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Industrial scale abuse of LLP system revealed | accountingweb
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Industrial scale abuse of LLP system revealed

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Researchers have uncovered widespread misuse of Limited Liability Partnerships incorporation processes to hide dirty money, as new laws designed to reform business registrations are picked over in Parliament.

14th Oct 2022
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More than one in ten of all Limited Liability Partnerships (LLPs) ever incorporated in Britain may be shell companies used for financial crimes, research from Transparency International UK has found.

The campaign group unearthed more than 21,000 LLPs – some 14% of all LLPs set up between 2001 and 2021 – with characteristics identical to those used in major corruption and money-laundering schemes.

A new report by the group exposes the scale of abuse of LLPs, with a conservative estimate putting the economic damage caused in the hundreds of billions of pounds, much of it flowing out of Russia.

LLPs are corporate entities that differ from private limited companies in that they are made up of partners instead of directors and shareholders. Law firms are commonly LLPs, as are legitimate investment vehicles.

However, this type of company is favoured by criminals seeking to move illicit funds because they can be set up in a way that provides multiple layers of secrecy, making it difficult to ascertain who really owns them, Transparency International said.

Financial crime and Companies House expert Graham Barrow, told the BBC that it was “quite hard to describe how bad and how enormous this problem is”. He estimated that about a fifth of all the companies set up in the UK in the past year were fraudulent in nature.  

Money-laundering flags

The analysis of all 146,948 LLPs incorporated between April 2001, when this type of company was first established, and September 2021 found 14% with three or more money-laundering red flags. These include being registered at addresses with hundreds, sometimes thousands, of identikit LLPs, and having partners that were also partners to dozens or sometimes hundreds of other LLPs. 

Researchers found an interconnected network of 15,000 LLPs, 10% of the total, controlled by pairs of omnipresent offshore corporate partners. Some 1,873 were controlled by two holding companies in Belize, while a further 661 were controlled by two firms in Seychelles. 

Both jurisdictions are noted as secrecy havens with no publicly available information on who owns companies there.

A further 948 suspect LLPs were registered at an address in Cardiff barely 100 metres from Companies House’s own headquarters. 

Long-overdue reforms 

“Key to getting on the front foot is a long-overdue reform of Companies House, effective anti-money laundering regulators and properly resourced law enforcement that can provide a credible deterrent to economic crime,” said Duncan Hames, director of policy at Transparency International UK.

New legislation to tighten up business registration protocols, tackle corruption and money laundering passed its second reading in Parliament on Thursday before heading for the committee stage for further scrutiny. 

The Economic Crime and Corporate Transparency Bill introduces new rules on the formation of companies, limited partnerships and other kinds of corporate entities, along with the registration of overseas entities. It includes reforms designed to end the abuse of the UK’s company registration system, including “long-overdue” new powers for Companies House.

The business registrar historically had no authority to challenge the information submitted, and it is hoped the new laws would add teeth, giving it more of a gatekeeper role in company formation.

Corruption campaigners said there are “crucial gaps” in the laws, particularly around the lack of support for agencies tasked with tackling economic crime, such as accounting regulators.

“These measures would only solve part of the problem and still leave vulnerabilities for money launderers to exploit,” said Hames. “Parliament should prohibit opaque corporate control of UK-registered companies to further strengthen this legislation and buttress Britain’s defences against dirty money.”

Accountants burdened

The business register had been exploited by virtue of the informality in which it was created “as a giant filing cabinet, which simply holds documents submitted to it”, said David Winch, forensic accountant at Sedulo.

“One of the most obvious issues is that there are very many legitimate owner-managed businesses that do not engage the services of an experienced or qualified accountant and happily file nonsense accounts, simply because the owner-manager does not have an understanding of what is required under UK company law,” Winch told AccountingWEB.

In most cases these are not criminal activities and the problem is one of ignorance and lack of effective regulation, Winch said.

“There is a natural desire to cut red tape and allow businesses freedom to operate – but, in contrast to the days when every limited company was obliged to have its annual accounts audited by a recognised auditor, perhaps deregulation has now gone too far,” he said. “Some of those regulations and requirements had a useful purpose.”

Creating effective regulation requires government investment in employing and training people to ensure compliance with those regulations, Winch said. 

“In the recent past governments have pursued the cheaper option of requiring accountants and others to ensure compliance – and threatening penalties where there is non-compliance,” he said. “In effect the ‘policing’ burden has been placed on accountants and others, rather than on government departments and official bodies.”

New laws ‘fall short’

Several lawmakers examining the Economic Crime Bill, which was languishing in Parliament until Russia’s invasion of Ukraine prompted ministers to dust it off, repeated previous criticisms that the proposals do not go far enough.

Labour MP Margaret Hodge, part of an all-party group on white-collar crime, said the bill “has never been more urgent”, but that “it falls short of the systemic overhaul of our battered defences against fraud… that we desperately need”.

Tax campaigners also believe it will not solve critical problems such as the ease with which false companies can be created from anywhere in the world. 

“There is still a way to go, given anyone can set up a company for somebody else,” Fair Tax Foundation chief executive Paul Monaghan. “To this end, Companies House should also be given the powers to review documentation connected to third parties’ ‘know your customer’ checks.”

Former Lord Chancellor Sir Robert Buckland KC MP has hinted that new offences linked to “failure to prevent” may be added to the Bill at a later date.

Speaking at an event hosted by the American Bar Association on 10 October, Buckland stated that he is “sure there will be further amendments tabled to the Bill, particularly centred around failure to prevent economic crime”.

 

Replies (7)

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By Paul Crowley
14th Oct 2022 19:41

Given the risk, maybe time to have an annual filing fee of a sensible sum.
Also time to restrict UK LLPs to UK Residents
What valid purpose is there in a UK LLP controlled abroad?

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Replying to Paul Crowley:
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By Arbitrary
15th Oct 2022 13:48

I doubt upping the annual filing fee will be in any way effective. I agree the residence of UK LLPs should be UK, though it might be a bit hard to police (& a plus for the legal profession). Perhaps LLPs should just be cancelled.

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By twohaporth
15th Oct 2022 20:02

Perhaps the new powers for Companies House may be helpful but surely what would be more helpful would be trained staff who could understand the accounts submitted. I have had a case where a Company was stolen and nonsense accounts submitted.
Companies House just didn't want to know and even the CEO at Companies House didn't respond to a letter - so any new measures must be accompanied by some sensible training of staff. Some of the rubbish submitted as accounts simply beggars belief but miss a nought off a company form and they'll spot it like a shot.
Same old, same old - untrained staff not up to the job just like HMRC who have nothing better to do than bring cases to the Tribunals at a huge cost over a fine of about £1,200 that they had no chance of winning.
Same old, same old - graduates from uni with no experience and little knowledge of any thing, never mind crafty finance matters, pitted against inexperienced people having no idea on the one hand and crafty MLs on the other hand who are cleverer and very experienced in finance.
Absolutely no chance.

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By Justin Bryant
17th Oct 2022 10:57

Crazy how on the one hand our lawmakers make it ridiculously aeasy for criminal to abuse this in the 1st place (has anyone searched for Mr Micky Mouse and Mr Donald Duck directors?) and on the other hand beat us all with a very big stick if we don't detect said crooks (Disney fans especially will be at a distinct disadvantage).

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By BryanS1958
20th Oct 2022 10:08

Presumably it isn't a problem because the banks are carefully checking the partners, in the same way that I get my details checked every 5 minutes.

My main account was frozen when someone in a fraud department in India decided a payment to a Mastercard debit card was 'fraudulent' (even though I had made the same payment before and it had been accepted). I was then told to go to my 'local' branch (naturally all the local ones have been shut down) to get it unlocked, only to be told when I went there that they are only a satellite branch and have no suitable staff! Once I eventually managed to get it unfrozen obviously my phone app was still frozen and I had to have another 2 hour conversation.....

If the criminals are able to negotiate the challenges of the UK banking system then good luck to them, they have better luck than I and many of my clients!

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By tonyaustin
20th Oct 2022 14:00

Any entity with limited liability for members should have to file accounts with the same disclosures as large companies and, if below the audit threshold, must have accounts signed off by a qualified independent examiner. Companies House and HMRC clearly do not have the resources or expertise to prevent abuse. If businesses do not want the extra cost, they can avoid it by not incorporating! That would probably also solve the IR35 problem as it would put off contractors using companies or make it more obvious what they were doing.

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