Essence of the scandal
On April 29, a publication on the use of thousands of SLP in criminal activities appeared in the British newspaper The Times. According to the British officials, SLP was used through shills in complex schemes for money laundering. In particular, by means of the scheme, including more than 100 Scottish Limited Partnerships, about 58 billion pounds sterling, accumulated illegally, was withdrawn from Russia. More than 20 SLP was used in a fraudulent scheme, by means of which about 742 billion pounds sterling was withdrawn from Moldova. There is also a link between SLP and organized criminal groups from Eastern Europe for the purpose of conducting weapon delivery deals.
All this became a reason for the announcement of the beginning of struggle against fictitious companies by Britain. And on the next day, April 30, a consultative document was posted on the official website of the British government with a number of proposals on reforming the legislation on limited partnerships to reduce the risks of their use in criminal schemes.
Importance of Limited Partnerships
It is worth noting that a Limited Partnership (LP), including its Scottish form, continues to perform important functions in key sectors of the British economy. This is a popular organizational and legal form for a number of legal business purposes: from exploration and production of oil and gas, to the construction and production of films. They have also become an important structural element in the structures of direct investment and presented an innovative mechanism for financing pension schemes in the UK. Therefore, it is important for Great Britain, when reforming legislation, to minimize any difficulties in the use of limited partnerships on a legal basis.
Flexibility to this business structure is attributed to the separation of the role of general and limited partners, as well as beneficial taxation (profit tax is paid separately by partners, not partnerships). An important advantage of such structures is the lack of reporting requirements.
A distinctive feature of the Scottish Limited Partnership is that it has the status of a legal entity and it can own property and conclude a contract on its behalf, in contrast to the limited partnerships of England, Wales and Northern Ireland.
What will change?
Such scandals do not arise for the first time and they damage the reputation of the UK as a reliable place to do business. Therefore, the UK Government plans to carry out a series of reforms aimed at reducing the risk of abuse. The proposals cover the entire life cycle of LP – from creation through registration to liquidation, and involve changes in the following areas:
- registration requirements;
- location of the company;
- reporting and transparency requirements;
- provisions for de-listing.
Most of the recent registrations (56%) have been made by only five registration agents. At the same time, the registration was massive, 58% of limited partnerships were registered for ten addresses. Some registration agents provide services of legal or accounting firms for registration purposes, having experience and resources to conduct the necessary checks for money laundering. Other agents who have registered many hundreds of SLPs and provide their address to registered partnerships do not have such experience or resources, and accordingly are not controlled by the supervisory authorities to combat money laundering. Currently, the legislation does not provide for such obligations for registration agents.
Recently, the government has enacted legislation to establish a central register of Trust and Company Service Provider (TCSP), managed by the Her Majesty’s Revenue and Customs (HMRC). After the implementation, the Register has the potential to improve the overall transparency of the LP during the registration phase. In this regard, it is proposed to introduce requirements for all registration agents to be subject to supervision to combat the legalization of income from crime to get into this register.
Controlled persons (registration agents) must fulfill a number of obligations, including risk assessment, the existence of policies and procedures, as well as training of personnel, conducting due diligence of clients and reporting suspicious activity to the National Crime Agency.
This modification is unlikely to affect customers in any way, since the vast majority of applications for LP registration are represented by agents. However, agents will need to provide an evidence in the registration form that they are controlled by the supervisory authorities to combat money laundering.
The Government of Great Britain believes that the current legislative requirements are not sufficient to ensure the validity of the registration address for communication of competent authorities with LP. The frequent occurrence of location of LP outside the UK without a message of change of address to the Registrar indicates that there is no significant connection with the UK, which increases the risk of their use for money laundering or other criminal activities. In order to confirm the connection of LP with the UK, the possibility of introduction of one of two scenarios is considered.
The first one involves the introduction of a requirement on the actual location of LP in the UK. In this case, LP must remain in the country of registration. The competent authorities will use the address of the location for communication with the partnership and delivery of procedural documents. At least once a year, all LPs will have to submit a supporting application with the address of the location within the country of registration. Actual activities should be conducted at this address.
The alternative scenario will allow the partnership to operate outside the country and to have a service address only in the UK. In this case, the requirements of the legislation regarding the location will remain unchanged, but supplemented with the provision that the location may be outside the country of registration. The service address in the country of registration will be an additional requirement. The competent authorities will use it to communicate with the partnership and serve procedural documents. In this case, all LPs will need to submit an application confirming or updating the service address, as well as indicating the actual location.
In order to increase transparency, as well as update the information in the Register, the possibility of introducing an annual reporting obligation (confirmation statement) for LP is considered. It is assumed that the report should include the information on the actual location and service address of LP, on limited and managing partners, as well as on the amounts of deposits of each partner and the forms of payment for these deposits (in cash or in another form). It is proposed in the consultation document to express their opinion on the need to introduce the obligation to file financial statements for LP, as provided for the British LTD.
The last block of proposals is to enable the Register in some cases to exclude LP from the Register.
At the moment, the Register does not have the right to exclude LP even if it receives a notice of liquidation. This makes the Register not updated and it can mislead its users. In this regard, it is proposed to grant the Register the right to remove LP in the following cases:
- Voluntarily: if the Register receives a notice of liquidation of the LP. However, historical records will remain in the Register, but it will be clearly indicated that this LP has been eliminated.
- Removal of non-functioning LPs: in the event of failure to submit an annual confirmation statement as described above. In this case, the Register will treat such LP as non-functional.
The government also considers granting the Register the right to restore LP without a court decision in case of their exclusion by mistake. Corresponding administrative procedures will be established.
Who will be affected by the changes?
As a result of the consultation, amendments will be developed to legislation on limited partnerships that will affect all LPs in the UK and Northern Ireland. The reform is also applicable to private foundations of limited partnerships, which are a variation of LP. But it will not concern Limited Liability Partnerships (LLP). Despite the fact that LLPs are considered as limited partnerships for tax purposes, their activities are regulated by a separate law of 2000. The legislation regulating LP, in most cases, does not apply to them. At the same time, many of the requirements of the Companies Act of 2006 are applied to them.
It is important to understand that at the moment no amendments to the law have been adopted yet, but in order to tighten the regulation of the Scottish, as well as other British partnerships, it is proposed to introduce a requirement for the presence of “real connection with the UK”, as well as the availability of a service address within the country of registration for controlling LP.
The changes are also assumed in the registration procedure to prevent mass registration of such partnerships. Only registration agents will be able to submit forms for registration, who have previously checked the client for their connection with terrorist organizations, as well as links of their activities with money laundering.
It is quite possible that the Register of Companies will be given new powers allowing to delete completely and remove non-existing partnerships from the Register.
The collection of opinions and proposals will continue until July 23, 2018, and everyone can participate. After the end of the consultations, the officials will need some more time to draft amendments and submit them for consideration to the parliament.
Now there is no doubt that changes in the legislation will be adopted, but the timing of such changes is still unknown. We follow the developments and will post our further comments.