Scotland: The new destination for money laundering and tax evasion?

April 11, 2016 Scotland: The new destination for money laundering and tax evasion?

There is growing evidence that criminals are swapping palm trees for lochs and heading to Scotland to avoid taxes and disclosure requirements

Following the ‘Panama Papers’ leaked from Mossack Fonseca, there has been a growing demand for transparency and disclosure in corporate structures. Even before the Panama Papers were disclosed, David Cameron and the G8 have been leading a drive in favour of greater transparency and disclosure for all countries and, in particular, for tax havens. However, almost in tandem with this there has been a huge growth in one of the UK’s most secretive vehicles, the Scottish Limited Partnership (LP).

Though little known amongst the public, the Scottish LP is a favoured vehicle amongst a niche group of ‘offshore’ providers. Elemental often receives requests to form secretive vehicles and, recently, we’ve noticed that the number of requests for Scottish LPs has been growing. We reject requests from untrustworthy sources, but they still seem to keep coming and, in our view, it is because they are largely exempt from the changes being brought in. There is no good reason why Scottish LPs should not be subject to the same level of scrutiny as a normal company and yet the government is actually looking to reduce the scrutiny they are subject to.

One of the more extreme enquiries we have received came from a Ukrainian business provider, who lists Scotland (and England), alongside Panama, Belize, Hong Kong and the Seychelles. They made clear they had nominee partners (ie partners who were not the real owners) and they wanted 10 Scottish LPs a month, indefinitely. This would be equivalent to half of all the Scottish LPs that were formed in 1998/9 and shows just how fast this structure is growing.

Last year, Scottish LPs were linked to a $1bn fraud in Moldova and a report by the international investigation agency Kroll, identified 20 UK LPs as allegedly involved in the complex scheme, all but one of the LPs were based in Scotland.

Elemental has also undertaken an analysis of the Principal Place of Business of all the Scottish LPs currently in existence. Five post codes in Scotland house over 50% of all Scottish LPs and 16 post codes house over 80%. Some of these are law firms and accountancy firms, but many just appear to be random addresses, with no discernable business at all.

Although there are many legitimate uses for Scottish LPs and many of them will be undertaking entirely lawful activities, the lack of disclosure means we just don’t know. This legal level of secrecy is pushing those who crave anonymity towards Scottish LPs and running the real risk of harming the reputation of both Scotland and the wider UK as a place to do business.

Why have I never heard of a Scottish LP and what is it?

It is a form of partnership which, like a limited company, can operate independently from its owners (it has legal personality). The Scottish LP first came about in 1907 as an alternative to the traditional partnership. It was intended to be a hybrid between a traditional partnership and a limited company, but it never really took off. At the end of the 20^th century, only 243 Scottish LPs were being formed a year, compared to a total of 215,200 companies per year[1].

As the LP was not being used, in 2000 the government introduced the Limited Liability Partnership. This was a much more flexible and useful hybrid vehicle that has been enthusiastically adopted, including by many law firms and accountancy firms. That would likely have been the death of the Scottish LP or at least limiting the vehicle to some specific corporate activities, such as private equity funds. Instead, around 2006, the number of Scottish LPs started to increase dramatically. This was around the same time that the law changed requiring every UK company to have a named individual as a director. For those wishing to hide their identity, this was an issue and so people started to switch to the Scottish LP. The number of Scottish LPs being formed has only continued to grow as the disclosure requirements in the UK and elsewhere have increased.

Why is the Scottish LP so appealing?

Scottish LPs provide their owners with a UK endorsed and entirely legal means of holding assets, but with near total secrecy and minimal disclosure requirements. The UK offers the appearance of legitimacy to these persons, without any oversight or verification.

Obligations	Scottish LP	UK private company
Individual Director	No	Yes
Register open for inspection	No	Yes
Requirement to file accounts	No	Yes
Requirement to pay UK corporation tax	No	Yes
Disclosure of ultimate beneficial owners	No	Yes (In 2016)
Requirement for UK registered address	No	Yes
Annual Reporting Requirements	No	Yes
Benefits
UK Legal Entity	Yes	Yes
Legal personality (ability to own property and enter into contracts)	Yes	Yes
Limited liability	Yes (for limited partners)	Yes
Tax transparency	Yes	No
Flexibility as to constitution and set up	Yes	Some

What is the UK doing about this?

In many respects, the UK is taking the lead on transparency and disclosure requirements. This year (2016) the Government has introduced the Register of People with Significant Control. This will require all UK companies and LLPs to disclose the individuals who ultimately control them.

However, the UK is not applying this to Scottish LPs. In fact, the UK is consulting on reducing the disclosure requirements relating to Scottish Limited Partnerships, to ensure these vehicles remain as attractive as possible. Particularly in light of the Panama Papers leak, this seems simply wrong and we would strongly recommend that the disclosure obligations for Scottish LPs are brought to the same level as companies. There should also be a wide ranging review into the use of Scottish LPs and what harm this is doing to the UK’s reputation.

[1] There were 243 Scottish LPs formed between 1 April 1998-31 March 1999 and a 215,200 total registered companies (as defined by Companies House) in the UK in the same period.