Pandora’s Box: How Scottish and Irish Partnerships Are Used in International Crime

Yves here. Our Richard Smith has been dogging the sordid dealings of Scottish limited partnerships for years. It’s gratifying to see more experts recognizing their role in facilitating crime and calling for crackdowns. So it’s disheartening to see, just as the UK is making reforms, that Ireland is stepping into this bad role.

I’m a bit perplexed that the author so prominently features “UK limited partnerships”. If you were to search for earlier reporting and legislative discussions, that’s not the target of concern. The offending ones are Scottish limited partnerships. Even though they are obviously also technically “UK limited partnerships” and can be reined in via UK-level reforms, as the article eventually explains, Scottish limited partnerships have special features that make them particularly abuse-friendly.

By Elspeth Berry, a Reader in Law at Nottingham Law School. Originally published at openDemocracy

UK limited partnerships have a sorry record at the forefront of international money laundering, corruption, tax evasion and other criminal activities. These corporate structures have been used in all sorts of cases – from complex financial structures used to commit fraud involving the theft of one-eighth of Moldova’s annual GDP to masking foreign investment in opaque deals in Uzbekistan.

But while investigative journalists, international organisations and academics have highlighted the misuse of limited partnerships in the UK, often referred to as LPs, now, new developments in Ireland have allowed Irish limited partnerships to be used in the same way, enabling great harm at home and abroad.

This means it’s time for real reform – not just in terms of legal disclosure requirements, restricting use of opaque corporate partners, and more active policing of LPs, but in the very ethics that are meant to guide those who set up and operate these structures, including the partners themselves, lawyers, accountants and business formation agents.

UK LPs are attractive to wrongdoers because they are subject to minimal disclosure requirements. For example, they are not required to disclose their accounts. Yet, unlike general partnerships, they are required to register at Companies House (the UK’s official registrar of businesses). This means that they can provide a certificate evidencing their existence, which may also suggest a degree of government recognition or approval.

In addition, LPs themselves are not taxable. Only the partners are liable to pay tax – and those partners are often resident in offshore locations where they pay little or no tax.

Scottish LPs – which have gained a particular reputation for misuse – are especially attractive because, unlike LPs in the rest of the UK, these structures have a separate legal personality to their partners. This enables the LP itself to enter into contracts and own property directly, further insulating their partners from risk.

The UK government’s response so far has been to apply its beneficial ownership regime – i.e. companies have to reveal who owns over 25% in control rights in their organisation – to Scottish LPs. In official language, these individuals are referred to as ‘people with significant control’ (PSC).

But this is not enough. Not only are PSC requirements not enforced, they do not apply at all to English, Welsh or Northern Irish LPs. Moreover, LP accounts are not disclosed, suspicious LPs cannot be terminated, and an LP may have no real connection with the UK and thus little opportunity for interaction with UK criminal enforcement agencies or its tax authorities. Further reforms in some but not all of these respects are the subject of an ongoing consultation by the Department for Business, Energy & Industrial Strategy.

Now, it appears that Irish limited partnerships (LPs) are following in the footsteps of UK LPs – something of a walk of shame. The Irish Times has detailed the growing use of Irish limited partnerships to facilitate international wrongdoing in a way which sadly mirrors the misuse of UK LPs. As criminology professor Kristian Lasslett puts it: “[P]eople in the UK and Ireland might think of offshore as being the Cayman Islands, but people in Uzbekistan think of offshore as being Ireland and Scotland.”

Yet this development could have been predicted by the Irish government, given the UK’s experience. Indeed it was predicted by Ireland’s Business Post newspaper, which sounded the alarm in 2019 about “obscure ownership structures” and “insufficient transparency requirements” facilitating abuse.

Worryingly – but unsurprisingly – The Irish Times notes that the misuse of Irish LPs developed only after the UK government introduced the PSC reforms for Scottish LPs. This ‘whack-a-mole’ effect was observed with the increased use of English and Northern Irish LPs after the introduction of those UK reforms.

Parallels between the UK and Ireland go beyond the lack of transparency in LPs. They also include signs that the private equity industry – direct investment firms that regularly use LPs – in both jurisdictions are influencing government to reduce regulation, rather than increase it. While the majority of those using LPs use them for legitimate purposes, reduced regulation favours those who do not.

It remains to be seen whether the UK’s ongoing consultation on LP reform will accept the many legal reforms that are still required. However, it is likely that there will continue to be significant gaps in the legal regulation of LPs, as well as significant failings in its enforcement.

What is therefore also required is the development of a strong ethical framework with mandatory application – via Companies House – to all those involved in forming and operating LPs. This would set out values that are already widely shared, such as honesty, integrity and fairness, but that can easily be suppressed as a result of economic pressures.

This new ethical framework would also enshrine the importance of considering the common good rather than narrow self-interest. Such an ethical code could reduce the tension between regulation and the desire of businesses to avoid it, and thus promote both compliance with the law and ethical conduct where the law is ambiguous or silent.

Ultimately, what is needed is a change of individual and collective attitudes in UK limited partnerships and those who promote them – not just a change in the rules.

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  1. LowellHighlander

    Elspeth Berry has contributed a veritable public service here. Thank you.

    Moreover, as an economist, I’d say that her work shows the weight of the Institutionalist School (i.e. paradigm) in Economics: she’s detailing how capitalism is changing (in one regard, at least) in response to external factors. Naturally, this kind of analysis will be completely missed by those practicing in paradigms whose methodology relies so heavily on a priorism.

    But, as an amateur historian, I can’t help but think that these LPs, originally based in Britain, were another manifestation of its old empire: they were designed to take wealth from elsewhere and channel that wealth to the very top of Britain’s socio-economic echelons. (Is this an incorrect interpretation?) And then these wealth-takers simply relocated to some place beyond the London parliament’s remit, such as the Channel Islands, which is far better than any man-made gated community.

    Could the fact that Eire is now serving as home to these wealth-hiding schemes be due to Brexit? (I remember seeing, perhaps on this website, that many entities in the City of London were relocating to Eire, specifically Dublin, in anticipation of Brexit’s hitting the UK with full force.)

    1. Colonel Smithers

      Thank you, LH.

      You are correct about the imperial angle. The LPs are replicated in the current and former colonies to act as screens to protect investors / ultimate beneficial owners. There’s often a web of such structures around the world to make due diligence, investigations etc. time consuming, expensive and throw prying eyes off the scent.

      David Cameron’s family used a global network set up by the father, a former stockbroker.

      In Scotland, LPs were first used to hold landed estates for the aristocracy and hide the beneficiaries. The largest native landowner, the Duke of Buccleuch, uses such devices. He has the use of palatial properties without being listed as the owner. Whoever is the owner is very generous towards the b@st@rd descendant of Charles II.

      You are also correct about the impact of Brexit.

    2. jsn

      You would probably enjoy this: “Pirate Nests and the Rise of the British Empire, 1570-1740” by Mark G. Hanna.

      Plus ça change, plus c’est la même chose.

      1. barefoot charley

        Totally agree, this is an old-fashioned, footnoted, archive-intoxicated page-turner in the grand manner. And it makes blindingly clear the primacy of piracy as an economic model wherever the English and Dutch sought to ‘trade’ with Spanish and Portugese outposts, as long as they were smuggling anyway. Lesson learned for opiating China! They riotously fuzzed the distinction between privateering and privacy, from the beginning, led by their colonies where anything could happen anyway, often to the king’s personal enrichment. The English were imperialism’s greatest pirates, and the pirate isles they made of their post-imperial scatterings deserve close attention. Truthfully, in the US South Dakota, Nevada, Delaware etc do the same dirty laundry work, but what’s left of Britain has set a high historic bar. En garde, EU!

  2. Paul Whittaker

    Hilariously the UK tax dept sent out forms demanding the identity of the Beneficial owner of these scams but included a check off box with “unsure” underneath…….. 200 LP companies in a rural Scottish mail box next to a derelict building is a mite suspicious..

  3. deplorado

    Read this tweet by the professor mentioned in the article:

    Kristian Lasslett
    1/9 A shame, but telling, this report on GFG Alliance (inc Liberty Steel) and Greensill Capital, was sidelined by Tory sleaze scandal:
    It offers a critical insight into Sanjeev Gupta and Lex Greensill, two men cuddled by the UK political establishment.

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