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In what looked like a Christmas present to advocates of corporate transparency, the UK government announced just before the end of the year its intention to reform the rules for registering limited partnerships (LPs) in the UK and published its response to a consultation on the subject launched earlier last year. Both the government’s response and its original consultation paper highlight concerns over ‘allegations that Scottish limited partnerships (SLPs) in particular were being used for illicit purposes’.
Key governmental proposals, which will require legislation to be passed by Parliament, include the following:
- Only businesses supervised by a UK anti-money laundering supervisor or a recognised equivalent authority overseas will be able to register LPs, including Scottish LPs.
- All LPs must demonstrate an ongoing link to the UK at all times.
- All LPs must certify to Companies House (the UK’s registrar of companies) that their information is accurate and up-to-date every 12 months.
- Companies House will be able to strike off from its register LPs that are dissolved or not carrying on business.
If adopted, these changes will be a step in the right direction, yet they are unlikely to stem the misuse of UK legal entities for money laundering. A true reform will require a consistent approach to all legal entities that face high risks of abuse by money launderers, including limited liability partnerships and limited companies, which are not covered by the government’s current proposals.
A person wishing to do business through a UK legal entity can choose from a range of corporate forms, which differ in terms of their legal status, corporate governance and tax treatment. For instance, while LPs registered in England and Wales or Northern Ireland cannot own property in their own name because they lack legal personality, Scottish LPs can (see p. 8 the UK government’s consultation paper). And although companies registered in the UK are subject to UK corporation tax, limited liability partnerships are not taxed in their own right, to name but a few variations.
The allure of this flexibility, coupled with ease of incorporation, has not been lost on criminals. In 2017, anti-corruption NGO Transparency International analysed 52 cases of money laundering involving a total of 766 UK legal entities. Of these, over 50% were limited liability partnerships; 25% were limited companies; and 22% were Scottish LPs. One high-profile example of a money-laundering case involving the use Scottish LPs is the alleged theft of US$1 billion from three Moldovan banks, an amount equivalent to one-eighth of the Eastern European country’s GDP.
Essential to the abuse of UK legal entities is the secrecy they can afford. In 2016, the UK introduced the register of people with significant control (PSC), which contains information on beneficial owners of companies, LLPs and Scottish LPs. However, the recent evaluation of the UK by the Financial Action Task Force (FATF), the global anti-money laundering standard setter, highlights that the information on the register ‘is not verified and there are limited screening checks’ (see p. 145). As a result, it is possible to establish a UK legal entity using obviously fictitious information, such as name or address. Although doing so is a criminal offence, to date the only prosecution has been that of a campaigner who claimed he was trying to show the deficiency of the system.
In addition to bolstering the capacity of Companies House to verify the data it holds, one potential solution is ensuring that those in the business of registering UK legal entities establish the identity of their clients and are subject to anti-money laundering supervision. UK legal entities can currently be set up either directly by the customer or by a professional intermediary, including those located overseas. While UK trust and company service providers (TCSPs) are subject to anti-money laundering obligations and supervision in the UK, as are lawyers and accountants who can also provide incorporation services, there is at present no requirement (see p. 44) for Companies House to ensure that only overseas businesses subject to equivalent regulation are able to set up UK legal entities.
The government’s consultation response goes to the heart of the issue by stating as follows:
The Government intends to make it mandatory for presenters of new applications for registration of LPs to demonstrate that they are registered with an AML supervisory body, and to provide evidence of this on the application form. The Government will seek to ensure that applications from overseas will be subject to equivalent standards and is considering options for achieving this. This could include limiting applications from overseas to those jurisdictions within the EEA. Any list of overseas jurisdictions with equivalent standards would be reviewed on an ongoing basis (p. 8).
However, the scope of the intended reform is limited to LPs, including Scottish LPs (see p. 15 of the consultation paper). This means that the same issues in relation to companies and limited lability partnerships, which present no lesser money-laundering risks, remain unaddressed. Neither will the new requirements of an ongoing link to the UK apply to companies or limited liability partnerships.
The government’s publications do not articulate the rationale behind this evident disparity. On the contrary, the consultation paper underscores the intention to harmonise the law of LPs with the legal regime applicable to companies, for instance by extending reporting requirements applicable to LPs and allowing Companies House to strike them off the register. (Note, however, that the government has reserved its judgment on extending the PSC requirements to LPs.)
It appears, however, that the proposed reforms are focused narrowly on addressing the apparent misuse of Scottish LPs. As stated in the government’s consultation paper (p. 23), the top 10 professional intermediaries are responsible for the registration of 75% of Scottish LPs between January 2016 and May 2017. Scottish LPs are thus not only a ‘threat du jour’ that elicits glaring newspaper headlines, but also the one legal entity whose incorporation is uniquely amenable to regulation.
Whether company or limited liability partnership registrations are similarly concentrated is unknown, but this is unlikely, given their vastly larger numbers. Although the FATF notes (p. 153) that 97% of those have a UK bank account and will therefore have undergone customer due diligence by a UK bank, those that do not present higher money-laundering risks.
Understandably, changing registration requirements for companies and limited liability partnerships presents greater challenges than changing them for LPs, yet by foregoing an opportunity to examine the matter, the government exposes itself to charges of looking for a solution where it is easiest to find, rather than where it is most needed.
In short, while the newly unveiled reforms cheer those who wish the UK to succeed in its fight against money laundering, they would do well to ask the government for more in the coming years.
BANNER IMAGE: UK government offices on Great George Street, London, 2011. Courtesy of Wikimedia Commons/Carlos Delgado.
The views expressed in this Commentary are the author’s, and do not necessarily represent those of RUSI or any other institution.