You Can't Just Take a Russian Oligarch's London Townhouse

(Bloomberg Opinion) -- It has taken Russia's invasion of Ukraine for the U.K. to pursue more concerted action against the flow of dirty money through the City of London and the capital's property market. Government reforms announced on Monday focused on lifting the veil of secrecy around corrupt real-estate ownership. These are just the first steps toward potentially seizing assets — but the steps are significant.

Multimillion-pound properties in London have proved a convenient and safe place to stash Russian fortunes. Hereon, anonymous foreign beneficiaries of U.K. real estate will face restrictions on selling if they hide behind shell companies. Whether these changes lead to a sudden outbreak of transparency in the property sector remains to be seen.

Assuming the chain of ownership extends to trusts in offshore jurisdictions, the U.K. would still appear reliant on cooperation from those overseas authorities. And the first line of legal defense will be to argue that the suspect properties are indeed owned by corporate entities rather than individuals – just as the big banks and consulting firms own houses for client meetings.

If the success of those measures is doubtful, one related change could make a more substantial difference: the new regime for “unexplained wealth orders,” whereby the U.K. National Crime Agency forces people to demonstrate they obtained suspect wealth legitimately.

While these are a conceivably valuable weapon in the fight against money laundering, their effectiveness so far has been limited. Cases are necessarily tortuous as they involve delving into history and unpicking opaque legal structures.

Legal resources matter here: the targets' pockets are deep, and they can afford to throw money at securing the best-resourced law firms and slickest advocates in a legal war of attrition. For the government, the stakes are high. Failing in an unexplained wealth order has historically meant picking up the other side's astronomical bill. That falls on a taxpayer purse already strained by the pandemic.

But under the reforms, a U.K. law-enforcement agency will no longer automatically have to pay the other side's costs if it loses. It just has to persuade the court the failed action was reasonable. That radically alters the economics and legal dynamics, and should enable the NCA to bring more cases.

The tail wags the dog in U.K. litigation: The “loser pays” model means potential costs determine whether an action is bought in the first place. If one side can proceed with an effective indemnity, it changes the game.

The key question now is whether more cases will lead to more wins — and, ultimately, to confiscation of assets. This could be a critical moment for the judiciary. Oligarchs will be aware that U.K. courts have historically been resistant to depriving people of property rights without strong justification. It's an almost instinctive aversion. The distinction between a corporate and a human actor is also firmly entrenched. Both tenets are enablers of secret, indirect real-estate ownership; both now face challenge.

Cabinet Minister Michael Gove is assessing how to seize British property owned by Russian oligarchs with links to Vladimir Putin without paying them compensation, but government lawyers are concerned about legal objections because this would undermine property rights, the Financial Times reported. Nevertheless, the political and legislative context is evolving rapidly. And that is likely to feed through to the courts.

“The cornerstone of common law is that property rights are respected. I think that is changing,” says Jonathan Fisher, a visiting professor at the London School of Economics. “We have seen a number of cases where confiscation has been upheld in financial crime.” Judges may be willing to allow an erosion of property rights so long as it's proportionate, he says.

The courts will be busy, the arguments will be drawn-out and the so-called London laundromat will continue to generate fees for the legal teams involved. But outspending the government on lawyers may no longer be a viable strategy for those with something to hide.

More From Bloomberg Opinion:

The West's Embrace of Russian Influence Has to End: Martin Ivens
Putin's War Shows West Must Clean Up Dirty Money: Paul J. Davies
All Is Not Quiet on Putin's Home Front: Clara Ferreira Marques

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.