British company structures which hide the identity of those behind them were branded a disgrace by the whistleblower who brought to light an alleged 200 billion euro (178 billion pounds) money laundering scandal involving Danske Bank (DANSKE.CO).
“The role of the United Kingdom is an absolute disgrace. Limited liability partnerships and Scottish [limited] partnerships have been abused for absolutely years,” Howard Wilkinson, who headed Danske Bank’s Baltics trading unit from 2007 to 2014, told European Union lawmakers on Wednesday.
Reuters, Nov 21st 2018
By Richard Smith
It rather looks as if the recently-concluded consultation, by the UK’s Department for Business, Energy & Industrial Strategy (BEIS), on Limited Partnership Reforms, has been somewhat overtaken by events in Denmark (and Estonia), does it not? But in fact, if you apply the Government’s standard of evidence to the latest news, it makes no difference at all: it’s just more ‘allegations’.
In my previous post I provided three years’ news headlines covering the involvement of UK Limited Partnerships in a third of a trillion dollars-worth of international financial crime. Above, we see the UK Government’s unpromisingly insipid and non-committal summary of this global bacchanalia of fraud and money laundering.
That certainly ‘sets expectations’, and indeed, as we dive into the detail of the reform proposals, we find that after two years of consultation, UKG still really doesn’t get it. Here are the main proposals from the consultation.
“Those registering Limited Partnerships must demonstrate they are registered with an official anti-money laundering supervised agent, such as an accountant or a lawyer, or an overseas equivalent.”
This looks like a great idea, and in fact, in a previous round of reform consultations, your scribe recommended it. But here’s Transparency International, 9th November 2017:
Transparency International UK has analysed 52 cases of global corruption – amounting to £80 billion – and found hundreds of UK registered shell companies at the heart of these scandals. At the same time the UK’s system to prevent this abuse is failing.
This new research, Hiding in Plain Sight, has found 766 companies registered in the UK that have been directly involved in laundering stolen money out of at least 13 countries. These companies are used as layers to hide money that would otherwise appear suspicious, and have the added advantage of providing a respectability uniquely associated with being registered in the UK.
Our evidence has shown this is no accident. The UK is home to a network of Trust and Companies Service Providers (TCSP’s) that operate much like Appleby and Mossack Fonseca – companies at the heart of the Paradise and Panama Papers – who create these companies on behalf of their clients.
TCSPs will register these companies to UK addresses, often nothing more than mailboxes. This has created ‘company factories’, where thousands of companies can be registered to unoccupied buildings with little to suggest any meaningful business occurs. We found half of the 766 questionable companies we identified were registered to only 8 separate addresses – in one instance a run-down building, next to a bank on Potters Bar High Street.
With the UK as a destination of choice for those seeking to hide illicit wealth, the UK’s own defence mechanisms have proven to be woefully inadequate. Just six staff in Companies House are charged with policing 4 million companies, TCSPs have a poor track record of identifying and reporting money laundering with only 77 of the 400,000 suspicious activity reports filed last year coming from this sector.
Meanwhile TCSP’s can set up companies in the UK even if they are not registered or based here. This means they avoid being subject to UK regulation, and instead are bound by local laws, which are often unenforced or so weak as to be ineffective.
In fact, many of the TCSPs behind the boom in anonymous LPs already put their identifying details on the registration forms, and are already supervised by HMRC. They continue to operate, unsanctioned and unperturbed.
In the absence of well-funded, energetic, coherent supervision, convincing enforcement, and a higher bar for TCSP registration and supervision, not only in the UK, but “overseas”, none of which is to be expected in the short term, if at all, the potential impact of the scheme proposed by BEIS is quite likely to be nil.
Verdict: Dead On Arrival, But MIght Come To Life If We Ever Get Any Enforcement.
“The Limited Partnership must demonstrate an ongoing link to the UK, for example by keeping its principal place of business in the UK”
There’s more about the “principal place of business” (PPoB) in the detail:
The Government believes it is vital for LPs registered in the UK under this country’s legal framework to maintain some demonstrable link to the UK. The Government intends to request information about a LP’s connection to the UK (a) on application for registration, and (b) on an ongoing basis. On an application for registration a LP must provide a proposed PPoB in the UK. LPs are diverse in terms of the ways they are established and used and so the Government intends therefore to offer LPs a choice in how to demonstrate their ongoing connection to remain eligible as a LP. A LP will need to either:
o retain their PPoB in the UK;
o demonstrate that they are continuing some legitimate business activity at an address in the UK; or
o demonstrate that they continue to engage the services of an agent that is registered with a UK AML supervisory body
Well now: every single LP ever involved in a fraud has been able to comply with the requirement to retain its PPoB in the UK, and will continue to be able to do so. In other words, this reform does absolutely nothing to mitigate abuse.
Verdict: Dead On Arrival.
Here’s the detail:
The Government is convinced that there is merit in all LPs being required to file a confirmation statement at least every 12 months. The Government intends to introduce this requirement for confirmation statements from LPs in England and Wales, and Northern Ireland; this requirement is already mandatory for SLPs.
Submission of a confirmation statement every 12 months does nothing to confirm the information is accurate. This measure delivers nothing apart from
- an annual hint that the LP might still be conducting business, somewhere on the planet.
- a slight increase in the torrents of unverified claims that already flow into and out of Companies House.
Verdict: Not Quite Dead On Arrival But Not Much of an Anti-Abuse Mechanism.
Registration particulars and accounts
Here’s the detail:
23. Based on the evidence submitted the Government does not consider the case has been made for all LPs to prepare accounts and reports in line with limited companies. However, where there are any gaps in the requirements for partnerships to file basic accounts with the UK government, the Government will close those gaps in a way that is not burdensome or duplicative. Furthermore, there is evidence from a number of respondents to suggest that it would not be controversial to provide some of the other information that is required on a company’s registration documents.
25. Additionally, the Government considers that the information currently required of LPs on applications for registration should be expanded and be confirmed by the confirmation statement. Currently, new registrations for LPs in England, Wales and Northern Ireland require:
o The name of the firm
o The general nature of the business
o Address of the proposed principal place of business of the LP
o The term, if any, for which the LP is to be entered into
o The names and signatures of each general partner
o The names, amounts contributed and signatures of each limited partner
o The name of the presenter and the presenter’s reference
26. In addition to this information, SLPs must also provide information about persons with significant control (PSC).
27. The Government intends to add to this list the following information: contact information for all limited and general partners, the date of birth and nationality of all limited and general partners that are natural persons, and also a SIC (standard industrial classification) code, identifying the nature of the LP’s business.
That proposal misses the point with terrifying precision. It increases the transparency of a few hundred LPs that have natural persons as partners (which aren’t abused much, so far, though here’s a harbinger, Rix Europe(an) LP), but does nothing at all to increase the transparency of tens of thousands LPs that have offshore corporations as partners (which are abused, allegedly, to the tune of multiple hundreds of billions of dollars).
So: where is the requirement to disclose the registered number and register location for LP partners that are corporations, not natural person? This disclosure requirement was introduced in 2017 for Scottish Qualifying Partnerships (which have no history of abuse) but not for Scottish Limited Partnerships that have offshore corporate partners (and those are the very SLPs that have a huge history of abuse).
This omission might sound trivial, but it has the side-effect of perpetuating another bizarre feature of LPs, their arcane and unenforceable accounting rules (overview; detail; amendments), which work like this
- If the General Partner is a natural person, no public accounts need to be filed.
- If one General Partner is a UK LLP, no public accounts need to be filed.
- If the General Partners include one or more UK Limited companies, but no LLPs, then the LP accounts must be filed at Companies House, under the name of each of the UK Limited companies.
- If the General Partners are all non-UK Limited companies registered in the EEA, then the LP accounts must be filed at the register of each of the EEA Limited companies, under the name of each of the EEA Limited companies.
- If the general partners are all non-EEA Limited companies, then the accounts must be made available for inspection at the registered UK place of business in UK, or, if there is no UK place of business, at a nominated address in the UK.
Failure to comply with these rules attracts a Level 5 fine (currently £5,000). However, it would be most unwise to conclude, from the size of the penalty, that the drafters took compliance and enforcement at all seriously when they produced these regulations. For some reason I imagine them emitting cretinous sniggers as they get stuck into the drafting.
A worked example illustrates the scale and nature of the problem that results from these rules. Consider Hilux Services LP. This LP, now dissolved, allegedly laundered $1.7Bn, or other currency equivalent, in the Azerbaijan Laundromat. Hilux Services LP had a General Partner, Solberg Buisness Limited [sic], that is evidently a limited company in an undisclosed, but definitely non-UK jurisdiction: there is no such company as Solberg Buisness Limited at Companies House, whichever way you spell it. Prima facie, then, Hilux Services LP should be making its accounts available for inspection under the accounting rules.
But where? Unfortunately, the required LP registration particulars, unamended since 1907, still do not include the registration number and register location of any corporate partners. Accordingly, the search for Hilux Services LP’s accounts has to cover the following possibilities.
- If “Solberg Buisness Limited” is a non-UK Limited company registered in the EEA, Hilux Services LP’s accounts will presumably have been filed in some non-UK EEA company register. In this case, the only way to track down the LP’s accounts is to visit every single non-UK EEA company register, in the hope of finding its General Partner, and thus, the LP accounts. Only after a fruitless and expensive search of all these registers can one safely conclude that the General Partner is in fact a non-EEA limited company, and thus, that its accounts might be found either at its registered place of business or at a nominated address.
- Next, then, one considers Hilux Services LP’s registered place of business, 111 West George Street, Glasgow, G2 1QX. This is a maildrop. A call to the maildrop provider, Mailboxes Etc. (0141 222 2527) readily establishes that no LP accounts at all are held at that address.
- So perhaps, then, Hilux Services LP’s accounts are to be found at a “nominated” UK address. Unfortunately, the mechanism by which a UK address may be “nominated” is undocumented, and, in particular, unknown to Companies House, who, when quizzed on how an address is “nominated”, recommended the author take “legal advice”. As it happens, my legal advisor recommends consulting the entrails of chickens, for a steer on how a nominated address might be identified.
In short, the combined effect of the absurdly convoluted accounts rules, and the inadequate registration disclosures, and the mysterious ‘nominated address’ mechanism, is that it is impossible for any person to be sure, at a reasonable expenditure of time and budget, whether or not Hilux Services LP, and many thousands of other similarly-configured LPs, ever filed any accounts at all, somewhere or other.
The lunacy does not stop there. The accounts regulations simply state that the members of the qualifying partnership “must make the latest accounts of the partnership available for inspection by any person, without charge and during business hours, at the head office of the partnership”. Whether the “head office” is the same as the “principal place of business” is unclear. Nor is any deadline specified for making “the latest accounts of the partnership available for inspection”; apparently an LP could promise to produce its accounts, then temporise for ever.
Now then: all of the LPs involved in financial crime, proved or alleged, Scottish or otherwise, appear to have corporate partners, offshore. If so, they are legally required to make their accounts available for inspection, somewhere. Since their PPoBs are in fact maildrops, it is easy to verify that none of them have ever lodged accounts there. That looks like large scale lawlessness, at £5,000 per transgression, but that is the strongest claim we can make: the combined effect of these legislative and operational lacunae is to make the accounting rules unenforceable.
Note also that the accounts filing requirement can still be avoided by appointing a General Partner that is a UK LLP, an expedient that happens not to have been adopted, so far, by the creators and users of the type of LP typically involved in large scale financial crime. Presumably they just aren’t that well versed in the minutiae of LP law; they should read this blog.
Verdict: Dead On Arrival.
Admittedly a workable accounting rule would be no silver bullet, by itself. One should remember that LLPs and Limited Companies, which have a much more comprehensive accounting requirement than SLPs, have been just as heavily abused (see the Russian and Azerbaijan Laundromat stories). BBC File on 4 recently highlighted a case of a UK LLP that turned over some $800,000,000 in two years, according to its leaked bank statements, while filing accounts that recorded annual expenses of £1,500 and annual revenue around £20,000 for the same two years. Frequently, the abusive LLPs and Limited companies are created by the very same agents that have registered abusive SLPs.
Without enforcement, none of your fancy pants laws and regs work at all.
Beneficial Ownership Information
At the moment, SLPs are required to disclose a PSC, if they feel like it; English and Northern Irish LPs are not; and that’s that. So, heaven knows what this means:
The Government will undertake further work to explore whether to require beneficial ownership information from corporate partners that do not already hold a PSC register. This will take into account the value to law enforcement of this information; their relevance to the UK’s compliance with international standards; the existing reporting requirements of these entities; and the potential burden of introducing these reporting requirements.
Why do the proposals not make a simple declaration that the PSC disclosure requirement, flawed as it is, for the moment, will be extended to English and NI LPs? We have already seen some displacement of dubious registration activity from SLPs to NI and English LPs in the last 18 months, and expect this to continue. As soon as PSCs were required to be disclosed, SLP registrations decreased sharply. At exactly the same time, ELP and NILP registrations, by the same agents responsible for the boom in anonymous SLPs, shot up.
Verdict: piecemeal reforms simply displace the abuse.
Note also, that out of the SLPs in the “offshore” category registered after the PSC scheme was extended to SLPs, 40% simply deny, perfectly legally, that they have a PSC, so they’re as opaque as ever. Thousands more haven’t made a PSC statement at all, more than a year after the requirement was introduced, according to the answer to a recent parliamentary question, nicely timed to coincide with the reform announcement, but remain unsanctioned. So that’s the PSC scheme for you, and UK enforcement of it.
Striking off defunct LPs
Here’s the detail:
For the register of companies to be transparent and reliable, the Government considers it essential that it should contain information that is up to date and accurate and therefore intends to grant the Registrar the power to strike off LPs that are dissolved or which the Registrar concludes are not carrying on business or in operation. The Registrar’s new powers will be subject to following a robust notification procedure for strike off in respect of dissolved LPs and LPs which are no longer carrying on business, at least as strong as the procedure that is already in place for companies. The Government will continue discussing with stakeholders how to design a process that ensures, as far as is possible, that all general and limited partners are given due notice that an LP is being considered for strike off. The Government recognises that particular safeguards will be needed in applying this to historic LPs that were registered many years ago. The Government will also consider the circumstances when it would be appropriate to restore a LP, and an appropriate procedure for the restoration of a LP that has been struck off.
At the moment, the SLP register is a mess. Where is the budget to scan 50,000 LP filing histories, in order to identify and strike off, inter alia, the 12,000+ SLPs that have already made filings to the effect that the partnership is dissolved? Agents have even developed a nasty habit of dissolving SLPs and then undissolving them again months or years later. See the bizarre filing history of Mainhold Products LP for one of dozens of examples.
Where, for that matter is the power to strike off miscreant LPs “In the public interest”, or disqualify delinquent General Partners?
Last of all, in the absence of enforced and enforceable accounts reporting requirements, how on earth will CH determine that an LP is no longer carrying on business? Presumably one can keep an LP alive simply by filing a confirmation statement (annual cost £17). Does the non-filing of a PSC statement imply the LP is no longer carrying on business? That seem like an obvious criterion to apply, but it is nowhere to be found in the response.
Verdict: Half-Dead On Arrival.
Overall Summary: we’re not quite out of the starting blocks here yet, are we, BEIS?