Yves here. Our Richard Smith provides a broader look into the question of why so little has changed on the secrecy front despite a fair bit of press and even some regulatory and legislative efforts to rein it in. The short version is: “It’s hard!” but there are specific devices the shadowy money types employ to evade what to most would seem to be pretty clear-cut rules.
Our Richard Smith is back! As you can see below, he’s a co-author of a new piece at openDemocracy on a favorite topic: how shady investment vehicles like Scottish limited partnerships facilitate scams and money laundering.
Richard took up this beat when a friend lost a lot of money to an international scammer. He discovered that the authorities won’t get out of bed if the ripoff is below $20 million, and even then it’s hard to get their attention, since cross border crime is harder to pursue than the domestic sort. And who wants to have to share credit?
Richard and his allies have been documenting how investment vehicles like Scottish limited partnerships, which provide for historically no and recently only lax disclosure of who is behind them, and dodgy company registries are essential for these crooks to flourish. But this is a decidedly technical and therefore unsexy topic, at least as far as the press and regulators are concerned. So despite officials saying they want to Do Something when stories like the Panama Papers and now the Pandora Papers break, their eyes glaze over when they find they have to get into the weeds to actually have an impact.
Funny that the same impediments also help private equity scamming to continue virtually unchecked, even with the SEC having woken up briefly to make noise about it.
By Richard Smith, a researcher documenting shell company abuse whose collaborations, credited and uncredited, include Australian Broadcasting Corporation, BBC, BBC, Canadian Broadcasting Corporation, Al-Jazeera, interest.co.nz, Glasgow Herald; blog posts at www.nakedcapitalism.com. Originally published at openDemocracy
The Pandora Papers have confirmed just how little oversight we have over what kind of money comes into the UK, and what’s done with it.
Politicians and campaigners are now calling for further action to tighten the UK’s transparency and anti-money laundering procedures: the truth is that our existing mechanisms are failing.
One important area is knowing who actually owns companies based in the UK. The issue of beneficial ownership, where one person enjoys the benefits of owning an asset, even though it is legally registered to another name, regularly features in stories about money laundering and asset secrecy.
Since 2016, English law has required anyone who owns more than a 25% stake (or controls more than 25% of shareholder votes) in private limited companies and limited liability partnerships to disclose their identity. In 2017, Scottish Limited Partnerships had to start making the same disclosures.
Identifying what the law calls a Person of Significant Control (PSC) is supposed to make ownership more transparent. But if you thought these new laws meant an end to the secret ownership of UK companies, you’ll be disappointed.
Whether it is anonymously-owned Scottish shell companies holding large commercial interests in Uzbekistan, or the use of limited liability partnerships (LLPs) in large-scale money laundering operations, it is clear that the changes to the law have not worked. The Department of Business, Enterprise and Industrial Strategy recently called shell firm abuse “appalling”, and has promised new powers for Companies House, the UK’s business registry.
But thanks to ill-thought-out legislation, and poor enforcement, owners have found a variety of ways to evade the existing rules. Here are four of the most common.
1. Delay
The first mistake was that the people who drafted the 2016 law gave companies a set of ready-made excuses for failing to disclose details of their owners.
For example, the legislation states that a company does not have to disclose its PSC if it “has not yet completed taking reasonable steps to find out if there is anyone who is a registrable person or a registrable relevant legal entity in relation to the company”.
Currently, around 3,000 UK companies and partnerships report that they are yet to identify their PSCs, according to Companies House data. There are no penalties for failing to do so, even if the situation continues for several years.
Problems with identification can be persistent, and companies can go for up to five years without declaring their owners. Long-term identification difficulties currently afflict 700 UK companies and partnerships.
But even when companies report that they have identified their owners, there’s still a provision allowing time for collecting their names, addresses and dates of birth – which again can last for years. Seven hundred UK companies and partnerships currently claim to have a PSC who cannot say who or where they are based. One company has told Companies House that it cannot confirm its owner’s particulars every year since 2016.
That pushes our total in the ‘delay’ category well over the 4,000 mark.
For a register that now records the personal information of owners of 5,000,000 active companies, this sounds like chicken feed. But a single, anonymous British shell company can launder billions of dollars. Seabon Limited, for instance, handled $9bn transferred out of Russia.
2. Deny
Under the current legislation, UK companies can also declare that they do not believe they have an owner, if they have “reasonable cause” to conclude this.
This points to a diabolical problem with the law: if no single person has at least a 25% stake, then there is assumed to be no “person of significant control”.
The 25% threshold sounds reasonable, but in practice, it has the unfortunate effect that any company can claim that it has no PSC. To challenge such a claim, you would need to prove who ultimately owned what size stake in the company, but the details on shareholders collected by Companies House are insufficient.
For example, take a UK limited company without a PSC. It says its shares are held by another company registered in an offshore jurisdiction, such as the Marshall Islands, which allows ownership details to remain secret. The Marshall Islands company does not have to reveal who owns its shares, so there is no basis for challenging the UK company’s claim about whether or not it has a PSC.
This is also true of the law in Scotland. A Scottish limited partnership could have a general partner – again, for instance, a company registered in an offshore jurisdiction – yet it will simply deny that it has a PSC.
Some Scottish limited partnerships go to great lengths to show exactly why they have no PSC. This could include appointing multiple new general partners, which themselves are limited partnerships or companies without any identifiable human owner.
The above are all based on real-life examples. The point of these nonsensical corporate structures is not, of course, to record any kind of commercial relationship between these entities – there is none – but simply to defeat the UK’s disclosure rules. If a company declares it has five general partners, you would naturally assume each had 20% control, a figure below the 25% threshold, therefore removing the need to declare ownership.
Analysis of recent Companies House data indicates that over 250,000 British companies claim to have no PSC. There is no place to challenge them over it.
3. Deflect
Once you have your mystery entity, you can use it to conceal even more.
All you have to do is to declare that it is the PSC of other companies and partnerships – all secretly controlled, and all perfectly legal.
For instance, one limited company, the enigmatic Wallingford Projects Ltd, used to be the PSC of dozens of companies and partnerships. At the time of writing, however, it is registered as the PSC for only one company – and Wallingford Projects itself has been dissolved. The same trick of registering an anonymously-owned company as a PSC also works with limited partnerships and limited liability partnerships, which can also be registered as PSCs for multiple entities.
This is a scalable principle. Several years ago, one network of opaque British companies, interconnected by PSC disclosures and shared addresses, reached over 600 entities at its peak in 2018. After the US Treasury encouraged Baltic regulators to examine reports of large-scale money laundering activity at their banks, most of those 600 entities have since been dissolved.
Around half a million British entities have a PSC that is in fact another corporation. Not many are likely to be part of such baroque structures, however, since there’s a much easier way for companies to avoid declaring a beneficial owner.
Since a PSC has to own more than 25% of a company, or control more than 25% of shareholder votes, companies can avoid having to disclose details by splitting ownership between multiple shareholders who own less than a 25% stake each.
Some company formation agents in the UK advertise precisely this service, offering clients the option to register five nominee shareholders to hold 20% of a company’s shares each, avoiding the need to declare a PSC.
In turn, they will also offer signatures by their nominee directors for bank accounts, filings to Companies House and HMRC, power of attorney documents and trusts. These services are often advertised explicitly for the purpose of avoiding the need to declare ownership.
4. Play Dirty
So far, we have dealt with the perfectly legal ways of concealing who controls a UK company. Another tactic is to rely on the UK’s vibrant tradition of non-enforcement.
You could declare as a PSC a company which is not, in theory, allowed to be registered as such. An “ideal” vehicle for this is an English limited partnership, which, unlike its Scottish equivalent, does not have a legal personality of its own. It can’t sign contracts, own property or hold bank accounts, and so cannot officially act as a PSC.
In practice, the lack of enforcement on which kinds of companies can be PSCs (and which cannot) means that you can just ignore the restriction and identify any old corporate entity as your PSC. The UK government has long promised investigatory and verification powers for Companies House, but is yet to provide a timetable.
For instance, a Scottish limited partnership could list its PSC as an English limited partnership, which in turn is controlled by a general partner in an undisclosed offshore jurisdiction. The English limited partnership doesn’t have a PSC, since it isn’t subject to disclosure rules, and so in the end you don’t know who controls the Scottish one, either. Many of the 900 or so entities that use this format have connections to the private equity world.
Irish limited partnerships can also be used in a similar way, despite the fact they do not have a legal personality, and therefore are not eligible. In 2017, two opaquely-owned Scottish limited partnerships were reported to have made a $165m investment in Uzbekistan’s textile industry in a deal that raised “serious red flags” for observers. As it turned out, they had declared Irish limited partnerships as their owners.
Up to 30,000 UK companies, LLPs and SLPs may have chosen companies that are not permitted as beneficial owners. This leaves us a total of 300,000 companies that have made no disclosure, according to Companies House data.
The ease with which the UK’s company registration system can be circumvented represents a resounding defeat for UK law. As pressure mounts for Parliament to finally consider an overseas property transparency register – to catch luxury property in London owned by kleptocrats and gangsters, for instance – it would be wise to bear the current loopholes in mind.
Otherwise, we will see the same workarounds, as well as new ones, being used to avoid declaring Mayfair pads, luxury apartment blocks and 5,000-acre Scottish estates. After years of revelations about how the global elite squirrels away its cash in the UK, that would be very depressing indeed.
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As expected it was excellent stuff by Richard Smith.
They ‘why’ in why the loopholes aren’t being closed might be related to some hints/rumours that powerful people are using these loopholes and these powerful people prefer it if these loopholes are kept open. The powerful people might not need to do anything, it might be well known without anything needing to be said that certain things aren’t to be done. Closing loopholes that the powerful use might be one such thing where people believe that if they did it then they might make enemies of powerful people. If so then it might not be a fear of loss of life but a fear of loss of life-style.
Once new loopholes are found/created for the powerful to use then maybe the existing and publicly known one can be allowed to be closed. The powerful might then regret the lack of community spirit as sooner or later someone will abuse their community good of having this loophole leading to the disappearing of the community good.
The key to stop abuses might be making it clear that it is not companies breaking/bending/avoiding the law – it is in fact people doing so. Once it is clear that it is people doing these bad things then maybe it can be decided to punish people instead of trying to punish a non-corporeal entity like a company.
Once upon a time then SOX-legislation might have been seen as a way of punishing the guilty rather than the non-corporeal entity that is the company. But since SOX isn’t enforced then executives can get away with many things.
It might be easier to enforce compliance if the wording was: “Person Name” refused to disclose the beneficial owners of Company X rather than “Company X” refused to disclose the owners of Company X. Such a refusal might come with a penalty and maybe it might be possible to limit the number of companies one person was responsible for disclosing beneficial owners for.
There are rich people who have made it on their own and there are rich people who have stolen it, either from the countries they and their friends rule or by renting legislators in democracies, paying them or their children an appropriate percentage, and taking advantage of the “updated and improved” rules and regulations. Scotland appears to have a case of “updated and improved”, something which should have been obvious to any enterprising reporter who read the rules before they were voted on, which raises questions about exactly which side the press owners are on
All of these people share the belief that “what is mine is mine” and, even if they have made it by honest methods and are surprisingly liberal and willing to pay a fair percent of it in taxes, they are informed enough to understand that the game is largely rigged and it is “Every man for himself”.
Non-scam examples abound: Isle of Sark Nominee Trusts go back to the beginning of British industrialization- and the food is French!; Swiss banks gave eastern European aristocrats and wary Jews a place to hide legitimately owned riches from not-always-ethical governments and revolutionary regimes; Shanghai banks and insurance policies, Bermuda reinsurance vehicles, and Delaware corporations have been traditionally used to protect against out-of-control Courts (see the rape of Texaco in TX), enterprising “Progressive” legislatures and confiscatory gangs using the cover of “enemy alien confiscations” during wartime (see German citizens’ assets in the US during WWI).
Half the dentists and doctors I know plus a fair share of the grandchildren of US 19th Century wealth have heard of “The angry wife who forum shops for a divorce and takes half of everything you own” cases (the California and Massachusetts courts are famous for this). For many perfectly honest people faced with radical courts and administrations, “Untracable” has simply become a word for “Safe”. Last night I was at a gathering with one knot of arts-related people in Austin. The Venezuelans were comparing asset stories with the Argentinians between more interesting conversations about how South American modern art evolved. As the old joke goes “You’re only paranoid if they aren’t all after you”.
I personally wonder if the authorities’ relaxed attitude toward scammers in places like the US and Scotland is not “Sending a message”; basically “Deal with this shady world and you are on your own”.
All that said, we really do need an international understanding about how to deal with the criminal government looters who hang out in Cyprus, London, Los Angeles, Tel Aviv, and the like. But a bit of graft to encourage the Batistas and the Idi Amin’s of this world to take some of the loot, run off to exile and play with the grandkids in Spain or Saudi Arabia is not a bad trade- ethically a bit of a “Hold your nose and do it”, but better than those no-place-to-run, fight-to-the-death situations. I know of a couple of Rhode Island kids who were sent to nice private colleges via “Uncle Guido’s” mafia money and turned into lawyers, military officers and accountants.
Unfortunately in the present world situation of competing blocks I don’t see an easy agreement on how to handle the monsters. The World Court in the Hague is a nice start- except for the friends of America and the west who seem to get a free pass.
‘The rape of Texaco in TX’.
What does this mean?
Pennzoil vs Texaco. Pennzoil had an agreement in principle to be purchased by another company, with all the usual contract provisions about due dilligence and the right of someone to arrive with more money and solicit the shareholders to turn down the first offer and accept the new one- standard legal boilerplate.
A Texas lawsuit said “Texaco interfered with a contract” and, with a local jury, awarded the plaintiffs 20-30% of the total value of Texaco. Totally contrary to all contract law before- and since. The legal boilerplate in the Pennzoil acceptance was standard and should have allowed Texaco to bid. Not one of the bigtime lawyers I knew in Texas or NYC thought this was reasonable. Could the fact that the winning lawyer (to the tune of more than $100 million for himself) had family roots in the same corner of Lebanon as the judge had any bearing? A shocking, truly shocking, suggestion. The Lebanese community in Texas is 120 years old, very tightly connected… and they takes care of their own.
All the merger contracts now say all cases will be heard in Delaware regardless of which state’s laws are involved. Famous Texas Judge Roy Bean would have been proud.
Something tells me that those 2016 English laws were actually drawn up in the City of London and then given to the government to pass. Of course, that may just be me being cynical.
All those papers: Paradise Papers, Panama Papers, Pandora Papers and nothing is done. It makes me believe that there are few people in the world who are honest and there are only a handful of people in politics who are honest and none who have the courage to do the right thing and pass legislation doing away with this corruption.
In the UK we still have an aristocracy.
Many can trace their family lines at the top back to 1066 and the Battle of Hastings. I heard one female member of the aristocracy proudly claiming she could trace her family line back to Charlemagne.
These people don’t like working and have succeeded in avoiding hard work for centuries.
The money has to flow down the generations.
Things started to get difficult in the 20th century and they needed to hide their money.
The techniques they used could then be opened up for others to benefit from, and a lot of money could be made.
A great business opportunity rose from necessity.