More than 700 British firms blacklisted in Ukraine for suspicious activity
They are as common as muck in Ukraine. And often as dirty.
Foreign shell firms – ‘offshores’ in the jargon – litter the
country’s politics and economy.
They are used to conceal ownership, avoid tax, make illicit
payments and launder dirty money. Their abuse, say anti-corruption campaigners,
help keep Ukraine poor.
Many are British, especially Scottish. Now an analysis of
Ukrainian government public records by openDemocracy gives another glimpse at
just how often UK corporate entities are being red-flagged in the country.
We found that more than 700 Scottish, English, Welsh and
Northern Irish firms are ‘blacklisted’ in Ukraine.
Transparency International said this was “a stark reminder
of Britain’s role as a global hub for financial crime”. The Scottish National
Party, which has been campaigning for tighter corporate governance, said
Scottish limited partnerships – or SLPs, one of the most common ‘offshores’
used in Ukraine – had left a “toxic” legacy.
The businesses are all listed on a searchable database of
thousands of international corporate entities subject to special sanctions,
usually because of suspicious money transfers.
Officials decreed that such enterprises – many of which
appear to be shell firms registered in traditional secrecy jurisdictions such
as Panama or Belize – could trade in the country only if they obtained
individual licences.
Perfect mix
For years British corporate entities – especially limited liability
partnerships from across the UK (LLPs) and SLPs – have been openly advertised
as ‘offshore companies’ in Ukraine and other parts of the former Soviet Union.
Scottish and other UK shell companies are widely seen as
providing a perfect mix of high prestige but low transparency. And combined
with a bank account, often in one of the Baltic nations, they formed what
amounts to a money-laundering kit.
Such firms regularly crop up in financial crime scandals –
big and small – across the region.
LLPs and SLPs formed a significant part of a complex
money-laundering scheme reportedly used to funnel some $1.5 billion out of Ukraine
on behalf of people close to the ousted Ukrainian president Viktor Yanukovych
and his ‘clan’.
And Ukraine’s elite but controversial anti-corruption task
force, NABU, said SLPs were used as fake intermediaries to skim millions from
at least two important state arms exports.
‘Stark reminder’
Rachel Davies, head of advocacy at anti-corruption campaign
group Transparency International, suggested the sheer volume of UK entities
subject to Ukrainian special sanctions reflected the widespread abuse of
British shell firms in that country.
She said: “The presence of so many UK companies on this list
is a stark reminder of Britain’s role as a global hub for financial crime.
Despite recent advances in improving corporate transparency, it is still far
too easy to set up opaque firms in Britain.
“The limited checks on the individuals behind these
companies means that UK entities regularly appear in major money-laundering
scandals. Until there are tighter controls on company formation, their
continued involvement in suspected financial crime poses a significant risk to
the UK’s status as a safe and respectable place to do business.”
Ukraine introduced its blacklist at the turn of the century
as it tried to stem capital flight and address irregularities in the movement
of money. Its economy ministry told openDemocracy that sanctions – which range
from special licensing to fines and outright bans – were imposed by officials
or courts at the request of law enforcement or market regulators
The country late in 2019 lifted its regime of special
licensing but the economy ministry still publishes a searchable database of
international companies which were subject to the rules. Ukrainian laws are not
usually retroactive and the ministry argues that sanctions still apply to
blacklisted firms, although this is under legal debate.
Tide of dark money
The blacklist underlines the sheer volume of ‘offshore
firms’ – mostly believed to be controlled by locals – in the Ukrainian economy.
It was part of a wider attempt – widely criticised both in Ukraine and abroad
as half-hearted – to stem the tide of dark money flowing in and out of the
country.
More than 700 named companies are identifiably British.
Around a third of them are Scottish, mostly SLPs. Many of the English entities
named are LLPs. There are six Northern Irish businesses on the blacklist, two
of them limited partnerships registered at a virtual office business in Newry
featured earlier this year in an openDemocracy investigation.
Northern Ireland limited partnerships do not have to say who
controls them. SLPs and LLPs do, or at least they have to make an effort to.
Official filings for SLPs suggest strong connections to the
former Soviet Union.
That means British firms being red-flagged in Ukraine may
not, in fact, be controlled in the UK.
So far Companies House, the UK’s corporate registry, has
recorded nearly 8500 individuals who are declared ‘persons of significant
control’ of SLPs, which means they have a controlling stake of at least 25%.
More than 1200 describe themselves as British, English or Scottish.
The rest are non-UK nationals, including more than 2000
Ukrainians and more than 1600 Russians. In total citizens of the 15 former
Soviet republics account for around 5500 of the roughly 8500 people who say
they have a controlling interest in an SLP.
Alison Thewliss, the Scottish National Party’s Treasury
spokesperson in the Westminster parliament, is a long-standing critic of what
she sees as the UK’s lax regime of corporate governance.
She said: “The legacy of financial vehicles such as Scottish
Limited Partnerships is – to a large degree – a toxic one. For years the UK
government has failed to properly regulate them, or to provide adequate
resource to Companies House to undertake the necessary due diligence.
“Ministers must take the opportunity during the Finance Bill
to put this right. Failure to do so will only add weight to the suspicion that
this government is happy to turn a blind eye to money laundering and corruption
occurring on its own doorstep.”
Where ‘Scottish’ means ‘shady’
Three years ago an undercover anti-corruption investigator
calling herself Yekaterina met a man in a Kyiv restaurant.
He had 100 kilos of amber to show her.
The semi-precious fossilised resin was Ukrainian – subject
to restrictions on sale – but the man was intending to pass it off as Polish.
It was just a taster of a consignment of a tonne he had on offer.
How could he make the sale ‘clean’? The vendor had a
“Scottish company”, the man explained. Yekaterina, the logic went, was to get
her own ‘offshore' firm. And so the transaction could go ahead out of sight of
the authorities.
The exchange – captured on video and broadcast on Ukraine’s
rolling news channel 24TV – was part of a complex sting by Ukraine’s
anti-corruption agency, Nabu.
The investigation went on to embroil two politicians and
became known as the ‘amber case’. It still rumbles on.
However, the casual reference to a Scottish company will
barely have registered in Ukraine.
That it is because British corporate entities – especially
limited liability partnerships (LLPs) from across the UK and limited partnerships
(SLPs) from Scotland – are ubiquitous in the nation’s scandals.
Essentially the term ‘Scottish company’ in Ukraine has come
to mean something like ‘Swiss bank account’. It sounds a bit shady.
The Confederation of British Industry has already warned
that the abuse of SLPs across the former Soviet Union threatens Scotland’s
reputation as a place to do honest business. But it is also this reputation –
including Scotland’s rule of law – that helped make SLPs popular in the first
place.
Scottish and UK corporate entities are still being heavily
marketed as high-prestige ‘tax-free offshore companies’, despite their repeated
abuse in a succession of money-laundering or corruption scandals.
But their popularity is waning. Two years ago authorities in
the UK – not Scotland, because the Westminster government is responsible for
corporate governance – ordered SLPs to name their beneficiaries.
Even more significantly, Latvia cracked down on the banks
giving accounts to SLPs, LLPs and assorted shell companies from around the
globe.
Earlier this year openDemocracy revealed that entities that
limited partnerships and LLPs from Northern Ireland were picking up some of the
slack. As registrations of SLPs fell, they rose for Northern Ireland limited
partnerships.
The revelation of hundreds of British firms blacklisted in
Ukraine gives some idea of the scale of shell firm abuse and related
corruption.
Last week the country’s parliament passed a new banking law
that outsiders hope will go some way to cleaning up its economy. The
International Monetary Fund is expected to release new lending as a result.
The UK, meanwhile, is left with what an Scottish National
Party MP today calls a “toxic” legacy of shell firm abuse. How many more
scandals involving SLPs or LLPs lie fossilised, like amber, waiting to be dug
up?
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