former French politicians, diplomats, and even Elysée advisors have created their own boutique firms or joined pre-existing companies. Their work straddles the line between strategic consulting, influencing, and public relations, thus capitalizing on their bureaucratic and political networks. They sell their clients opportunities to meet and influence French elites,” Cohen and Soares de Oliveira wrote.

Dark arts and disinformation

The reputation laundering services of public relations and social media companies do not end at connecting oligarch and kleptocrat clients with local elites. They also help the regimes these individuals represent push out disinformation.

“There is an entire industry of disinformation for hire that has been exploding over the past three years to the point where Facebook doesn’t know who is behind 36% of the disinformation they take down, because their investigations hit dead ends in the form of PR and marketing firms with secret clients,” Rudolph said.

Awareness of the role Russia’s oligarchs play in pushing President Vladimir Putin’s agenda overseas and their connection to disinformation campaigns aimed at undermining democracies is at odds with governments’ reluctance to go after enablers. That reluctance is also at odds with governments’ own sanctions on Russian politicians and oligarchs in response to the Ukraine war.

“This is how Russia is laundering its disinformation about how the AstraZeneca vaccine will turn you into a monkey, the Pfizer vaccine is lethal,” Rudolph said, referring to egregious examples of disinformation.

“All of these lies they pay influencers to promote without any kind of attribution. Funnelling everything through fly-by-night PR firms including some set up in London that ultimately tie back to secret funders in Moscow to promote the same talking points as the Russian government uses to promote its own vaccine.”

Disinformation makes it harder for firms running negative news searches as part of their anti-money laundering (AML) customer due diligence. The Wolfsberg Group’s latest guidance on negative news screening warns on disinformation and recommends firms take a risk-based approach to assessing sources used in such screening.

“Credibility of the content is in general higher when subject to editorial oversight,” the Wolfsberg Group paper said. It also notes that there “are a few factors which may indicate that a source is not reliable,” including content that relies on social media for corroboration.

Cyber sanctions target disinformation

The U.S. and UK sanctions packages have targeted Russian entities and individuals involved in disinformation campaigns using cyber sanctions. The UK has added social media trade sanctions as part of its Russia (Sanctions) (EU Exit) (Amendment) (No. 9) Regulations 2022 package which came into force three weeks ago. Those sanctions aim to prevent designated persons from using social media.

“A person who provides a social media service must take reasonable steps to prevent content that is generated directly on the service, or uploaded to or shared on the service, by a designated person being encountered by a user of the service in the United Kingdom,” the UK amendment says.

It does not target those generating content on designated persons behalf, however.