UK law is masking corruption. Why is the government delaying its reform?
Law professor Elspeth Berry explains the loopholes that have let faceless ‘partnership’ firms get away with fraud for years
Far too many pressing reforms to UK law are agreed in principle by the government but made subject to the weasel words ‘when Parliamentary time allows’.
The result is significant delay in enacting legislation even when the government itself admits that it is needed.
One such area of legislation concerns the proposed reforms to force businesses registered in the UK to become more transparent.
Revelations that significant numbers of UK limited partnerships (LPs) and limited liability partnerships (LLPs) have been utilised for criminal wrongdoing on a massive and international scale first appeared in the press as early as 2016. These prompted consideration of reforms by the responsible government department – the Department for Business, Energy and Industrial Strategy (BEIS) – as far back as January 2017.
A weekly summary of our latest stories about the post-Soviet world.
The wrongdoing includes money laundering, tax evasion and criminal activities as diverse as fraud, bribery, child pornography and digital bootlegging.
It is particularly noteworthy, in the light of current events in Ukraine, that much of the wrongdoing facilitated by UK businesses, particularly related to money laundering and corruption, has taken place in states of the former USSR and has been linked to Russian involvement, including to the country’s security forces – something that concerned MPs as early as 2016.
The scale and seriousness of the criminality clearly requires a proportionately urgent and extensive response by the UK government.
Yet only a minority of the reforms needed to combat criminal wrongdoing facilitated by corporate bodies registered in the UK have been proposed, and even these have stalled – allegedly pending the availability of Parliamentary time.
What has been proposed?
One set of reforms relates to LPs only. These would require anyone registering an LP to be subject to regulation by an anti-money-laundering supervisor. They also purport to require an LP to prove a continuing connection with the UK – but this proposal contains such a major loophole as to be almost worthless, since one acceptable connection would be the use of a UK agent’s address.
The proposals also provide new powers to Companies House to strike an LP off the register, but only where an LP no longer exists or carries on business, and not where strike-off would be in the public interest because the LP is guilty of wrongdoing.
Another set of reforms relate to corporate transparency more generally, and would apply to both LPs and LLPs.
These would mandate identity verification of LLP members and some – but not all – partners in LPs. This would enable their real names to be ascertained at Companies House, and establish when individuals using different versions of their names are in fact the same person disguising suspicious behaviour.
The proposals would also provide greater powers for Companies House to check the accuracy of information supplied to it, so that those doing business with LPs and LLPs, journalists, and other UK government bodies such as HMRC and the National Crime Agency, can rely upon registered information as being both full and accurate.
However, whether Companies House is sufficiently resourced to do this, and whether the way in which suspicious filings are identified is sufficiently rigorous, remains to be seen.
Use of corporate partners or LLP members enables the true owners and operators of the business to hide their identity behind opaque corporate structures, often registered overseas.
Regrettably, however, the government is not planning to extend existing restrictions on the use of corporate directors to corporate partners or LLP members. These restrictions require companies to have at least one individual director, and legislation was also enacted to prohibit the use of corporations as directors entirely (unless a statutory exemption applied), although this has never been brought into force.
The government has also refused to apply to corporate partners or LLP members the further restrictions it is proposing for directors. These would require corporate directors themselves to have only individual directors, in an attempt to limit the scope for obscuring the true controllers of the business to an infinite extent.
After the PSC legislation was applied to Scottish partnerships, wrongdoing simply migrated to the rest of the UK
Another racket that the government has failed to address is the so-called ‘certificate of good standing’.
Anyone who registers an LLP or LP at Companies House automatically receives an initial certificate of incorporation or registration, as evidence that the LLP or LP has been formed. However, on payment of an additional fee, firms can obtain an additional ‘good standing’ certificate.
This certificate can be used by wrongdoers to mislead those doing business with a UK LP or LLP into believing that UK authorities have endorsed the integrity of the business – when in fact all they have done is confirm that its filing at Companies House is up to date. The government initially proposed to reform or abolish these certificates, but this reform does not appear in the most recent version of its proposals.
One of the very few transparency reforms that have made it into law in the first place, arising from the UK’s pre-Brexit obligation to implement an EU directive on money laundering, is the PSC register – which requires LPs and LLPs to disclose the identity of ‘persons with significant control’ (PSCs) over the firm.
Unfortunately, the PSC legislation has significant flaws and itself needs reform.
It applies only to Scottish partnerships (and not even all of them), as a result of a knee-jerk reaction to the fact that early revelations of wrongdoing centred on Scottish LPs which, unlike their counterparts in the rest of the UK, offer the advantage of separate personality (so that the partnership itself can enter into contracts or own property, rather than the partners collectively having to do so.
Unsurprisingly, after the PSC legislation was applied to Scottish partnerships, the wrongdoing it was intended to prevent – including money laundering and bribery – simply migrated to partnerships in the rest of the UK, to which the legislation clearly needs extending.
Furthermore, Companies House is not mandated or resourced to verify the PSC information submitted to it. Finally, the threshold for ‘significant control’ is so high that it is entirely possible for people to exercise effective control without being subject to the PSC legislation. Even the government has recognised that the PSC system already needs reform.
Reforming LPs and LLPs would have many potential benefits, including ensuring tax fairness, with the resulting benefit of more money available from tax revenue for public services. It would also reduce the harms that result from criminal activities both in the UK and overseas.
Despite this, five years down the line from the initial LP proposals, none of these reforms have resulted in legislation, let alone a draft bill – and the government says it will act on LPs only ‘when Parliamentary time allows’.
Some related reforms, requiring disclosure of foreign ownership of UK property, made it into the recently enacted Economic Crime (Transparency and Enforcement) Act 2022. But this came six years after the government’s initial promise to clean up the system.
More worryingly still, parliamentary time was made available for that bill only after Russia’s invasion of Ukraine in February 2022. The invasion was also the trigger for the bill to be fast-tracked so that it became law within two weeks. That is not typical – most bills take months to pass through their legislative stages, and the bulk of the proposed transparency reforms have not even started this process.
Nonetheless, it appears that the terrible events in Ukraine have finally prompted action on LPs and LLPs. The corporate transparency proposals that were first considered in 2018 and which seem to have stalled after the latest round of consultation in 2020, finally appeared in a government white paper issued on 28 February 2022.
So why has progress since the wrongdoing was first extensively highlighted in 2016 ground to such a juddering halt? It is true that the government has had other pressing concerns resulting from the pandemic, and it may also have been distracted by its self-inflicted political woes in relation to ‘partygate’, breaches of the lobbying rules and many other scandals.
It would be depressing if the most positive view of the situation is summed up by Hanlon’s razor: “Never attribute to malice that which is adequately explained by stupidity.”
But the alternative is even worse: that the democratic process of enacting legislation has been ‘captured’ by powerful interests and that there is a more deliberate government agenda of indefinite delay at the behest of vested interests in the financial services and related sectors, for whom lack of transparency, dressed up as privacy, is a key concern. If this is the case, then we should all be concerned.
Get our weekly email