new plans to curb wrongdoing by UK-registered firms are riddled with loopholes
- Written by Elspeth Berry, Associate Professor in Law, Nottingham Trent University
What links the UK with the theft[1] of over a billion US dollars from Moldovan banks and the global money laundering schemes operated through the infamous Russian and Azerbaijani “laundromats”[2] that allowed more billions of US dollars of dirty money to be laundered through shell firms overseas into apparently clean money? The answer is UK limited partnerships (LPs) and limited liability partnerships (LLPs).
As anti-corruption watchdog Transparency International[3] and others[4] have highlighted, these types of organisation are used for serious wrongdoing, including money laundering, political corruption and worse.
They undermine sanctions against Russia and destabilise other former Soviet countries, since those involved in these arrangements often come from these places. The wrongdoing also includes drugs and people trafficking and tax evasion, all of which have direct consequences in the UK.
Both LPs and LLPs are a sort of hybrid between standard partnerships and companies, and have become popular[5] in the past couple of decades.
The UK government proposes to tighten their regulation with the Economic Crime and Corporate Transparency bill[6], which is currently going through its final stages in the House of Lords. However, the bill’s provisions could be made much more effective, while vital reforms are entirely missing.
As it stands, any reduction in wrongdoing is therefore likely to be minimal. Here is what needs to be addressed:
1. Corporate partners
The use of corporate partners, where a company is made a partner of a firm, is common in wrongdoing firms. This enables actual human managers to hide behind a corporate front. Whoever is running the company can also avoid the personal liability for partnership debts that the law imposes on individual partners.
The answer is to ban corporate partners. Failing that, the bill should bring the rules into line with those for corporate directors: companies must already have at least one human director. Meanwhile, the bill is going to prohibit a corporate director from itself having any corporate directors. Legislation banning corporate directors completely was previously enacted but never brought into force.
2. Overseas partners
Partners based overseas, particularly in “tax havens[7]” such as the British Virgin Islands, are common features of wrongdoing firms because they provide a layer of protection from regulation or investigation, as well as facilitating tax avoidance. This is because it is more difficult for UK regulators and enforcement agencies to track down those partners or their assets.
Overseas partners, or at least those based in secrecy jurisdictions, should be banned. As for corporate partners based overseas, these should be required to disclose the same information as those based in the UK, including directors, shareholders and other controllers.
3. Transparency of ownership and control
Hidden ownership and control of partnerships are highly attractive to wrongdoers[8]. Indeed, when Scottish LPs were legally required in 2018 to disclose all “people with significant control” over their business (PSCs), the number of LP registrations in Scotland decreased and the number in England, Wales and Northern Ireland increased[9].
However, the UK bill does not extend this Scottish rule, despite English and Northern Irish LPs being implicated in significant wrongdoing. The international Financial Action Task Force (FATF), a watchdog created by the G7 nations, also recommends that[10] that all partnerships disclose their beneficial owners.
The bill also fails to close existing loopholes[12]. One is that firms can declare they have no PSCs, even though in practice there will always be at least one person in control.
It’s also possible for the real controllers to avoid disclosure because they fall outside the technical definition of PSCs in the legislation. The definition sets a threshold of 25% of financial shares or voting rights. So, for example, five partners each with a 20% share will avoid disclosure.
4. Corporate service providers
These are sometimes set up purely to provide corporate services[13], such as registering firms on behalf of partners and filing documents at Companies House on their behalf. Because these service providers don’t fall within the ambit of a regulatory body such as the Association of Chartered Certified Accountants, they are overseen only by UK tax authority HMRC.
They are often involved in forming wrongdoing firms, yet the bill does not restrict their activities. It also doesn’t improve on how they are supervised over anti-money laundering.
For example, HMRC is their default anti-money laundering supervisor but is inadequately resourced for this function and doesn’t even know[14] which service provider formed which firm.
5. Identity verification
The bill introduces new rules on identity verification so that some attempt will be made to check that directors and controllers are who they say they are before they are allowed to register a new business, but there are loopholes.
First, this only applies to directors and people with significant control. This is expected to be extended to partners via secondary legislation, but even then, some partners will be exempted. There is also no timescale for this legislation, and secondary legislation receives far less parliamentary scrutiny than a bill.
Equally, details of how identity will be verified will only appear in the secondary legislation. There are also concerns about how verification will work[15] and whether Companies House will have the resources to verify robustly enough to stamp out fraudulent documentation. The bill also allows corporate service providers to verify identities, which is also a mistake.
6. Reliable information about businesses
The public register at Companies House needs to have accurate and complete information about who the partners and PSCs are, where they and the firm are located, what kind of business it is, and so on. This is essential to those doing business with a firm, as well as enforcement agencies and investigative journalists.
Yet the bill will only give Companies House the power, not the duty, to query or reject suspicious information, and does not provide additional resources for this task.
Investigative journalists are among those that need accurate information at Companies House.
Gagarin Lurii[16]
7. LLPs
The reforms only apply to LPs, even though LLPs are significantly involved[17] in wrongdoing. We are promised secondary legislation to tighten the LLP rules, but again there is no timetable.
The bill is in danger of being a missed opportunity. The closest thing to a crumb of comfort is an unexpected Brexit dividend: since Ireland offers many of the same legal loopholes plus EU access, some wrongdoers are migrating[18] from UK to Irish partnerships instead.
References
- ^ the theft (en.odfoundation.eu)
- ^ Russian and Azerbaijani “laundromats” (www.financeuncovered.org)
- ^ Transparency International (www.transparency.org.uk)
- ^ others (www.heraldscotland.com)
- ^ have become popular (www.gov.uk)
- ^ Economic Crime and Corporate Transparency bill (bills.parliament.uk)
- ^ tax havens (fsi.taxjustice.net)
- ^ attractive to wrongdoers (fsi.taxjustice.net)
- ^ increased (taxjustice.net)
- ^ recommends that (www.fatf-gafi.org)
- ^ Zhu Difeng (www.shutterstock.com)
- ^ close existing loopholes (www.theguardian.com)
- ^ provide corporate services (www.financeuncovered.org)
- ^ doesn’t even know (questions-statements.parliament.uk)
- ^ how verification will work (techmonitor.ai)
- ^ Gagarin Lurii (www.shutterstock.com)
- ^ significantly involved (www.transparency.org.uk)
- ^ wrongdoers are migrating (www.bellingcat.com)
