As we approach the end of the Brexit transition period, the siren voices advocating for a bonfire of the current regulatory system grow louder.
Their argument is that regulation is costly, stifles innovation, and holds back our banks and financial institutions.
They look at other jurisdictions, such as the United Arab Emirates (UAE) and in particular the beautiful and modern city of Dubai, and say that the Emiratis’ light touch regime is the reason for a huge expansion in trade and wealth.
This is a dangerous and short-term argument that, far from bolstering the position of London as the World’s financial centre, would undermine it.
In the Tactics Institute’s latest report, entitled “Renegotiating Europe’s Financial Transparency Regime Post Brexit: the EU, Britain and the United Arab Emirates” (available for free download here,) we show how cutting regulation and becoming less transparent might have superficial short-term benefits for London, but risks our institutions getting hooked on attracting foreign money from dubious sources.
Yes, it is impossible not to be impressed by the pace of development in Dubai, to marvel at the gleaming skyscrapers and ambition of its rulers. However, this rapid growth has come at a huge cost.
Last year, a report by anti-corruption group Transparency labelled Dubai as a “money laundering paradise, where the corrupt and other criminals can go to buy a luxurious property with no restrictions”.
The UK parliament and US State Department have echoed these concerns for two decades. Indeed, in 2018 a State Department report noted that the UAE was a regional and international station for the movement of terrorist organisations, and that its operational capabilities and political considerations hindered the freezing and confiscation of terrorist assets.
The report alleged that the exploitation of illegal financial systems in the UAE is of great concern and made it difficult to enforce UN sanctions on so-called Islamic State and Al Qaeda.
The previous year, the US State Department had revealed that UAE financial institutions were involved in cash transactions involving large amounts of proceeds from international drug trafficking. It cited the UAE as one of the “leading countries for money laundering”.
As we identified in our report, the lack of transparency and oversight, rapid economic growth, booming property market and regulation-free ports have made the country a safe haven for the proceeds of illegal arms sales, drug smuggling, people trafficking, and even terrorism. With concern from the UK and US, pressure is mounting on Dubai to clean up its act.
Compare and contrast this with London. Through the Bank of England, Financial Services Regulation Authority, HMRC and other institutions, Britain has by far the most advanced regulatory system within Europe — maybe the world.
This acts as a powerful deterrent to those who would try to launder the proceeds of crime through its institutions. And when a scandal occurs, far from the cartoon villain image of the City and its regulators being slow to react, perpetrators face the full force of British law and institutions are subject to severe sanctions.
This mature, trusted system has not held the City back. Far from it: it has underpinned its success as one of the world’s top financial centres. It is a success that is built on trust and high standards.
As our report argues, rather than cutting regulation, the government must push for the EU 27 to adopt the UK’s high standards and should continue working closely with European regulators.
This entails cooperating on the naming and shaming of countries which are engaged in money laundering and the financing of terrorism, as well as contributing to the anti-money laundering (AML) and countering financing of terrorism (CFT) lists, even (or, indeed, especially) when they include EU members such as Cyprus, Malta, Latvia, Estonia and Luxembourg. As the Tactics Institute shows, these states lack adequate regulatory oversight and have a financial system that “has an overwhelming grip over their governance structures”. They pose a risk to the EU27 going forward.
Specifically, our report calls for: the need for an agreement between the EU and the UK to continue to work together in tackling the challenge of financial transparency; EU countries to accommodate British standards, to prevent a race to the bottom; a concerted effort to put pressure on money laundering hubs such as the UAE; implementation of all the FATF (Financial Action Task Force) requirements; enforcing legislation to tackle money laundering, the financing of terrorism, and corruption; wider adoption of the UN reporting platform; the strengthening of judicial independence; and lastly more support for whistle blowers.
Far from tearing up the European rule book and adopting a UAE bonfire approach, this could be the UK’s chance to lead the EU — and the world — towards a tougher and more robust regulatory framework.
Once the Brexit transition period ends on 31 December 2020 and the UK starts to set its own rules, there is scope for significant regulatory divergence. As things stand, Boris Johnson’s government has failed to signal which path it wants Britain to take, with hyped-up talk in some quarters of the capital becoming “Singapore” or “Dubai on Thames”.
We hope that a regulatory race to the bottom is not the direction embraced by the Prime Minister. Such a short-sighted move would threaten the global reputation and position of London and make us all poorer.
This article was first published by City AM.