The Use of Scottish Limited Partnerships in Money Laundering Schemes

Written for MLROs.com by Jaccy Gascoyne 

 

“Scottish Limited Partnerships are attractive to money launderers because they can provide anonymous ownership and control, while giving the impression of a respectable UK business” – Transparency International UK

 

For anyone seeking to conceal and launder the proceeds of crime, the role of an anonymous and untraceable legal entity is critical.  These entities, typically found within offshore jurisdictions (such as the British Virgin Islands, Belize and Seychelles), provide little to no information on the individuals sitting behind them.

The role of such companies and their role within the world of financial crime was clearly demonstrated in the data leak of 2016, known within the media as the ‘Panama Papers’.  This leak provided us with just a glimpse into the significant scale of the level of abuse of these anonymous companies.

Whilst many of these opaque companies are located in offshore jurisdictions across the globe, anonymous companies also exist right here within the UK.  Originally created for the purpose of managing agricultural tenancies, Scottish Limited Partnerships (SLPs) are increasingly being abused by those wishing to launder the proceeds of crime.  This is due to SLPs allowing for minimal filing requirements and interaction with UK Authorities, along with the capability to have corporate partners based in so-called ‘secrecy jurisdictions’, and all whilst maintaining the perceived respectability of a legal entity incorporated within the UK.  Despite their name, the laws governing SLPs originate in Westminster, so these entities fall under the legislative competence of the UK government.

According to Transparency International’s report ‘Hiding in Plain Sight’, the formation of UK companies is amongst the cheapest and fastest in the world, costing as little as GBP 12, and taking a matter of minutes to complete the forms.  In contrast, it costs circa GBP 1,000 in the British Virgin Islands, and a number of days for the paperwork to be completed.  In other words, in the time it takes to set up one company in the British Virgin Islands, an entire network of UK shell companies could have been created, and for a fraction of the price.

Are SLPs really that popular for criminals?

To illustrate the scale of abuse of SLPs to date, below are some facts provided by the Organised Crime and Corruption Reporting Project (OCCRP):

  • In 2014, 20 SLPs were used to extract more than USD 1billion from a number of Moldovan banks, costing the country almost an eighth of its GDP.
  • SLPs played a key role in the Russian Laundromat scheme, where between USD 20billion and USD 80billion was moved out of Russia over a four-year period. A significant amount of these funds is suspected to be from the Russian treasury and state contracts.
  • 70 per cent of SLPs incorporated between 2007 and 2016 were registered at just 10 addresses.

Let’s start at the beginning – what are the different types of partnerships within the UK?

Partnership entities in the UK can be broken down into the following company types:

General Partnership – a business with two or more owners where all partners have equal responsibility, authority and liability

Limited Partnership – a business for partners that can invest without participating in the day-to-day management of the business

Scottish Limited Partnership – a limited partnership which has been registered in Scotland, rather than in England, Wales or Northern Ireland; these businesses operate in the same way as other UK-registered partnerships but an SLP has its own legal personality, distinct from the partners themselves.

What does this mean in practice?

An SLP can hold property, enter into contracts, be a debtor or creditor, and sue or be sued, doing so in the name of the partnership, not its partners.  This enables the laundering of significant amounts of money through incurring fake debts and participating in cases of so-called ‘sham litigation’.  SLPs also act as an initial layer of secrecy by leaving only the name of the SLP (not its partners) on any associated paperwork, or reports of its activities.

Compared to the other forms of partnership, SLPs have recently experienced an unusual rise in popularity.  Introduced in 1907, SLP company formations remained relatively under-used until recent years.  According to data from Companies House, between 1907 and 2006 there were circa 4,450 SLP registrations, with over 5,000 SLP registrations during the year 2016 alone.

What’s the bigger concern in this respect?

SLPs have recently become more synonymous with schemes involved with corruption, tax evasion and organised crime, including online fraud scams and the distribution of child pornography.  Research conducted by Transparency International suggests that this surge in SLP registrations indicates that these entities are now being abused on an industrial scale, including for money laundering schemes linked to high-end corruption scandals.

Presently, SLPs can be registered by company formation agents that are unsupervised by Anti-Money Laundering agencies.  These shell companies have previously been reported as being advertised as ‘Scottish zero-tax offshore companies’ across the EU, highlighting the serious issues with the transparency and accountability of SLPs.

Ok, so we now understand SLPs and their risks, but what are the red flags associated with them?

To any financial crime professional, SLPs are clearly a major concern.  When, in July 2017, new legislation came into force meaning SLPs would have to specify the persons behind their companies (known as The Scottish Partnerships (Register of People with Significant Control) Regulations 2017), we all (for a very short while) became hopeful.   In short, the effect of this legislation was to require the filing of ‘Persons of Significant Control’ to Companies House by the SLPs within fourteen days.  This was to be undertaken by the completion of a ‘SLP PSC01’ form.

However, many SLPs are still not fully compliant, and the entities have failed to file sufficient information with Companies House.  A number of work-arounds have also been identified by those who do not desire to disclose their identification, yet wish to feign compliance to this legislation, and the following observations (visible on the entities’ Companies House profiles online) are therefore deemed red flags for suspicious activity:

  • No PCS01 form has been filed (i.e. no Person of Significant Control identified)
  • A PSC01 form has been completed. However, the person completing the form has simply ticked a box stating ‘The LP has not yet taken reasonable steps to find out if there is anyone who is a registerable person or registerable legal entity in relation to the LP’.  This is particularly relevant if the signatory to the form is the same signatory as the LP5 form which registered the SLP in the first place.
  • A PSC01 form has been completed. However, the person completing the form has simply ticked a box stating ‘The LP knows or has reasonable cause to believe that there is a registerable person in relation to the LP.  But it has not identified the registerable person’.  This is also particularly relevant if the signatory to the form is the same signatory as the LP5 form which registered the SLP in the first place.
  • An individual’s identity has been provided for a Person of Significant Control. However, there are good grounds to disbelieve the individual is the relevant Person of Significant Control, perhaps via adverse media or if the individual is a child.
  • A PSC01 form has been completed. However, another LP is listed as the Person of Significant Control, not an individual

Discussions held with a number of financial crime professionals have resulted in additional red flags which appear to facilitate criminality:

  • Multiple layers of ownership (an SLP owned by another anonymous company, which is in turn owned by another etc.)
  • SLP is owned by a company located within a high-risk jurisdiction (i.e. Panama, British Virgin Islands, Belize, Cyprus, Seychelles…etc.)
  • SLP holds a bank account with an Eastern European bank (predominately Latvia and Estonia), which appears to be the company’s only, or main, bank account (i.e. the company isn’t solely using an account in Latvia for Latvian business)
  • SLP’s registered address does not appear to be a legitimate business address (usually consists of a brass plate address, but can be residential), and is shared with multiple other companies
  • SLP is set up via a middleman or introducer, utilising a Trust and Company Service Provider

The following supplementary red flags have been compiled based on Transparency International’s report ‘Hiding in Plain Sight’:

  • Funds originate from former Communist states in Eastern Europe, Central Asia and the Caucasus
  • Links to ‘Laundromat’ (complex money laundering) schemes uncovered by the Organised Crime & Corruption Reporting Project (OCCRP)
  • Companies appear to be dissolved once their purpose has been met
  • Presence of anonymous corporate partners
  • Links to a significant number of other UK shell companies

Are there any plans for the UK Government to put an end to SLPs being used for criminal purposes?

In April 2018, the UK Government declared their intention to crack down on the abuse of SLPs, proposing that these companies must be incorporated by company formation agents which are registered with a money laundering supervisor, although such reforms are yet to be agreed and put into place.  Under these new proposals, those wishing to register an SLP would also need to have a “real connection” to the UK, and conduct business or maintain a true address in Scotland.

Until such measures have been agreed and come into force, professionals working within the field of anti-financial crime should take extreme caution when dealing with, or reviewing, these entities, and Suspicious Activity Reports should be used to report any suspicious activity identified, per their company’s policies and procedures.

As for any new legislation, we can but hope that the solution agreed upon within Government is not only enforceable but removes loopholes which are currently being exploited by a number of organised crime groups…

 

References:

Transparency International

http://www.transparency.org.uk/publications/offshore-in-the-uk/

http://www.transparency.org.uk/publications/hiding-in-plain-sight/

http://www.transparency.org.uk/tackling-the-abuse-of-scottish-limited-partnerships-needs-a-uk-wide-money-laundering-reform/

Organised Crime & Corruption Reporting Project (OCCRP)

https://www.occrp.org/en/investigations/4203-grand-theft-moldova

https://www.occrp.org/en/laundromat/the-russian-laundromat-exposed

https://www.occrp.org/en/27-ccwatch/cc-watch-briefs/7565-scottish-law-firm-hq-for-anonymous-shell-firms

UK Government & Legislation

https://www.legislation.gov.uk/ukpga/Edw7/7/24/contents

http://www.legislation.gov.uk/uksi/2017/694/contents/made

https://www.gov.uk/government/consultations/limited-partnerships-reform-of-limited-partnership-law

Herald Scotland

http://www.heraldscotland.com/news/14623297.Fears_grow_over_Scottish_firms_used_for_money_laundering_in_former_Soviet_Union/