Tuesday 4 December 2018 1:51 pm

Why a river of dirty money flows through the United Kingdom

Britain first passed a law allowing for the creation of limited-liability companies – described by the Economist in 1999 as “the key to industrial capitalism” – in the mid-19th century. They quickly exploded in popularity.

Those arrangements are now under close scrutiny, after landing at the heart of the money-laundering scandal that has enveloped Danish lender Danske Bank.

In a report compiled after British banker Howard Wilkinson blew the whistle, Danske found some $200bn had been laundered through its Estonian branch, with UK limited partnerships “the preferred vehicle for non-resident clients” upon who the scandal is centred.


Wilkinson was excoriating in his remarks about the UK’s business structures during testimony to the European Parliament last month.

“The role of the UK is an absolute disgrace,” said Wilkinson, Danske’s Baltics trading head during a period in which it processed huge amounts of dirty money. “Limited liability partnerships and Scottish liability partnerships have been abused for absolutely years.”

UK companies themselves are highly attractive for people wanting to shift their ill-gotten gains. In two major recent money-laundering schemes, dubbed the Russian Laundromat and Azerbaijani Laundromat, a significant number of laundered payments went through UK limited companies.

The National Crime Agency estimates that hundreds of billions in dirty money slosh through the City each year, with Scottish limited partnerships the preferred vehicle.

The government has been consulting on potential changes to limited partnerships. Last week, the Financial Times reported that – despite opposition from the City – the government is looking to tighten the rules, forcing limited partnerships to have UK links and be registered through a supervised agent, in an effort to stem the flow of dirty money.

“It’s long been known that UK companies are used to facilitate these types of money-laundering and corrupt activities, because it gives them a veil of reputability,” said Hannah Laming, an investigative lawyer at Peters & Peters who specialises in corruption.

Key to their appeal is how easy they are to set up. A formation agent can register a limited partnership in the UK for a nominal fee, making it hugely cheap to create so-called ‘shell’ or ‘wrapper’ companies.


The enforcement problem centres on the role of Companies House, the agency which registers and lists UK businesses. Its website offers a collection of useful information about firms: their reports, lists of directors and numerous other statutory documents.

The roughly 4m-firm list is vast and hard to manage, meaning fraudsters who want to take advantage of loopholes in the system – say, by registering hundreds of shell companies at a single location – can use a number of tricks to do so. For instance, a misspelt name could stop the website properly showing all the companies one person directs.

Laming said such companies would likely show “red flags”, including disparities between revenues and payments, or controlling parties based in jurisdictions where prosecution is more of a challenge.

“We have a very light-touch touch entry point for limited liability, so you can buy a company off the shelf for £9.99,” said Frances Coulson, a solicitor who is a trustee of the Fraud Advisory Panel – which campaigns against fraud in the UK. “You can acquire a veneer of respectability without any substance behind it.”

Such firms create a layer separating the business’s true form or owner, making it harder to determine who owns it – adding a barrier in the way of investigators trying to trace where dirty money flows are going. “It’s very hard to track someone who might have five or six companies under their name,” said Coulson.

The market for setting up wrapper firms is flourishing: agents will sometimes register hundreds of firms at a single location in the capital. Theoretically, HMRC monitors such registering agents, but fines have been low so far, meaning the UK remains an attractive thoroughfare for illicit funds.

Companies House has fewer than 100 employees working on maintaining the listings, and lacks the capability to independently check all details sent in, or to hound companies which drag their feet over reporting. “I don’t think they really have a properly-resourced team,” said Laming.

There are a variety of remedies possible: Coulson suggested assigning directors a unique number after they first verify their identity, which could then be linked to their other engagements. Ultimately though, checking through the 80,000 or so limited companies currently on the business registry will require a significant manpower boost.

The UK will have to overcome several major hurdles if it wishes to stop the flow of dirty money though the capital. Ironically, the cure for dirty money might be clean money, and the test of the government’s commitment to stopping such activity may be whether it is willing to put Companies House in order.

Share


Tags: