How to fix the UK’s dark money problem

If you’ve never heard of limited liability partnerships (LLPs), or you don’t know why they are important – read on. 

Simply put, LLPs are corporate bodies whose members have the benefit of limited liability. This means, for instance, that if two people set up an LLP, and things go badly, there is a limit to how much those people are on the hook for. 

Bad actors from around the world have used LLPs registered in the UK to facilitate a wide range of harms to people in the UK, to the UK economy, and to innocent people in countries such as Ukraine. Our security is threatened by the use of LLPs by Russian military and intelligence agencies and by the North Korean government. And our economy and individual safety and wellbeing is threatened by the use of LLPs for money laundering which is associated with political corruption, with drug, arms and people trafficking, and with tax evasion. 

But there is a solution. And it should be a priority for the new UK government. 

The solution should have been the Economic Crime and Corporate Transparency Act 2023 (ECCTA), which was designed to do what it says on the tin – combat economic crime and improve corporate transparency. 

ECCTA was a hard-won victory in the face of considerable opposition from vested interests in the financial services and corporate service provision industries. But, sadly, ECCTA is riddled with loopholes, as evidenced by the fact that the All Party Parliamentary Group (APPG) on Anti-Corruption & Responsible Tax has had to issue a second Economic Crime Manifesto to highlight the failings and set out a strategy for progress in addressing them.

One of ECCTA’s many flaws was that it did not apply at all to LLPs, even though their role in criminality is long established – for example the Danske Bank money laundering case, and the Azerbaijani and Russian laundromats. And although regulations to extend ECCTA to LLPs have now been enacted, they have not benefited from the extensive Parliamentary scrutiny afforded to the primary legislation, and have many loopholes which will allow the criminality to continue.

LLPs were introduced in 2000 to combine the benefits of the traditional partnership with those of a limited company but, as a result, LLPs fall between two stools when legislation is proposed for either companies or partnerships. Even the otherwise admirable second Economic Crime Manifesto fails to mention LLPs. 

So the solution is to put LLPs front and centre of efforts to close loopholes in ECCTA and in the landscape of combating economic crime.

A partnership of faceless corporations

One of the key loopholes is that there are no restrictions on the use of corporate LLP members. This means that an LLP can be a partnership between two faceless corporations, rather than between individuals who are easier to trace. This is problematic because the use of corporate members facilitates secrecy and lack of accountability, and is thus, as Transparency International has reported, a risk factor for money laundering, bribery and corruption, tax fraud, bank theft, and facilitation of drug trafficking. 

Indeed, the UK government has already acknowledged equivalent risks in relation to companies, which have for several years been required to have at least one director who is an individual. 

Moreover, a general prohibition on all corporate directors (albeit subject to significant exceptions) is pending, and such prohibitions already exist in many other jurisdictions, including the US. The rationale for this prohibition, as explained by former MP Dame Margaret Hodge in Parliament, can readily be transposed to LLPs. First, sanctions for wrongdoing lack bite against corporate members, because  any fines are paid by their shareholders, while the threat of imprisonment is meaningless for a corporate body.  Second, corporate members are used to obscure the identities of the individuals behind them, and are thus ideal for individuals wishing to use LLPs to commit fraud or other crimes. 

Since LLPs mirror companies in being able to limit the financial liability of their members, they should also mirror the safeguards applicable to companies, so that any restrictions on corporate directors should apply equally to corporate LLP members. Yet the government has refused to apply any of these restrictions to LLPs, citing concern about ‘affecting the legitimate use of these structures, particularly in the investment sector’.

No restrictions on overseas money

A second loophole is that there are no restrictions on the use of overseas LLP members. This is problematic because their use, like that of corporate members, facilitates secrecy and enables economic crime. The FinCEN files demonstrated the use of UK LLPs by Russian mafia groups, Mexican cartels, a corrupt Italian politician and international fraudsters. 

Of course, the frequent use of LLP members which are both corporate and overseas creates a perfect storm of anonymity. A corporate entity obscures the identity of the individuals operating it, and many overseas jurisdictions increase this obscurity by having minimal transparency requirements for the corporate entity, or minimal enforcement of those requirements.

As Transparency International note, many of the LLPs used in corruption and money laundering schemes are incorporated in high-risk secrecy jurisdictions where corporations are not required to disclose their ‘beneficial owners’ – in other words the human beings who ultimately own and control the business. 

Again, the parallel problem of overseas directors, and indeed of overseas ‘corporate service providers’ (CSPs) who register and file accounts and other paperwork on behalf of UK firms, was recognised by the government in its proposals to restrict corporate directorships to UK-registered corporate bodies and ban overseas CSPs. However, neither proposal made it through to ECCTA, and there is no equivalent in the LLP Regulations.

Limited disclosure

A third loophole exists because the LLP Regulations have not addressed the deficiencies in the ‘people with significant control’ (PSC) rules which supposedly mandate disclosure of who ultimately owns and controls UK firms. These rules require public disclosure of the identity of any person who has more than 25% of the voting rights or capital in an LLP, or the right to appoint or dismiss its managers. 

However, the 25% threshold is too high, and in any event can easily be circumvented through those with lesser shares working together. Another problem is that LLPs can declare they have no PSC, and the odds are that Companies House will either believe this, or have insufficient resources to investigate the truth of the claim. 

A fourth loophole concerns corporate service providers, or CSPs. CSPs are not properly regulated for anti-money laundering purposes, and LLPs formed by CSPs have been heavily implicated in the widespread use of LLPs for criminal purposes. Yet CSPs continue to be allowed to form, and make public filings on behalf of, LLPs. 

Worse still, when the ECCTA-derived provisions requiring identity verification of LLP members and PSCs are brought into force, that verification will not have to be carried out by Companies House but will be permitted to be outsourced to CSPs without any additional oversight. CSPs need to be properly regulated.

Yet another loophole is the lack of any limit on the number of LLP member (or PSC) appointments which a person (corporate or individual) may hold, despite multiple appointments being associated with LLPs involved in crime. The government consulted on whether to impose a limit on the number of directorships which a person could hold, but ultimately decided not to, and did not even consult on LLPs. A limit would be easy to impose, and indeed has been done in Ireland. 

Finally, there is no evidence that any of the above behaviours will constitute a ‘red flag’ to Companies House to investigate further or share information with regulators or enforcement agencies. And, the paltry increase in Companies House fees for LLP registration from £10 to £50 leaves it still woefully short of the EU average of €300. Triggers for Companies House investigations based on what we already know about LLP structures associated with wrongdoing need to be enshrined in Companies House policy, and proper resourcing for investigations needs to be provided.

You can sign up for updates on the work of the APPGs, or listen to or read more about the work of those investigating this under-the-radar business vehicle at organisations such as The Dark Money Files, Finance Uncovered, Transparency International and the Tax Justice Network. And of course, you can vote for individuals or parties who are committed to tackling these abuses despite all the lobbying by the financial services sector.