A paradise for corruption: Britain tries to clean up its dirtiest secret

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LONDON — In July 2020, Andrew Fahie, premier of the British Virgin Islands, wrote to the U.K. government boasting of transparency in its financial services industry that “competitors may envy.”

A publication detailing the letter shows a smiling Fahie alongside the proud message that the BVI “continues to meet and adhere to the highest international standards as a responsible, cooperative and quality financial centre.”

Less than two years later, Fahie was arrested by the U.S. Drugs Enforcement Agency in Miami on cocaine smuggling and money laundering charges. DEA agents had pretended to be members of the Sinaloa cartel — once run by famed Mexican drug lord El Chapo — to lure Fahie to the U.S, where he agreed to let them smuggle cocaine through the British Virgin Islands (BVI).

Fahie was found guilty earlier this year, and awaits sentencing.

For some, this dramatic tale is symbolic of the dirty money hotbed the BVI has become, enabled in part by the U.K.’s lack of action to prevent it.

“The Foreign Office, in my view, has not been tough enough,” said Conservative MP and Shadow Foreign Secretary Andrew Mitchell.

Mitchell, who served as deputy foreign secretary under the previous Conservative government and is a prominent campaigner against dirty money, said Fahie’s arrest “underlines the urgent requirement for the BVI to clean up its act, and prevent it from being accused of this sort of crime.”

The BVI, a Caribbean archipelago with crystal-clear waters, comprises four main islands and more than 50 smaller ones. It’s one of Britain’s 14 overseas territories. The “B” in its name stems from an uncomfortable history of British colonization: its residents are British citizens, its flag includes the Union Jack, and its sovereign is King Charles III.

So, it’s firmly a British issue.

“The reason why the BVI is British is because we took it from the people it belonged to and used it as a slave colony,” said Oliver Bullough, an author who writes about illicit finance. “The people in the BVI discovered how to make money through being a tax haven, and we allowed them to do so, because it meant that we didn’t have to pay to support them anymore.”

The BVI’s popularity as a sunny destination for tourists as well as for money laundering is now well established.

It hosts a financial services industry which greatly outsizes its local economy. Companies registered there hold $1.5 trillion in assets, in a country with a GDP of just over $1 billion.

More than 50 percent of the shell companies uncovered by the Panama Papers document leak in 2016 were registered in the BVI. An International Monetary Fund report from February accused the BVI of not providing evidence it is implementing sanctions. A Transparency International report from 2022 found “endemic problems” with the BVI as the “destination of choice for corrupt individuals looking for secrecy.”

Plus, the International Consortium of Investigative Journalists revealed that BVI companies appeared in one in every five suspicious activity reports filed by banks that had concerns about possible money laundering.

While there are legitimate reasons to register a company in the BVI, the appeal of offshore financial centers is that they can offer opaque systems and few checks on the source of funds. Would-be criminals eye up “shell companies,” allowing them to disguise who actually owns an asset via a firm without active business operations or assets.

After all, offshore hubs must offer companies a reason to move away from global financial centers. Privacy, and a lower or non-existent tax rate, is how they do so.

Renewed focus

Russia’s invasion of Ukraine in 2022, and resulting sanctions, have renewed the focus on Britain’s role in the darker side of financial services. Be it in the City of London, or the shores of British-owned islands, more attention is being paid to where oligarchs and kleptocrats stash their money.

The BVI in particular has been the subject of this heightened attention.

“There’s increasing recognition that the BVI stands out in terms of criminals and kleptocrats funneling dirty money through shell companies based there. Unfortunately, it is lagging behind other British territories when it comes to progress on tackling the problem,” said Rachel Davies, advocacy director at Transparency International.

Indeed, the overseas territories are a preferred location for Russian oligarchs. A report by Global Witness said that £68 billion of Russian money was invested in British Overseas Territories between 2008 and 2018, and that the BVI was the second most popular destination for Russian money leaving the country. (Cyprus was first.)

Investigative journalist Juliette Garside — who worked on both the Panama Papers and Paradise Papers investigations — told British MPs on the Foreign Affairs Committee in 2018: “In Russia, one of the names for a shell company — one of the words people use — is BVI. They just call them BVIs as shorthand.”

David Lammy, the new Labour government’s foreign secretary, has called for more to be done to counteract the impact illicit finance has on Britain’s security, and the role played by its overseas territories and the City of London.

But the new government will have a big fight on its hands, not least due to the amount of money it could cost.

A paradise for corruption

A former British government official, granted anonymity to speak freely, said DEA agents convinced Fahie to go to the U.S. so he could be arrested and tried in an American court. “The level of corruption in the BVI means you wouldn’t get a local jury to convict him,” they said.

But, the official added, the U.S. also doubted the U.K. would act. The Americans “lacked confidence that the British would take firm action — they wanted just to get [Fahie] out and prosecute him,” they said.

Under several Conservative administrations, promises of transparency improvements were made, but little concrete change came about.

In 2021, an inquiry was commissioned by the British government into corruption in the BVI. Led by Gary Hickinbottom, a former judge at the Court of Appeal, the 2022 report, reaching almost 1,000 pages, stated that “almost everywhere, the principles of good governance, such as openness, transparency and even the rule of law, are ignored.” Hickinbottom suggested that the government there be suspended.

Given the removal of Fahie, the British government did not take up this option. Liz Truss, best known as the U.K.’s shortest-serving prime minister, said in her position as foreign secretary at the time that the BVI administration should have the opportunity to implement Hickinbottom’s 48 recommendations before the U.K. stepped in.

But there have been no quick results. Labour, which won a landslide election in July, is now aiming to take on the job, with new foreign minister Lammy pledging action.

In a speech in May, Lammy said the problem of corruption “starts here in London, in the dark corners of Britain’s financial center,” pointing to Britain’s overseas territories as contributors to more than £250 billion worth of economic crime.

Lammy expressed sympathy with the plight of overseas territories as a “son of the Caribbean” — both his parents were Guyanese. But, he said, “it remains the case that three out of four of the offshore jurisdictions with the highest risk of involvement with international corruption are U.K. overseas territories. This is a contradiction that cuts into our credibility. We must be honest about this and we must solve it together.”

But if dirty money props up the economies of overseas territories — company registrations account for 51.4 percent of the BVI’s revenues, according to its government’s website — fixing it opens a financial hole.

The U.K. has a responsibility under the UN Charter to support the political and economic development of overseas territories, particularly those which are not financially self-sufficient.

While it’s unclear whether the U.K. government would offer financial support if revenue from potential financial crime dissipated, the question is why any territory would surrender more than half of its government revenue unless the U.K. gave it a good reason to, or forced it to.

New U.K. Chancellor Rachel Reeves is hardly in the mood for splashing the cash, after warning last month that Britain faced a £22 billion “black hole” from the previous government’s overspending.

Cleaning up Britain’s dirtiest secret

Margaret Hodge, former Labour MP and a prominent critic of illicit finance, criticized the U.K. for its lack of action. The BVI “is supporting evil across the world. It’s a security issue, it’s not just a financial issue. If we’re supporting kleptocrats, facilitating drug money, we’re supporting instability around the world,” she said.

In a statement to POLITICO, the Foreign, Commonwealth and Development Office (FCDO) said: “We have been clear that the overseas territories need to achieve the highest standards of corporate transparency … We are engaging closely with those overseas territories to meet these standards and are actively considering future proposals to increase transparency further.”

The BVI government said: “We are working with the FCDO’s advisers, Open Ownership, on progressing with the implementation of a publicly accessible register of beneficial ownership for those with a legitimate interest in the requested information. We anticipate that the appropriate framework will be in place by mid-2025 as previously agreed with the FCDO.”

As the ball remains firmly in the territories’ court, it will be up to the new British government to decide whether it is willing to take on what could be a very expensive issue when there are pressing problems closer to home.

Andrew Mitchell rejects the financial argument as an excuse. If the BVI loses most of its government revenue because of transparency improvements, he said, then that shows “their economy is dependent upon dirty money.”

“What does that say about our values, our king and our flag?” he asked.

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