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12 October 2022

How Companies House became a haven for oligarchs

More than one in ten LLPs incorporated in the UK share “almost identical” features to shell companies used for serious financial crime, new research reveals.

By Oscar Williams

After the Soviet Union collapse triggered an unprecedented transfer of wealth in the 1990s, a new generation of oligarchs needed somewhere to hide their money. Many enlisted financiers in former Soviet states such as Latvia and Estonia, who appeared to turn a blind eye to the origins of their clients’ wealth. But the companies that the financiers used to launder the money, secured through embezzlement, corruption and other organised crime, were largely registered in the UK.

A new report by Transparency International, a non-governmental organisation (NGO), reveals how, between 2005 and 2015, UK limited liability partnerships, or LLPs, became a major means of transferring money out of the former Soviet Union. Over that ten-year period, the analysis suggests, tens if not hundreds of billions of pounds worth of economic damage was enabled by the UK’s inadequate anti-money laundering regime. LLPs registered at Companies House provided the perfect vehicle through which money could be laundered on an industrial scale. They were subject to weaker reporting requirements than other classes of business and there was no attempt to verify the people who set them up.

Transparency International’s researchers tracked nearly 15,000 LLPs in one of the widest ranging analyses to date of how the networks of UK-registered shell companies serve as vast laundromats. Like limited companies, LLPs allow directors or partners to limit their liabilities in line with their initial investment, but they are also subject to less onerous administrative requirements and do not pay corporation tax. Transparency International’s report reveals that 21,000 LLPs, more than 10 per cent of all those incorporated at Companies House, have “almost identical” features as shell companies used in bribery, sanctions evasion, embezzlement of public funds and other serious financial crime.

The LLPs form networks with at least three of eight common characteristics. They are likely to have been set up between 2005 and 2015 and name a corporate “partner” in a high-risk jurisdiction, many of which are British Overseas Territories or members of the Commonwealth. These partners are rarely people, but legal entities established to register dozens if not hundreds of other LLPs through which the money flows, before it is transferred to funds in tax havens, such as the British Virgin Islands, and then spent in the UK or other Western nations. “Where they have data on Persons with Significant Control,” the authors write, “it is frequently either non-compliant or a natural person based in Russia, Ukraine, a Baltic state or somewhere else in the former Soviet Union.”

Since the mid 2000s, networks of British LLPs have enabled a range of high-profile white-collar crimes, including the $230m (£208m) Russian tax fraud exposed by the lawyer, Sergei Magnitsky, who was beaten to death in a Russian jail aged 37. Other crimes enabled by the networks, the report adds, include bank thefts in Moldova, Kazakhstan and Ukraine. But Mexican drug cartels and corrupt Nigerian defence operatives have also funnelled money through the so-called laundromats.

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The UK government has taken some steps to challenge this practice. In 2016 it required those who were incorporating LLPs at Companies House to declare who the “beneficial owners” of the businesses were. According to Transparency International’s research, this has reduced the number of fraudulent LLP registrations in the years since, but it is still far from a perfect system. Companies House still doesn’t have the power to verify the information businesses submit. The financial crime expert, Graham Barrow, told the New Statesman earlier this year that he believes 20-25 per cent of the 3,000 businesses registered on Companies House each day are questionable.

Since the invasion of Ukraine in February, the government has sought to further crack down on the presence of Russian money in the UK, most prominently through sanctions, but also through a raft of new policy measures. On Thursday (13 October), MPs will debate the Economic Crime and Corporate Transparency Bill, which seeks to strengthen Companies House’s power to identify fraudulent businesses before they are incorporated. But Transparency International believes the reforms need to go further.

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Among the report’s recommendations, the NGO calls for parliament to prohibit LLPs from being controlled by opaque offshore companies, to give Companies House the power to scrutinise the practices of company formation agents and to develop a more secure funding stream for the organisation by allowing it to charge £50 per incorporation. Beyond the legislative proposals, it also wants the UK to streamline the patchwork of rules and agencies tasked with investigating money laundering to ensure they can take action against suspected offenders.

The most significant challenge, said Transparency International’s head of research Steve Goodrich, is preventing “complacency and inertia” within government “winning out against the need for urgent reform… A lot of the issues that we’ve identified have been known about for years, but successive governments haven’t put them at the top of their pile.” While ministers have been distracted by other issues, added Goodrich, “chaos has ensued”. The legislation is “just one step in the right direction, but there’s a lot more that needs to be done”.

[See also: How Brexit broke the UK’s fiscal credibility]

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