Offshore

Expat Russian HNW Clients Shouldn't Panic Amid Diplomatic Deep Freeze

Tom Burroughes, Group Editor, London, 26 March 2018

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Private client advisors to Russian expats in the UK say such HNW individuals face tighter scrutiny amid worsening diplomatic relations but counsel against panic or knee-jerk reactions.

Russians in the UK face more scrutiny and authorities will use new powers to hunt down tax miscreants. They should not however fear a blanket clampdown on them all in the fraught diplomatic environment, private client advisors say.

So far, the private client industry in the UK appears to be adopting a cautious stance amid the dramatic events of recent days, which have seen the UK accuse the Russian state of using deadly nerve agents to try and kill supposed enemies.

The UK says it is highly probable that Russia attempted to murder Sergei Skripal, 66, and Yulia Skripal, 33, in Salisbury earlier in March. A police officer who was at the scene, Detective Sergeant Nick Bailey, was left seriously ill; he was released from hospital last Friday. The UK claims Russian operatives used a form of poison; the affair has prompted anger in the US and Europe. It is not the first time that people connected with the former Soviet Union have been targeted in the UK. 

The saga has seen Russian-UK relations sink to new lows – Russian president Vladimir Putin has scoffed at UK claims - raising worries that wealthy Russian nationals residing in the UK face increased hostility and legal hurdles.

“When tensions arise, views polarise and even 'regular' HNWs may be viewed as being part of Putin's circle when the opposite is true. Aside from possible public animosity, it may affect their ability to do business as counterparties delay deals, investments or contracts; until they understand the lie of the land with sanctions and whether they (the Russian HNWs) are on Putin's side or not,” Stephen Ross, head of the fraud team at Withers, the international law firm, said.

“Just as we are all connected to Russian state companies (and their success) even if we don't know it – e.g. many of our pensions will hold shares in BP which owns roughly 20 per cent of Rosneft - so too many regular Russian HNWs are connected to the success or failure of Russian companies, their investments, or the professional services industry in London which depends on Russian work whatever their views on the Putin regime may be,” Ross said.

The situation is ironic as the UK has been a favoured destination for wealthy expat Russians since the end of the Cold War. So much so, in fact, that they have been sometimes blamed, along with other groups of wealthy foreigners, of boosting residential house prices outside the reach of locals, although arguably central bank quantitative easing is the main culprit.  

According to some estimates (Guardian, 2014), there are upwards of 140,000 Russian-born persons living in the UK. The phenomenon has even spawned nicknames for London (“Moscow-on-the-Thames”, etc). Most of those persons are not wealthy. However, a small but often prominent number are. Many Britons are, for example, familiar with Russian oligarch Roman Abramovic, owner of Chelsea Football Club. The UK’s non-domiciled residency system has been used by such persons down the years, although various recent administrations have tightened rules. The UK also operates “golden visas” for high net worth clients – its Tier 1 investor and entrepreneur visa regimes. The UK increased the minimum required sum for an investor visa to £2 million ($2.83 million) from the previous £1 million, taking effect from November 2014.

These, and other changes – such as removal of tax breaks on foreign-owned property – appear to have cut inflows of wealthy persons, including Russians, to the UK. In fact, the hike in Tier 1 Visa rates saw entrants using these routes fall from 1,172 in 2014 to 192 in 2015, according to Home Office data. With enterprise visas, the numbers fell less sharply, to 918 from 1,087 over the same two years. The total number of Russians getting UK visas – covering all wealth levels – also fell. In 2016, the latest year for which data is available, 116,983 Russians got UK visas, down 227,468 in 2013.

Explaining wealth
Concerns about how some émigré Russian citizens might have been dodging taxes and taking illicit sources of income played a part in the UK’s new system of Unexplained Wealth Orders, which kicked in earlier this year. (UWOs have prompted concerns about potential misuse.)

The UK already has robust rules to foil dirty money – some of the toughest in the world - and the arrival this year of the Unexplained Wealth Order system will only tighten the controls yet further, Ashley Crossley, who heads the wealth management department at Baker McKenzie in London, told this publication. 

“It would certainly not be fair to characterise the UK as a soft touch for international money,” he said. “The idea that the government, regulators and main players in the wealth management industry do not take this issue extremely seriously is mistaken. It may make good political headlines but it is far from the truth,” he continued. 

Crossley said there is a risk of people treating clients from Russia as if they were all high-risk...”I think that situation has been a while coming and it not fair or constructive. Many Russians have come to the UK, made it their home and have contributed to this country,” he said.  

What sort of advice is Baker McKenzie giving to clients? “Clients are being advised that if they have structures that are not fully explainable to the authorities then they should get their affairs in order and check that their wealth structures are fit for purpose,” Crossley said.

Russian-born clients in the UK should not, for example, assume that they only need to be clear and compliant on assets in the UK and not about their offshore assets, he added. 

 

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