News 03rd May 2018

Tackling the abuse of Scottish Limited Partnerships needs a UK-wide money laundering reform

Ben Cowdock

Senior Investigations Lead

Ben is responsible for leading research into corrupt money entering the UK. He joined TI-UK as an intern in September 2015, helping support the work of the UK advocacy and research team. Ben holds an MA in Governance and Corruption from the University of Sussex.

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On Monday the UK Government declared their intention to crack down on the abuse of Scottish Limited Partnerships (SLPs) – a type of British company that shot to prominence as it became the go-to money laundering vehicle for criminals in former Soviet States. These reforms are both welcome and badly needed however care will be needed to ensure their effectiveness.

SLPs –dubbed ‘the UK’s home-grown secrecy vehicle’ – gained popularity with money launderers because their separate legal structure, low reporting requirements and ability to be controlled by corporate partners allowed them to provide opaque offshore companies with the respectability of a UK business. Last year research by Transparency International UK (TI-UK) and Bellingcat found 71 per cent of all SLPs registered in 2016 to be controlled by companies based in secrecy jurisdictions like Seychelles and Belize, hiding who is really behind the partnership. These superficial companies have enabled theft, bribery and organised crime to thrive around the world under the veneer of a legitimate UK enterprise.

The Scottish Herald has played a vital role in exposing these stories and highlighting the centrality of SLPs to a broad range of financial crime. 20 SLPs lay at the heart of “the theft of the century” where more than an eighth of Moldova’s annual Gross Domestic Product was stolen, resulting in a national scandal that is still unresolved to this day. Secretive Scottish firms are also reported to have been used to bribe politicians in the Parliamentary Assembly of the Council of Europe in order to suppress criticism of Azerbaijan’s human rights record. The schemes SLPs facilitated may be complex, but the outcomes are simple – ordinary people suffering at the hands of corrupt individuals and repressive regimes.

To fix this sorry state of affairs, the UK Government have proposed that SLPs must be incorporated by company formation agents registered with a money laundering supervisor. This would look to address the issue of professionals forming SLPs without any regulatory oversight – something that has allowed much of the wrongdoing that has been identified. Previous TI-UK research found unregistered agents were forming companies en-masse for dubious clients, which then went on to be used to launder billions of pounds in illicit wealth.

In isolation this sounds like a good change however its effectiveness would be reliant on money laundering regulations being enforced effectively in the UK and elsewhere. As our research has shown, the supervision of British formation agents has been found to be lacking. Two separate studies conducted four years apart revealed UK professionals were not even carrying out the most basic checks on prospective clients.

The primary regulator responsible for supervising this sector – HMRC – has a poor record on enforcement against money laundering failings. In 2016/17 HMRC issued just 895 penalties across all the sectors it supervises amounting to just over £1 million – equating to an average fine of around £1,300 – providing little disincentive to formation agents considering lucrative clients which are nonetheless suspicious and constitute a high money laundering risk.

UK based agents are only part of the problem however. We found professionals in Latvia, Cyprus and Vanuatu who’ve formed companies which went on to launder billions of pounds. The UK Government need to think long and hard about how to prevent rogue agents operating outside the UK from granting criminals access to SLPs.

This isn’t the only area where more thought needs to be given. The Government want SLPs to display a ‘meaningful’ connection to the UK as firms that have been involved in money laundering often represent little more than a mailbox with little connection to Scotland or the rest of the UK. Thousands of firms can be registered at ‘company factories’ where their presence can be little more than a brass plate (or even less).

TI-UK’s research found around half of the 766 companies we identified in money laundering schemes were registered to just eight addresses across the UK – three of which were SLP factories. Under the current proposals being put forward as part of the government’s consultation, it is unclear how Companies House would be expected to differentiate between a mailbox service and an address that signified a ‘meaningful’ Scottish presence. As the past year has shown us, reforming SLPs is more difficult than just changing the law.

After SLPs were required to reveal the individuals which owned them in July of 2017, the Scottish Herald found more than 60 per cent of partnerships have failed to disclose their ownership information whilst less than 10 per cent identified an individual as a ‘person of significant control’. Despite stringent fines being available to stop non-compliance, sanctions are not being enforced. More than 17,000 SLPs could have already been liable to £2 billion in fines. Clearly without the will to use such powers, the potential to issue fines is unlikely to cause the deterrent effect intended in the law.

The government faces the risk that its broader set of reforms to SLPs could fall flat if it fails to improve other areas of the UK’s money laundering defences. Proper regulation of company formation agents is crucial if criminals are to be denied access to UK companies whilst Companies House badly needs more resources and powers to ensure recent transparency measures are complied with. Without these changes the SLP will not shed its reputation as the UK’s home-grown secrecy vehicle, favoured by money launderers and the corrupt.