Mon, May 2, 2016

The Impact of the New PSC Regime on Financial Crime Risk and LLPs

The UK is generally seen as a low risk country (Transparency International ranked the UK 10th in 2015) from a financial crime risk perspective, but I’ve often noticed how the regulations around Limited Liability Partnerships (LLPs) make them attractive to criminals. The role of LLPs in suspicious activity has been highlighted in investigations by media organisations (Private Eye 2013, BBC, Global Witness). I’ve come across them too as vehicles used to pay bribes and rig government contracts, or to launder the proceeds of a fraud.

There are currently thousands of LLPs that are controlled not by named individuals but by one or more corporate members registered overseas, often in a secrecy jurisdiction with no publicly disclosed ultimate beneficiaries. This makes it difficult for investors, investigators and compliance officers to identify their real counterparty. According to 2015 data, there are some 3.7 million corporate entities in the UK, including around 60,000 LLPs. We estimate that as many as 10% do not disclose the names of their ultimate beneficiaries. For example, we found more than 1,600 LLPs that are controlled by corporate members in the Marshall Islands. We found hundreds more in the BVI, Seychelles, Belize and Panama.

It is hoped that a new change in the law will have a big impact, forcing many of these entities to disclose their real owners for the first time. A new People with Significant Control (PSC) regime came into force on 6 April 2016. Companies (including LLPs) incorporated in England & Wales will need to disclose a list of the names of the individuals or Registrable and Relevant Legal Entities who exercise control over them, such as individual shareholders with more than 25% of the shares or voting rights, or protectors of trusts which own majority stakes. From 30 June 2016 onwards the registers will be free to access from Companies House. The hope is that the introduction of PSC registers will bring greater transparency which should make it easier to spot financial crime risk. One would hope that banks will make full disclosure a pre-requisite to opening or maintaining an entity’s bank account. These names could be screened against black lists or subjected to enhanced due diligence.

It remains to be seen whether the new PSC regime will really impact on determined criminals. On the face of it, failure to comply can lead to a prison sentence for a director, and sanctions can be taken against PSCs who refuse to comply with disclosure notices from companies. But it looks like there are loopholes which may be exploited. The PSC regime is unlikely to catch out anyone determined to avoid disclosure. The real Mr Bigs will remain hidden.

There are limited exceptions within the law which will allow controlling persons, for legitimate reasons, to remain hidden. For example, individuals connected to a business that conducts live animal testing who fear for their security may request to remain anonymous. Individuals with less than 25% interest do not need to be disclosed as they are not deemed to have a controlling influence.

Another potential loophole is that companies only need to take “reasonable steps” to identify their PSCs. Entities can serve notice on the individuals and Registrable and Relevant Legal Entities who they believe exercise control, and on third parties they suspect might know. They can even withhold voting rights from someone who does not comply. But in practice, there is a danger that many LLPs with foreign corporate members will do the minimum to comply, report that they are unaware of their PSCs and take no punitive action. There is also a real question as to how the authorities will investigate and bring cases to prosecution.

Existing structures such as trusts and foundations used in private wealth management are also covered by the PSC regime. Again, the reporting companies may struggle to obtain full disclosure. These structures are designed to protect the identities of their beneficiaries after all. However, most structures I’ve seen are controlled by a trustee, protector or guardian and this individual would likely be defined as a controlling person. I think we should expect new schemes to emerge which will help controlling parties avoid reporting.

If the PSC regime gains traction and boosts transparency, we can also expect criminals to revert to entirely fraudulent ownership structures, in which the true beneficiary is deliberately removed from all paperwork. One ruse is to use “dead souls” either made-up individuals or unrelated individuals (some have even been deceased) to own assets on their behalf without their knowledge.

The individuals may get paid a fee in return for the use of their “clean” KYC data. A group of five or more such individuals (each with less than the 25% deemed to equate to control) based in the UK could end up owning a Russian smelter or be party to a lucrative sports contract, while the company can legitimately report that it has no PSCs, staying away from the prying eyes of regulators, law enforcement and investigators.

Ultimately, the PSC regime is a step in the right direction, but determined money launderers and criminals will remain many steps ahead.

By William Scott-Gall, Senior Director in Kroll’s Investigations and Disputes practice, based in London. [email protected]

Forensic Investigations and Intelligence

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