Organised crime crackdown on Scottish Limited Partnerships strikes the right balance to protect private investment, say lawyers

Tony McGlennan

Limited partnerships, particularly Scottish Limited Partnerships, are popular as part of the investment funds framework for private equity and venture capital firms. Businesses backed by private equity and venture capital currently employ approximately 692,000 people across the UK.

Concerns have, however, arisen, in recent years that SLPs were being misused by organised crime.

There was an exponential and unexplained rise in registrations of SLPs from the early part of this decade and reported use of the entity as part of large scale money laundering and fraud scandals in Russia, the Ukraine and Moldova.

Accordingly, on December 10, the Department for Business, Energy and Industrial Strategy (BEIS) published its proposals for reform, following a 15-month consultation process examining the issue.

Tony McGlennan, legal director in Addleshaw Goddard’s global investigations team, said it was important that regulation was able to balance the interests of business with deterring criminal abuse.

The theme of the proposals is an increase in the level of anti-money laundering (AML) scrutiny. Under new legislation only persons registered with an AML supervisory body would be permitted to present new SLPs for registration with Companies House.

SLPs which migrate their business abroad would, at least, be required to continue to engage a professional or agent registered with an AML supervisory body, and provide, through that person, a UK service address. However, they will not have to maintain their main place of business in the UK, which the funds management industry argued would restrict investment in an increasingly international market place.

Lastly the Registrar of Companies House is to be given a power to strike off SLPs from the register.  

The proposed reforms build on regulations introduced in 2017 which required SLPs to list upon registration, information about individuals with ultimate ownership or significant control over the partnership. This also includes an obligation to confirm the information each year.

Directly following these regulations there was a marked reduction in registrations of SLPs; 97 registrations made in October 2017, compared to 487 in October 2016, and 616 in October 2015. However representative bodies for legitimate business, such as the British Private Equity and Venture Capital Association, reported that the rate of establishment of SLPs amongst their members remained steady. The early indications therefore are that the reduction may be attributable to “walk away” from organised crime.           

Tony McGlennan, legal director at Addleshaw Goddard, said: “The government must target its measures so as to drive organised crime away without inhibiting legitimate business. The early signs are that last year’s Regulations requiring identification of beneficial owners have had a positive effect. These proposals, in seemingly prioritising proper AML due diligence, also appear to be taking a targeted approach. By requiring that registrations are presented only by persons who are familiar with AML diligence and who are scrutinised by a supervisory body, criminal involvement may be deterred from the outset.

“For example, a solicitor taking on a new client must conduct thorough due diligence before accepting an instruction – and continue to do so if asked to provide a service address for a new partnership.  Importantly though legitimate businesses will not be unduly burdened by these   processes, and of course have nothing to fear from them. The key will be to ensure that these measures are properly checked and audited and resource made available otherwise organised crime will circumvent the controls.”