UK Partnerships Act Masks Fraud and Corruption

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Another racket that the government has failed to address is the so-called “certificate of good character”.

Anyone who registers an LLP or LP at Companies House automatically receives an initial certificate of incorporation or registration, as proof that the LLP or LP was formed. However, upon payment of an additional fee, companies can obtain an additional certificate of “good reputation”.

This certificate can be used by criminals mislead those doing business with a UK LP or LLP into believing that the UK authorities have approved the integrity of the business – when in fact all they have done is confirm that its filing at Companies House is up to date. The government had initially proposed to reform or abolish these certificates, but this reform does not appear in the most recent version of its proposals.

Potential benefits

One of the few transparency reforms to have the force of law, stemming from the UK’s pre-Brexit obligation to implement an EU money laundering directive, is the PSC register – which obliges LP and LLPs to disclose the identity of ‘persons exercising significant control’ (PSC) over the business.

Unfortunately, PSC legislation has significant shortcomings and itself needs to be reformed.

This only applies to Scottish partnerships (and not even all of them), due to a knee-jerk reaction to the fact that early revelations of wrongdoing focused on Scottish LPs who, unlike their counterparts in the rest of the UK, offer the benefit of separate personality (so that the partnership itself can enter into contracts or own property, rather than the partners having to do this collectively.

Unsurprisingly, after the application of PSC legislation to Scottish partnerships, mischief it aimed to prevent – including money laundering and corruption – simply migrated to partnerships in the rest of the UK, to which the legislation clearly needs to be extended.

Further, Companies House is not mandated or provided with the resources to verify the PSC information submitted to it. Finally, the threshold of “meaningful control” is so high that it is quite possible for people to exercise effective control without being subject to CSP legislation. Same the government has recognized that the PSC system already needs to be reformed.

Reforming LPs and LLPs would have many potential benefits, including ensuring tax fairness, with the resulting benefit of having more money from tax revenue available for public services. It would also reduce harm from criminal activity in the UK and overseas.

Despite this, five years after the initial LP proposals, none of these reforms have resulted in legislation, let alone a bill – and the government says it will only act on LPs’when parliamentary time permits‘.

Some related reforms, requiring the disclosure of foreign ownership of UK property, were incorporated into the recently enacted Economic Crimes (Transparency and Enforcement) Act 2022. But this came six years after the initial government promise to clean the system.

More worryingly, parliamentary time was only made available for this bill after Russia invaded Ukraine in February 2022. The invasion was also the trigger for the acceleration of the project of law so that it becomes law within two weeks. This is not typical – most bills take months to go through their legislative stages, and the bulk of proposed transparency reforms have not even begun this process.

Nevertheless, it seems that the terrible events in Ukraine have finally prompted action on LPs and LLPs. Proposals for corporate transparency that were first considered in 2018 and which appear to be stalling after the last round of consultation in 2020, finally appeared in a government white paper published on February 28, 2022.

So why has progress since wrongdoing first come to light in 2016 come to a screeching halt? It is true that the government has had other pressing concerns resulting from the pandemic, and it may also have been distracted by self-inflicted political woes regarding ‘participation’, violations of lobbying rules and many other scandals.

It would be depressing if the most positive view of the situation were summed up by Hanlon’s razor: “Never attribute to wickedness what is adequately explained by stupidity.

But the alternative is even worse: that the democratic process of passing the legislation has been “captured” by powerful interests and that there is a more deliberate government program of indefinite postponement to the on behalf of vested interests in financial services and related sectors, where lack of transparency, disguised as privacy, is a major concern. If so, then we should all be concerned.


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