The Vulnerability of Party Finance in the Face of Cryptocurrency
Party financing rules are beset with loopholes, allowing for various forms of financial manipulation, including the use of shell companies and anonymous donations through online campaigns. The latest threat to transparency comes from the rise of cryptocurrency, which, while allowing anonymity in transaction identity, records all transactions on a public blockchain. This system has already been exploited for purposes ranging from evading sanctions to meddling in elections.
Recent findings from the Centre for Information Resilience have highlighted the misuse of cryptocurrencies like A7A5, the digital rouble, in funding illicit activities, including election interference in Moldova by fugitive oligarch Ilan Shor. His operation is alleged to have funneled over £29 million into the accounts of Moldovan citizens in return for their votes.
In the UK, the political landscape is adapting to this challenge, with parties like Reform UK announcing plans to accept cryptocurrency donations. Cryptocurrencies offer an array of ways to conceal the source of funds, enabling donors to obscure their political affiliations and motives. Techniques such as online "mixers" blend various transactions, complicating tracking efforts. Furthermore, donors can evade reporting requirements by breaking larger contributions into smaller, untraceable amounts.
This situation has created fertile ground for unethical practices, where foreign entities may launder funds into UK accounts before donating to political parties. Russia, having invested heavily—approximately £230 million since 2014—in efforts to undermine democracies worldwide, is poised to take advantage of these avenues.
In response, ministers are preparing a mini white paper to introduce a new elections bill, including stricter “know your donor” rules. However, true knowledge about donors is difficult when cryptocurrencies are involved. A more effective measure would be an outright ban on crypto donations, a step already taken by countries like Ireland and Brazil.
Moreover, the government should prohibit unchecked and unverified entities, such as unincorporated associations, from contributing to political funds. These groups have funneled over £60 million into UK politics over the last two decades without the need for financial transparency.
Concerns persist surrounding foreign money entering UK political funding, especially in light of past reports suggesting that donations from UK citizens may have originated from Russian sources. A notable case involved a donation linked to a UK citizen whose funds were traced back to a Russian account. Despite assurances that the transaction wasn’t suspicious, such mechanisms pose risks for exploitation by malicious actors.
To effectively combat these risks, the National Crime Agency and Electoral Commission require increased resources to investigate financial misconduct and the authority to impose stricter penalties. The Labour Party has promised to enhance the regulations governing political donations, and Foreign Secretary David Lammy has made strides in addressing the issue of corrupt money in politics.
While the potential for reform exists, significant action is required to close the existing loopholes and safeguard the political finance system. The Kremlin—and others with ulterior motives—will undoubtedly be watching closely as these changes unfold.