Dark Money Investigations: Investigation

Revealed: More than 700 British firms blacklisted in Ukraine for suspicious activity

British shell companies provide high prestige with low transparency – perfect for money-laundering, popular across the former Soviet Union.

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David Leask Richard Smith
16 May 2020
City of London skyline
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Alberto Pezzali/NurPhoto/PA Images

They are as common as muck in Ukraine. And often as dirty.

Foreign shell firms – ‘offshores’ in the jargon – litter the country’s politics and economy.

They are used to conceal ownership, avoid tax, make illicit payments and launder dirty money. Their abuse, say anti-corruption campaigners, help keep Ukraine poor.

Many are British, especially Scottish. Now an analysis of Ukrainian government public records by openDemocracy gives another glimpse at just how often UK corporate entities are being red-flagged in the country.

We found that more than 700 Scottish, English, Welsh and Northern Irish firms are ‘blacklisted’ in Ukraine.

Transparency International said this was “a stark reminder of Britain’s role as a global hub for financial crime”. The Scottish National Party, which has been campaigning for tighter corporate governance, said Scottish limited partnerships – or SLPs, one of the most common ‘offshores’ used in Ukraine – had left a “toxic” legacy.

The businesses are all listed on a searchable database of thousands of international corporate entities subject to special sanctions, usually because of suspicious money transfers.

Officials decreed that such enterprises – many of which appear to be shell firms registered in traditional secrecy jurisdictions such as Panama or Belize – could trade in the country only if they obtained individual licences.

Perfect mix

For years British corporate entities – especially limited liability partnerships from across the UK (LLPs) and SLPs – have been openly advertised as ‘offshore companies’ in Ukraine and other parts of the former Soviet Union.

Scottish and other UK shell companies are widely seen as providing a perfect mix of high prestige but low transparency. And combined with a bank account, often in one of the Baltic nations, they formed what amounts to a money-laundering kit.

Such firms regularly crop up in financial crime scandals – big and small – across the region.

The presence of so many UK companies on this list is a stark reminder of Britain’s role as a global hub for financial crime

Rachel Davies, Transparency International

LLPs and SLPs formed a significant part of a complex money-laundering scheme reportedly used to funnel some $1.5 billion out of Ukraine on behalf of people close to the ousted Ukrainian president Viktor Yanukovych and his ‘clan’.

And Ukraine’s elite but controversial anti-corruption task force, NABU, said SLPs were used as fake intermediaries to skim millions from at least two important state arms exports.

‘Stark reminder’

Rachel Davies, head of advocacy at anti-corruption campaign group Transparency International, suggested the sheer volume of UK entities subject to Ukrainian special sanctions reflected the widespread abuse of British shell firms in that country.

She said: “The presence of so many UK companies on this list is a stark reminder of Britain’s role as a global hub for financial crime. Despite recent advances in improving corporate transparency, it is still far too easy to set up opaque firms in Britain.

“The limited checks on the individuals behind these companies means that UK entities regularly appear in major money-laundering scandals. Until there are tighter controls on company formation, their continued involvement in suspected financial crime poses a significant risk to the UK’s status as a safe and respectable place to do business.”

Ukraine introduced its blacklist at the turn of the century as it tried to stem capital flight and address irregularities in the movement of money. Its economy ministry told openDemocracy that sanctions – which range from special licensing to fines and outright bans – were imposed by officials or courts at the request of law enforcement or market regulators

The country late in 2019 lifted its regime of special licensing but the economy ministry still publishes a searchable database of international companies which were subject to the rules. Ukrainian laws are not usually retroactive and the ministry argues that sanctions still apply to blacklisted firms, although this is under legal debate.

Tide of dark money

The blacklist underlines the sheer volume of ‘offshore firms’ – mostly believed to be controlled by locals – in the Ukrainian economy. It was part of a wider attempt – widely criticised both in Ukraine and abroad as half-hearted – to stem the tide of dark money flowing in and out of the country.

More than 700 named companies are identifiably British. Around a third of them are Scottish, mostly SLPs. Many of the English entities named are LLPs. There are six Northern Irish businesses on the blacklist, two of them limited partnerships registered at a virtual office business in Newry featured earlier this year in an openDemocracy investigation.

Northern Ireland limited partnerships do not have to say who controls them. SLPs and LLPs do, or at least they have to make an effort to.

Official filings for SLPs suggest strong connections to the former Soviet Union.

That means British firms being red-flagged in Ukraine may not, in fact, be controlled in the UK.

So far Companies House, the UK’s corporate registry, has recorded nearly 8500 individuals who are declared ‘persons of significant control’ of SLPs, which means they have a controlling stake of at least 25%. More than 1200 describe themselves as British, English or Scottish.

The rest are non-UK nationals, including more than 2000 Ukrainians and more than 1600 Russians. In total citizens of the 15 former Soviet republics account for around 5500 of the roughly 8500 people who say they have a controlling interest in an SLP.

Alison Thewliss, the Scottish National Party’s Treasury spokesperson in the Westminster parliament, is a long-standing critic of what she sees as the UK’s lax regime of corporate governance.

She said: “The legacy of financial vehicles such as Scottish Limited Partnerships is – to a large degree – a toxic one. For years the UK government has failed to properly regulate them, or to provide adequate resource to Companies House to undertake the necessary due diligence.

“Ministers must take the opportunity during the Finance Bill to put this right. Failure to do so will only add weight to the suspicion that this government is happy to turn a blind eye to money laundering and corruption occurring on its own doorstep.”


Where ‘Scottish’ means ‘shady’

Three years ago an undercover anti-corruption investigator calling herself Yekaterina met a man in a Kyiv restaurant.

He had 100 kilos of amber to show her.

The semi-precious fossilised resin was Ukrainian – subject to restrictions on sale – but the man was intending to pass it off as Polish. It was just a taster of a consignment of a tonne he had on offer.

How could he make the sale ‘clean’? The vendor had a “Scottish company”, the man explained. Yekaterina, the logic went, was to get her own ‘offshore' firm. And so the transaction could go ahead out of sight of the authorities.

The exchange – captured on video and broadcast on Ukraine’s rolling news channel 24TV – was part of a complex sting by Ukraine’s anti-corruption agency, Nabu.

The investigation went on to embroil two politicians and became known as the ‘amber case’. It still rumbles on.

However, the casual reference to a Scottish company will barely have registered in Ukraine.

That it is because British corporate entities – especially limited liability partnerships (LLPs) from across the UK and limited partnerships (SLPs) from Scotland – are ubiquitous in the nation’s scandals.

Essentially the term ‘Scottish company’ in Ukraine has come to mean something like ‘Swiss bank account’. It sounds a bit shady.

The Confederation of British Industry has already warned that the abuse of SLPs across the former Soviet Union threatens Scotland’s reputation as a place to do honest business. But it is also this reputation – including Scotland’s rule of law – that helped make SLPs popular in the first place.

Scottish and UK corporate entities are still being heavily marketed as high-prestige ‘tax-free offshore companies’, despite their repeated abuse in a succession of money-laundering or corruption scandals.

But their popularity is waning. Two years ago authorities in the UK – not Scotland, because the Westminster government is responsible for corporate governance – ordered SLPs to name their beneficiaries.

Even more significantly, Latvia cracked down on the banks giving accounts to SLPs, LLPs and assorted shell companies from around the globe.

Earlier this year openDemocracy revealed that entities that limited partnerships and LLPs from Northern Ireland were picking up some of the slack. As registrations of SLPs fell, they rose for Northern Ireland limited partnerships.

The revelation of hundreds of British firms blacklisted in Ukraine gives some idea of the scale of shell firm abuse and related corruption.

Last week the country’s parliament passed a new banking law that outsiders hope will go some way to cleaning up its economy. The International Monetary Fund is expected to release new lending as a result.

The UK, meanwhile, is left with what an Scottish National Party MP today calls a “toxic” legacy of shell firm abuse. How many more scandals involving SLPs or LLPs lie fossilised, like amber, waiting to be dug up?

Peter Geoghegan: dark money and dirty politics

Democracy is in crisis and unaccountable flows of money are helping to destroy it. Peter Geoghegan’s new book, ‘Democracy for Sale: Dark Money and Dirty Politics’, charts how secretive money, lobbying and data has warped our democracy.

How has dark money bought our politics? What can be done to change the system?

Join us for a journey through a shadowy world of dark money and disinformation stretching from Westminster to Washington, and far beyond.

Sign up to take part in a free live discussion on Thursday 13 August at 5pm UK time/6pm CET

In conversation:

Peter Geoghegan Dark Money Investigations editor at openDemocracy and the author of ‘Democracy for Sale: Dark Money and Dirty Politics’.

Mary Fitzgerald Editor-in-chief, openDemocracy.

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