A Spark in the Dark - Scottish Limited Partnerships and the UK Government's Faltering Transparency Initiative

The government recently announced new legislation to reveal the beneficial owners of Scottish Limited Partnerships.  But this has done little to shed light on the people controlling them.

In June 2017, Bellingcat and Transparency International published a joint-report into Scottish Limited Partnerships (“SLPs”) and their increasing rise in popularity, their use in large scale money laundering and corruption cases, and their unique attractiveness as opaque vehicles which guaranteed anonymous ownership for their ultimate beneficial owners.

On 26 June 2017, new rules came into force which obliged SLPs to file details of their beneficial owners.  The Business Minister for the UK, Margot James stated “Laws will help to improve transparency of partnerships and act as a deterrent against their use for criminal ends”. Scottish Secretary David Mundell added “Campaign groups and media activity have highlighted growing concerns that SLPs had the potential to be used for criminal activity, and by introducing stronger deterrents the UK government is encouraging transparency.”

This was a welcome move. SLPs had a growing reputation as a conduit for criminal organisations and corrupt officials to launder billions of pounds. 19 SLPs were alleged to have been involved in the $1bn Moldovan bank fraud.  SLPs were reported as fronts for everything from binary option scams to child pornography websites. The explosion in SLP registrations required a robust reaction from the government, and the new legislation was a way to ensure that those who used these partnerships for illegal activities would become accountable for their actions.

The new rules, which came into force on 26 June 2017, introduced a Register of People with Significant Control, requiring SLPs to disclose the identity of their beneficial owners within 28 days. Failure to do so would mean that partnerships would have to pay a daily fine of up to £500. As reported in the Scottish Herald these rules appear to have had an effect on the number of SLP incorporations, demonstrating that the legislation has had a considerable effect on those who wish to use SLPs for nefarious means.

But what of the existing SLPs incorporated before the new rules came into place? New research by Bellingcat indicates that despite the financial penalties imposed by the government – these partnerships are less than enthusiastic when it comes to revealing their beneficial owners.

In 2016, 5,215 SLPs were incorporated. As reported in Bellingcat’s joint report with Transparency International more SLPs were registered in this year than the preceding century.  As at 13 August 2017 less than a fifth of SLPs incorporated during this period have filed the requisite documents revealing their Person with Significant Control (“PSC”). As at 13 August 2016;

• Of the 5,215 SLPs registered during 2016, only 938 had filed their PSC statements
• Of these, 355 SLPs have named PSCs.
• 236 of the PSCs named were individuals, the rest being other forms of corporate vehicles.
• The corporate vehicles named included SLPs (who themselves hadn’t filed their PSC statements), as well as numerous forms of corporate vehicle. One of which was itself a company incorporated in an offshore jurisdiction.
• 141 claim to have no registerable person. The remainder of the PSC filings state that the partnerships are still attempting to establish who their own beneficial owners are.

Despite the lacklustre response to the new legislation, the 236 individuals named reveal the parts of the world where SLPs have proved popular, and may shed some light as to where SLPs have been marketed aggressively as an attractive option.  218 of these individuals are residents of Post-Soviet countries, the largest numbers coming from Russia (66) and Ukraine (94). Certainly, the worldwide appeal of SLPs has been revealed with beneficial owners coming from Eastern Europe, Africa, Asia and the Middle East.

Summary of the locations of companies or individuals in completed PSCs. Countries that appear less than 3 times are collated under “Other”.

Although the above statistics do not suggest any form of criminal activity on behalf of those who have filed their PSC statements – it does seem curious that the vast majority of SLPs have not felt the need to reveal who their beneficial owners are. Perhaps this stems from the knowledge that despite the fanfare attached to the new legislation, those behind SLPs are aware that the authorities in the UK have no practical means to compel offshore partners to comply with their demands.  If a General Partner of an SLP is based in Belize and Companies House asks them to provide details of their beneficial owner – what steps can the government take to ensure their compliance?

According to the new rules, the government will now fine all SLPs who have not revealed their beneficial owners at a rate of up to £500 per day.  This, in theory, will provide a windfall worth millions of pounds. But in practice, how will this work? The joint report published by Bellingcat and Transparency International found that at least 71 per cent of SLPs registered in 2016 are controlled by companies based in secrecy jurisdictions.  How then, will the government convince offshore partners to pay thousands of pounds in late filing penalties? This should become clear in the coming months, but in the meantime it is clear that the ownership of existing SLPs remains as mysterious as ever.