In late January, this writer was enjoying a drink offered by a large UK-based asset manager during the World Economic Forum in Davos, discussing how this particular group would manage a mooted emerging markets private equity fund, and specifically how it would avoid inadvertently passing money to the cronies of corrupt regimes in its target markets.
Up stepped a well-dressed young man who presented himself as a minister of the UK government, and said corruption was part of his mandate. I asked him whether his government was looking to prevent corruption or facilitate it.
It seemed like a reasonable question, given the current and previous UK governments’ culpable lack of action on the misuse of Limited Liability Partnerships; the current government’s use of PricewaterhouseCoopers as an advisor on the redrafting of UK tax law in 2012 when PwC was already known to have advised countless companies on how best to minimise their UK tax by using pass-through companies in Luxembourg and other artificial structures; and its repeated backtracking on the non-dom issue discussed in Part 1.
Twice during the conversation the minister assured me that his government would ensure LLPs were obliged to have named owners, perhaps even before the end of the current legislation. The minister concerned was asked by email dated March 13 to confirm his Davos comments, but did not reply, presumably being too tied up with his election campaigning. Which is why we have not identified the minister in question…
As noted in Part 1, UK journalist and former tax inspector Richard Brooks documented much of the misuse of UK companies in a 2013 investigation published in the satirical UK fortnightly Private Eye, yet UK business secretary Vince Cable had until recently continued to deny that abuses are facilitated by the fact that offshore companies can be directors or owners of UK LLPs.
The U.S. and UK governments have been aware of the potential misuse of shell companies, often in the form of Limited Liability Partnerships or Companies, for some time. For example, in a November 2006 paper entitled “The Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies,” the U.S. Department of the Treasury Financial Crimes Enforcement Network noted in a November 2006 paper that:
“By virtue of the ease of formation and the absence of ownership disclosure requirements, shell companies – generally defined as business entities without active business or significant assets – are an attractive vehicle for those seeking to launder money or conduct illicit activity.”
“While business entities generally, and shell companies specifically, have legitimate commercial uses, this lack of transparency in the formation process poses vulnerabilities both domestically and internationally,” the paper said. The U.S. has however backpedalled on curbing any such abuse when it comes to, for example, companies registered in the state of Delaware, a tax haven to all intents and purposes.
The UK’s role in international crime
Similarly, UK-mandated Limited Liabilities Partnerships are open to all kinds of abuse, according to an article, “Where there’s muck… there’s brass plates” by Richard Brooks and Andrew Bousfield, published by UK satirical magazine Private Eye in May 2013.
Notes the article, “the world’s most corrupt, least transparent companies are not located in fragile states or faraway tax havens. They are to be found here, in offices across the UK from Clapham to Cardiff, facilitating the most serious international crimes while the government ignores one of Britain’s few growth industries: corporate corruption services.”
The journalists cite “the historic relaxation of British company law, and almost non-existent regulation and financial policing that has turned Britain into a capital of international organised crime.”
UK legislation allowing Limited Liability Partnerships was passed in 2000 and came into effect in 2001, at more or less the same time that the backlash from the Enron scandal definitively knocked out accountancy firm Arthur Anderson, reducing the big five accountants to the big four of KPMG, PricewaterhouseCoopers, Deloitte & Touche and Ernst & Young.
One of the effects of the legislation was to circumscribe the liabilities of single partnerships within services companies like international law or accountancy firms, in order to ensure that such groups cannot be destroyed by the misbehaviour, however egregious, of a single subsidiary.
This protects the central brand, making each subsidiary responsible for its own actions, but it can also have the effect of diluting corporate culture, as some subsidiaries may take decisions that run counter to the corporation’s stated rules because there is a strong business case for doing so.
HSBC has recently used a variation on this theme to argue that the parent company is in no way responsible for the misdeeds of its small Swiss banking subsidiary, and that the company’s top executives were unaware that its Swiss arm was engaged in facilitating massive tax avoidance. This was despite the subsidiary being credited with a huge chunk of the group profits prior to the financial crisis, when the bulk of the misbehaviour is supposed to have taken place.
Proposals for a register of who actually owns LLPs may go some way to resolving the problem, but here too, there are pitfalls.
“First, [beneficial ownership] covers companies, but not all trusts, so the easiest way to avoid disclosure would be to use one of those trusts which fall outside the scope, instead of companies,” says Andres Knobel, a freelance researcher at the Tax Justice Network.
Furthermore, “the definition of beneficial owner is based on FATF’s (the Financial Action Task Force) recommendations on Anti-Money Laundering, which refer to the individual holding more than 25% of ownership… which is a really high threshold.”
A further issue is that companies can continue to act as directors of UK LLPs. That is problematic, because if these corporate directors are incorporated in, say, the BVI, Gibraltar or Belize and their directors are not named individuals – and they are not required to be in many such jurisdictions – then the question of ultimate ownership remains open, as the true owners can continue to hide behind opaque corporations.
Limited Liability Partnership legislation combined with the UK’s hands-off corporate tax regulation produces a financial environment which is almost impossible to monitor, and has made the UK the jurisdiction of choice for criminal enterprises all over the world.
Sources close to international tax matters have said that in recent weeks and months the government has attempted to burnish its anti-tax evasion and money laundering credentials as tax issues in particular come into focus in the run up to the UK election. To this end they have been quietly lobbying former UK territories such as British Virgin Islands and the Caymans to tighten up local legislation that currently facilitates tax evaders and money launderers.
Specifically, it has asked for companies registered in these protectorates to provide the names of the actual company owners. As things stand, it can be virtually impossible for the authorities to establish who really owns companies set up in these jurisdictions, which can in turn be owned by a series of trusts or companies set up in other jurisdictions where legislation is equally opaque, making them a vehicle of choice for tax evaders, corrupt politicians and criminals alike.
But so far, sources say, the protectorates are refusing to play ball.
From the mouths of ministers
In March 2015, as the United States and the European Union crossed swords with Russia over the latter’s intervention in the Ukraine conflict, UK Foreign secretary Philip Hammond said he could cause Russian leader Vladimir Putin “strategic embarrassment” by revealing the extent to which his oligarch cronies had siphoned off the country’s wealth and stashed it in the UK.
Underlying Hammond’s threat was the suggestion that corrupt Russians have parked much of their ill-gotten gains in London’s real estate market, sending skywards prices that were already far beyond the reach of most Londoners.
But such revelations are a much bigger indictment on a UK government which, far from cracking down on abuse of the UK’s light tough regulatory environment, seems to have done little to prevent such abuse, and on occasion has made it even easier.
In recent times Russian oligarchs like Oleg Deripaska, Roman Abramovic and the now deceased Boris Berezovsky have turned London courtrooms into battlegrounds where they fight over their stealthily accumulated billions, while a conviction and prison sentence for Nigerian politician and professional conman James Ibori shed some light on the extent to which the world’s corrupt and criminal have turned London’s booming property and financial markets into their own personalised money laundry.
Hermitage Fund manager Bill Browder has seen first hand how lax UK company oversight has made life easy for financial criminals. Browder has since 2009 been campaigning for justice for his accountant Sergei Magnitsky. Magnitsky was arrested and ultimately died in a Russian prison after accusing Moscow tax officials of massive fraud. Browder’s researchers have painstakingly documented how money wrongly appropriated by these officials was spirited out of Russia through Austrian, Swiss and other banks, with LLCs providing the money with a thin shroud of respectability which allowed the money to be fed through the banking system with few questions asked.
With the issue now turning mainstream given the increasing budgetary pressure in the UK, the main political parties are beginning to voice their own proposals for combatting abuse of the UK’s burgeoning financial markets.
But given all that the main political parties – the Conservative, Labour and the Liberal Democrats – have been happy to feed at the trough of undeclared, non-dom money, even when proven to have been criminally acquired, it remains to be seen what they will do if returned to power.