MPs accused the government of “turning a blind eye” to Russian “dirty money” and risking national security despite the outcry following the Salisbury nerve agent attack.
It called for ministers to show “stronger political leadership” and impose further sanctions on “Kremlin-connected individuals”.
The committee said assets stored and laundered in the capital were being used to support Mr Putin’s campaign to “subvert the international-rules based order” and undermine the West in the process.
It said fighting it should be made a “major UK foreign policy priority”.
“Despite the strong rhetoric, President Putin and his allies have been able to continue ‘business as usual’ by hiding and laundering their corrupt assets in London,” the committee said in the report.
“These assets, on which the Kremlin can call at any time, both directly and indirectly support President Putin’s campaign to subvert the international rules-based system, undermine our allies, and erode the mutually-reinforcing international networks that support UK foreign policy.
“This has clear implications for our national security. Turning a blind eye to London’s role in hiding the proceeds of Kremlin-connected corruption risks signalling that the UK is not serious about confronting the full spectrum of President Putin’s offensive measures.”
The MPs said when they had pressed Foreign Secretary Boris Johnson on what needed to be done to stop corrupt money flowing into the UK, he appeared to suggest “there was no real role for the government in this process”.
The committee called on ministers to work with allies in the US and EU to identify and put sanctions of individuals and entities, which Moscow is using to carry out “acts of aggression” – including assassinations and disinformation campaigns.
“Gaps” in the sanctions regime which allowed the Russian government and those linked to Mr Putin to continue making money in London were also highlighted.
Russia was able to raise £3bn in eurobond issuances just two days after the UK announced the expulsion of 23 Russian diplomats in response to the Salisbury attack.
Russian energy firm Gazprom PJSC made a £650m bond sale a day earlier, causing the Russian embassy in London to tweet: “Business as usual?”
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“There is no excuse for the UK to turn a blind eye as President Putin’s kleptocrats and human rights abusers use money laundered through London to corrupt our friends, weaken our alliances, and erode faith in our institutions,” said committee chairman Tom Tugendhat.
“The UK must be clear that the corruption stemming from the Kremlin is no longer welcome in our markets and we will act.”