The UK’s Money Laundering Mess (III): LLPs, Secrecy Jurisdictions, PSCs, and a Forthcoming Fiasco

By Richard Smith

Let’s sketchily define a term from our headline. “LLPs”, or in full, “Limited Liability Partnerships”, are a relatively new fangled type of British legal entity, somewhat analogous to Limited Companies or Limited Partnerships, though very different in detail.

Why is this vague description at all interesting? From 2013, here is a seven-minute video of Richard Brooks, formerly a tax inspector, and currently a journalist at the UK’s renowned Private Eye magazine (familiarly, the “Eye”), gumshoeing his way round various tatty UK addresses with another investigator, Andrew Bousfield. LLPs are the subject of their investigation:

We’ve learnt about a group of offshore companies that are behind thousands of Limited Liability Partnerships formed in offices across the UK. We believe these Limited Liability Partnerships are being used to launder millions of pounds that are the proceeds of crime in the Ukraine and Eastern Europe.

The video gives you an idea of the evasiveness of the company agents involved in creating these LLPs for their dubious end users. First up, there’s a Mr Williams, who runs a formation agent called Company Formations Limited. He deflects a phone enquiry and denies all knowledge of the registrations that the official record says his company has performed. He promises a response by email, for what that’s worth.

By a happy fluke, Brooks and Bousfield are at Mr Williams’ old maildrop address when the postman turns up, dropping off a mass of post, including a bank statement for one of the LLPs, which is from ING Bank’s branch, in (quelle surprise) Kiev, Ukraine. That immediately makes it look as if Mr Williams is most likely in a position to know plenty about the inner workings of the 600+ LLPs that, according to Private Eye’s research of the official records, he has registered at that same address. It also looks as if Brooks and Bousfield are on broadly the right track with their Ukrainian suspicions. Elsewhere in the piece they instance multi-hundred-million-ripoffs of the Ukrainian tax payers, via wildly overpriced state purchases of items as diverse as bulk vaccines and oil rigs, in which UK LLPs played key roles.

Another agent, doorstepped by Richard Brooks at 5:09 in the video, improvises desperately. This fellow, addressing Richard Brooks over a bog standard entryphone, dimly remembers some other panic-stricken bodyswerve, and absurdly pretends that he is not really there at all.  Somehow, he bluffs, he is operating the entryphone via a completely fictional landline telephone at some other location altogether. The alleged telephone is apparently an alleged coinbox and, apparently, the coins are about to run out.

After relaying this surreal excuse for an excuse, the entryphone, and the idiot at the other end of it, fall silent. This agent seems a wee bit unconvincing to me, but what do you think, dear reader? I certainly hope his anti money laundering due diligence is a bit better than his ad-libs.

Given all the stonewalling, it’s a pleasant surprise that Brooks and Bousfield get so far along with their project:

We want to know where the LLPs actually operate, who is ultimately behind them, and what checks are being made in Britain to ensure that we are not hosting major levels of money laundering.

I think we can hazard an answer to the last question at least. The result of the Private Eye investigation is a special report, one of many available here, called “Where there’s muck…there’s brass plates”, and aptly subtitled “How UK ghost companies made Britain the capital of global corporate crime.” It costs five quid, but subscribers to Private Eye can download it free and, if they are bloggers, indulge in a bit of ‘fair use’ republication.

LLPs are a fairly new type of British legal entity (in use from the early noughties), and it would be fair to say that the bugs haven’t quite been worked out yet; Brooks and Bousfield say:

One major flaw was that an LLP with offshore members and no UK business would not be taxable in the UK but, as a UK-incorporated body, would also generally not be tax resident anywhere else and thus of little interest to any country’s tax authorities. This probably explains the big gap between the number of LLPs and those that file tax returns. By March 2011 there were 45,932 LLPs registered at Companies House, of which 43,241 were active. Yet for 2011/12, just 35,400 returns were submitted to HM Revenue & Customs, indicating that nearly 8,000 LLPs didn’t bother.

The precise number of illicit LLPs is hard to know. By March 2012, there were more than 52,348 LLPs in total, 49,005 of them active. This is up from fewer than 12,000 in 2005…

…the number of dodgy LLPs looks likely to be well into five figures.

That’s a reasonable ballpark estimate.  Two years later, my own independent research, which came at the problem from a slightly different angle, quickly turned up 9,000 dodgy LLPs, and since I was in a hurry, I may well have missed some.

Now it’s time for a second definition: secrecy jurisdictions. The aspect relevant to LLPs is characterised concisely by one campaigner:

secrecy jurisdictions create a deliberate, and legally backed, veil of secrecy that ensures that those from outside that jurisdiction making use of its regulation cannot be identified to be doing so.

Got that? What it means is that, via LLPs, you can import to the UK all the offshore secrecy of, say…

• Belize (one of the world’s “major money laundering countries”, according to the US State Department),

• the Marshall Islands (a “jurisdiction of concern”, according to the US State Department again, in 2012),

• the Seychelles (“a paradise for dirty money and corruption”),

• or sleazebucket-in-chief, Panama, which even The Economist, at least thirty years late, now thinks might be risking “pariah status” because of its recent intransigence about disclosure,

All that is required is the simple expedient of registering LLPs whose members are companies in one of those jurisdictions. Voila: you now have an impenetrably anonymous, potentially bank account holding entity, based in a trusted jurisdiction,  the UK.

We will look at a few of these dubious creations in a minute. As a baseline, here’s an LLP that wants to look squeaky clean. All the members are named human beings that look like traceable UK residents; the accounts filings are comprehensive. It’s all very neat and above board. Mind you, one can see why someone wanted it to look that way. Here’s that same LLP, Eclipse Film Partnership 35, getting its comeuppance in the courts. It was a squeaky clean…tax dodge…that HMRC successfully challenged.

The 287 partners borrowed large sums from Barclays Bank to buy the licensing rights for a number of films. The interest on these loans created losses, for which they could then claim the special sideways tax relief introduced in 2005 to encourage investment in the British film industry. Each investor obtained GBP400,000 of tax relief for an investment of GBP173,000.

By way of contrast, let’s go downmarket a bit more. Here are some quick examples, from the UK register, of seriously dodgy and utterly unidentifiable offshore people using the LLP vehicle to really take the Mickey:

• Belizean corporate partners: here are 371 UK LLPs that have Viala Trade of Belize as one of their two designated members.

• Marshall Islands corporate partners: here are 229 UK LLPs of Eurointer AG.

• Seychelles corporate partners: here are 7 UK LLPs that have Formations Office Ltd of the Seychelles as one of their designated members. That seems a bit skinny, so here are another 450-odd, from the same stable, that have a Seychellois member called Secretary Solutions Limited.

• Panamanian corporate partners: here are 364 UK LLPs that have Gateno Ventures Inc of Panama as one of its two designated members.

In other words, this type of opacity isn’t a mere theoretical possibility, with LLPs.

All of these sightings result from pulling at two or three of the many leads offered by the UK’s LLP hairball; there are many, many other such leads and further offshore jurisdictions. One could go on and on – there are 9,000 of these things, remember – but one is merciful.

Good luck finding out who really controls those LLPs. A motivation for their shyness is indicated by more examples provided by Brooks and Bousfield:

…when in 2004 EADS employed a renowned Italian fraudster to facilitate side deals on the Austrian air force’s €1.5bn purchase of a fleet of Eurofighter jets, the fixer…set up shop at 31 Dover Street in Mayfair. From here and his Grosvenor Square apartment, Gianfranco Lande would manage an outfit that remained unknown until, four years later, suspicious Austrian MPs started to ask questions. By then Vector Aerospace Limited Liability Partnership, as the Mayfair firm was known, had paid out more than €80m to companies controlled offshore by Lande, his Maltese bagman David Marinelli, and other unknown parties. Much of the money was paid through RBS Bank in the Isle of Man; but where it ended up is still not clear. Among the outcomes believed to be linked to the scandal was the melting away of domestic opposition to the fighter contract in Austria: in 2004 the country had no discernible need for €1.5bn worth of fighter jets.

…

As with other cases the Eye has examined, there was no sign of intervention by the UK authorities. The reason Lande had chosen London for this web was now clear. British companies and other legal structures provided all the obfuscation a man running such an operation could want.

Or again:

the 2007 Hermitage tax fraud proceeds were also laundered through a couple of the limited liability partnerships that were by now becoming increasingly popular among launderers (partly because the Companies Act 2006 required companies to have at least one “natural person” as a director, whereas LLPs could continue with entirely shell company directors). The LLPs in this case, Armut Services LLP and Dexterson LLP, filed either no accounts or figures way out of line with their multi-million pound activities…their ultimate ownership would be impossible to trace…

Or this:

The preferred escape route for dodgy former Soviet funds became clear when the Eye obtained reports from inside the London branch of US bank Wachovia, already under investigation in the US over Mexican drugs money laundering. They showed a small selection of what are understood to be far greater volumes of money transfers from accounts, first in Riga, then to Raffeisen Zentralbank in Vienna before onward transfer to Wachovia,…

the inevitable punchline:

…all operated by a string of British LLPs.

Brooks and Bousfield sum it up:

IT IS EASIER to set up what is now the international criminal’s corruption vehicle of choice than it is to open a bank account or rent a DVD. Fill in a form with some basic details of two or more “members” in the LLP and send it off with a cheque for £40 to Companies House: no checks; no ID; you’re in (dodgy) business right away.

Clearly, Something Must Be Done about LLPs.

Since “PSC disclosure” is a Thing, it is going to be Done, and by 6 April 2016, no less, in the guise of a new public register of PSCs, part of the UK’s first stab at implementing the EU “4th Money Laundering Directive”. After a couple of delays, the Directive will be applicable to LLPs in a month or so’s time. That’s a mere three years after the full horror of LLPs was public knowledge, courtesy of Private Eye, and only a little more than a decade after dodgy company agents, onshore and offshore, first embarked on their LLP rampage, to the greater or lesser immiseration of the people of Austria, Russia and Ukraine, (oh, and Moldova, by the way).

What’s a PSC? From the blurb introducing the new register, here’s the definition: it’s a Person of Significant Control:

1.3. LLPs incorporated under the Limited Liability Partnerships Act 2000 are required to maintain a register of people with significant control over the LLP (“PSC Register”).

1.4. A person has significant control over an LLP if one or more of the specified conditions are satisfied. The first three specified conditions concern the rights to more than 25% of the assets on a winding up, holding more than 25% of the voting rights, and the right to appoint or remove the majority of management.

1.5. The fourth and fifth specified conditions require a person to have “significant influence or control” either over the LLP itself or over the activities of a trust or a firm which meets any of the other specified conditions in relation to the LLP.

The idea is that the people who really control the LLP have to reveal their identities: no more anonymity!

One has one’s doubts. First, one jibs at the thresholds. It’s not obvious what stops crooks drawing up purported LLP agreements that assign 20% rights and control to five equal partners, all puppets, so that the PSC reporting threshold is never reached. It’s been done before: a central strategy of the recent $1Bn bank fraud in Moldova was to covertly seize control of one of the banks via a huge cluster of nominee-controlled companies that acted in concert. None of them exceeded the apparently tight 5% ownership reporting threshold imposed by the Moldovan banking regulator. As a result, that essential preparatory part of the whole plot stayed off the authorities’ radar until long after the fraud was consummated.

I’d say this 25% threshold idea for LLPs has been defeated even before it has gone live.

A still more awful suspicion dawns when one delves into the details, though. Here is one of a number of official wordings prescribed for PSC register entries:

a) The LLP knows or has reasonable cause to believe that there is no registrable person or registrable relevant legal entity in relation to the LLP.

In other words, UK officials already anticipate circumstances in which the LLP needs to make no disclosure whatsoever. Uh oh. One naturally wonders what a registrable relevant legal entity might be, and a non-registrable one.

In the end, there’s no need to puzzle it out in detail; one can take a short cut instead. Here is the definition of the one big thing that’s not a registrable relevant legal entity (my bold):

7.4.6 When a legal entity is not an RLE it cannot be registrable and you cannot enter it on the PSC register. A legal entity might not be an RLE because:

• It is a UK legal entity which is not a company, LLP or SE (such as a Scottish Limited Partnership); or

• It is a non-UK company or other legal entity that does not meet the test in paragraph 2.2.2.

In other words, the very type of structure (LLPs controlled by secret companies offshore), whose opacity has facilitated the international crime documented by Brooks and Bousfield, is pretty much the only thing that will be left undisturbed by the new anti money laundering rule that will come into force this April.

All that is required from LLPs with offshore corporate members is a filing to the effect that “there is no registrable person or registrable relevant legal entity in relation to the LLP”, a claim that no UK enforcement agency will be in a position to check or verify. Once that entry has been put on the register, all the big time money laundering can carry on as before. Clearly, whatever it is that has motivated the introduction of this new register, it isn’t a desire to tackle the roughly 9,000 opaque LLPs that look exactly like money laundering apparatus.

Meanwhile, the lion’s share of the overhead of complying with this utterly worthless “anti money laundering” edict will land, with smart bomb precision, on the 50,000+, all-onshore LLPs that, give or take the occasional bustable tax dodge, aren’t much of a problem.

It might be time for one last definition…

fi·as·co noun; plural noun: fiascos

a thing that is a complete failure, especially in a ludicrous or humiliating way.

synonyms: failure, disaster, catastrophe, debacle, shambles, farce, mess, wreck, flop, washout, snafu

antonyms: success

There’s also one last twist: as soon as there is a year’s worth of empirical evidence confirming the utter failure of this inane measure, it will get a chance to fail again. In April 2017 the same provisions will be rolled out to the even more toxic Scottish Limited Partnership vehicle, whose nastier manifestations will by then outnumber dodgy UK LLPs by at least two to one, assuming that current registration rates are maintained.

With little more than a month to go before the new LLP regulation goes live, the UK is now stuck with that particular ignominious misfire. However, there are still a few months left to devise a better solution for Scottish Limited Partnerships.

Scottish MPs might want to get on the case, right now. They have less than a year to devise and promote something better, but they will score a big point, locally and internationally, if they pull that off. Conversely, if it turns out that Scotland’s voice cannot be heard in Westminster, on an issue that has such implications, for Scotland’s international image, for the financial wellbeing of the world at large, and for international law and order, that will make a powerful point, too.