Money laundering and terrorist financing etc

Sanctions and Anti-Money Laundering Bill [Lords] – in a Public Bill Committee at 3:15 pm on 1st March 2018.

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Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 3:15 pm, 1st March 2018

I beg to move amendment 38, in clause 43, page 33, line 12, at end insert—

“(1A) Provision made under subsection (1)(a) may in particular include provision for enabling or facilitating the detection or investigation of money laundering, or preventing money laundering, through limited partnerships registered in Scotland.”

This amendment would ensure that regulations under this section made in relation to money laundering particularly applied to money laundering through limited partnerships in Scotland.

It is a pleasure to serve under your chairmanship, Mr McCabe. I will probably try to move around a little bit while I am speaking to warm myself up. It is wonderful to be able to speak to amendment 38. As colleagues will have seen, it is designed to ensure that regulations made under clause 34 in relation to money laundering also apply to money laundering through Scottish limited partnerships—SLPs, as they are commonly known and as I will call them for the purpose of this speech.

SLPs are a unique form of company. We tabled the amendment because we are concerned that, in addition to their use for modern business purposes—particularly by private equity firms and property investment funds—there appears to be considerable evidence that the huge surge in their use may be linked to money laundering. That concern has certainly been raised extensively in Scotland. It needs to be heard in the House, and action surely needs to be taken.

The key difference between SLPs and other forms of limited partnership is that they have a distinct legal personality; an SLP is able to sue and be sued, but the liability of the directors is still limited. In many respects, principally on tax, the partners within an SLP behave as they would elsewhere in the UK as part of a normal partnership, but the structure enables the company to maintain secrecy. They can also carry out other activities that other partnerships cannot—it can open bank accounts on its own account, for example. SLPs also have limited management participation requirements; the limited partners do not have to be involved directly in management, so there is less of a necessity for accountability there.

There has been some suggestion that SLPs initially proliferated partly for tax reasons. They reduce the liability of partners to UK or foreign tax on income and chargeable gains, as well as to stamp duty land tax. However, the recent increase in their number has been quite astonishing. The number of limited partnerships in Scotland has more than doubled, from just over 6,000 to nearly 15,000, since 2009. Now Scotland has more of those partnerships than England and Wales put together have ordinary limited partnerships.

One worrying matter is the new regime in which companies are required to name a person with significant control. There seems to be varied evidence in this regard: Global Witness suggested that only 20% of SLPs had named a person with significant control, but other commentators have said that 30% are now complying, although that is still an incredibly low compliance rate with an important requirement. It is also interesting to note the very high number of beneficial owners named as PSCs who are either nationals or former nationals of former Soviet countries, or companies incorporated there. That compares with only about 0.01% of all limited companies across the UK. Of course, in and of itself that might just indicate that there is more awareness of this type of partnership in different areas, but the concern that many campaigning groups, lawyers and others have raised is that these SLPs can be used for the purposes of money laundering and corruption.

Transparency International, which as colleagues will know has done a lot of research on the issue, suggests that 71% of all SLPs registered in 2016 were controlled by anonymous companies based in secrecy jurisdictions such as Belize, Seychelles and Dominica. Furthermore, 113 SLPs were used to launder $20 billion to $80 billion between 2010 and 2014 as part of what has been called the “global laundromat”. I will go into some of the different examples in a minute.

Photo of Hannah Bardell Hannah Bardell Shadow SNP Spokesperson (Trade and Investment) 3:30 pm, 1st March 2018

I congratulate the hon. Lady on making an excellent speech. Will she join me in paying tribute to the former Member for Kirkcaldy and Cowdenbeath, our colleague Roger Mullin, who did a huge amount of work on this? Will she acknowledge as well that despite their name—Scottish limited partnerships —these companies have little to do with Scotland? They were introduced by the UK Government under Liberal Chancellor Herbert Asquith in 1907. The operation, regulation and dissolution of SLPs remain exclusively the preserve of Westminster, so it is vital that this legislation goes through and the changes happen.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am very grateful to the hon. Lady for bringing those matters to light; I will return to the point about this being a UK Government responsibility later, because it is enormously important. It is important to raise our recognition of those who have done so much to uncover what has been occurring with SLPs. I also pay tribute to The Herald newspaper, which has done a good investigative job in this regard, and I know that Labour’s Jackie Baillie has expressed her concern about Scotland’s name being used potentially to enable offshore tax arrangements and worse. It is important that we look at these arrangements.

Also related to the hon. Lady’s comment, there is huge concern that the unfortunate link between the name SLP and Scotland itself is potentially darkening Scotland’s name. I understand that there is an advertisement that is run on a Belarus TV station, Varyag, saying,

“A company operating in the UK does not need to register with the tax authorities and is therefore automatically freed from any tax payments on an absolutely legal basis. Having registered a company in Scotland, by using offshore rules, you do not need to carry out any audits and, furthermore, there is no requirement to provide financial reports.”

The TV station stressed the kudos of Scotland and the fact that it is part of Britain:

“As a result of Scotland being part of the United Kingdom it does not fall in to the black list of offshore zones”,

presumably meaning either the OECD blacklist or the EU blacklist.

I will briefly mention a couple of specific cases where SLPs have been shown to be problematic, before looking at the current legal context, why this is a UK Government responsibility, and why we require Government to act and hopefully to accept our amendment. The first, which is very worrying, is the Moldovan case. According to the Organised Crime and Corruption Reporting Project, in November 2014 $1 billion was reported to have gone missing from three Moldovan banks. Hon. Members will know that Moldova is not a well-off country—quite the opposite: although it is one of the most beautiful countries in Europe, it is one of the poorest. The corruption that was revealed in that case was enormously damaging for that nation, which has many governance challenges. The World Bank and the International Monetary Fund suspended financial aid to it after revelations about what had occurred in that siphoning off. Two companies registered on Brunswick Street in Edinburgh—a street I know well, as I am sure others do, too—kept coming up in the records for the case, which has had such a significant impact on that nation.

Another example that is commonly adduced in this regard is the Ukrainian one. A Lancashire-based firm called Fuerteventura Inter, which sounds rather like a football team, appears to have been used as an SLP. It was created in February 2015, and was used to siphon off funds from the sale of cannon shells to the United Arab Emirates. The SLP was an intermediary in that deal. The prosecutors allege that it enabled officials to take a large slice of the value of that contract.

Then there is the Azerbaijani laundromat, which I will come back to later. I am sure colleagues have heard of it, and I am sure we will hear a lot more about it in our discussions next Tuesday. “The Global Laundromat” was a piece of investigative journalism that looked into Russian money being laundered through different shell companies. That was going on until 2014. More recently, an investigation of Azerbaijani companies that came out in 2017 showed how companies including SLPs appear to have been used to hide the real ownership of payments.

This is not just about stealing from very poor people; it is about political influence. Some of the payments from the Azerbaijani laundromat were going to individuals who sit on Council of Europe working groups, including those involved in producing reports about human rights in Azerbaijan. Of course, many of the individuals involved have rejected any accusation that those funds had any influence on them. We will draw our own conclusions from looking at the paperwork and what has been said legally about that matter.

Photo of Hannah Bardell Hannah Bardell Shadow SNP Spokesperson (Trade and Investment)

I declare an interest: I represent my party in the Council of Europe. I spoke to some activists from Belarus, who raised that issue with me and talked about the damage and devastation it is causing in their country. That again highlights why this is so very important.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am grateful to the hon. Lady for raising that issue. It is particularly important that highly respected international bodies are above any insinuation or reproach. It may be that there has been confusion and a lack of knowledge about the provenance of some of those funds, but we need to remove from the system any opacity that could give that impression.

Operation Car Wash, which came up only last month—it is funny that all of these cases use the washing metaphor, but it is clearly because they are about washing out the provenance of money—covered Brazil and Peru. A giant construction firm in those countries paid £1 billion in bribes for, it appears, political purposes, and it appears that some of the payments went through SLPs. When we look at the evidence, we see we need to have a far stronger grip on this problem.

In early summer last year, legislation was introduced by the Department for Business, Energy and Industrial Strategy to try to regulate SLPs, under which they were to be forced to disclose their beneficial owners within the next 28 days or face daily fines. I am concerned that we still do not know how many such firms have genuinely indicated their beneficial owners—I hope we will hear from the Minister on that now. I am not privy to information on how many fines have been levied, and most commentators suggest that not a single business has been prosecuted. Perhaps some have been fined but not prosecuted. Perhaps we can find out more about that.

The Opposition are concerned that more action needs to be taken. To return to our earlier exchange, it is important that the UK Government take responsibility, because they have reserved powers over Scots corporate law. The Scottish Government have asked the UK Government to act, and it appears that previous actions to require more ownership information may not have gone far enough. I hope the Minister will enlighten us on that and support our amendment.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Cities), Shadow SNP Spokesperson (Treasury)

The hon. Lady has already said much of what I was going to say, so I am sure that, if that I am a bit briefer, that will be okay with everyone. We have serious concern about SLPs, and the Bill provides an opportunity to do something about it. When we know there is a problem and an opportunity to put it right, it would be negligent of us as parliamentarians to look the other way.

I understand that, even in the new regime where people with significant control should be registered, up to December 127 or so SLPs had registered via law firms, but 489 had registered via anonymous mailbox addresses, which means that the people with significant control are not there, are barely identifiable and are very hard to trace. We know from recurring stories in The Herald worked on hard by David Leask and the researcher and expert in this field, Richard Smith, that such companies keep the issues, scandals and money laundering behind the scenes, and that it keeps going on. We therefore need to do everything we can in every area to tackle these problems.

There is the broader issue of SLP non-compliance and the inadequacies of Companies House, which we may speak about later in our proceedings. Not having a postcode when registering a company should be a pretty simple compliance issue—the process could be stopped at that point, never mind going into the more technical detail. We therefore need to look at this issue carefully. Never mind all the overseas territories; we are allowing it to happen here, in this country, behind mailboxes in Scotland. Frankly, that is unacceptable. We need to do something about it. If we continue to let it go, the problem will not go away.

We can talk about how we might go ahead with this issue in terms of enforcement, because other countries have tackled it. My colleague Roger Mullin and others have worked on it for many years, and we should take the opportunity to look at it here and now. If the Government are not willing to accept any of the amendments, I urge them to table their own and not to let the opportunity pass.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I am grateful to both Front-Bench spokespeople for their speeches, and I will try to address the detail of the points they raised. The essence of the case made by the hon. Member for Oxford East was about whether the Bill covers SLPs. First, I draw attention to clause 9(5), which confirms that “person” includes individuals, corporate bodies, unincorporated bodies, organisations and

“any association or combination of persons.”

The Bill therefore does include SLPs, and we can make anti-money laundering provisions for them.

Amendment 38, as the hon. Lady set out, makes it explicit that future regulations made under clause 43 have the power to include provisions that enable or facilitate the detection, investigation or prevention of money laundering through limited partnerships registered in Scotland. However, the amendment would have no effect on the powers contained in clause 43. The power to make provision that relates to Scottish limited partnerships for the purposes of the detection, investigation or prevention of money laundering is already contained in clause 43(1)(a).

I recognise that hon. Members have legitimate concerns, as I do, about the transparency of certain Scottish limited partnerships. The hon. Member for Glasgow Central set out on Second Reading that

“SLPs have become a cover for all manner of murky and dubious behaviour.”—[Official Report, 20 February 2018; Vol. 636, c. 93.]

I assure her and other hon. Members that the Government have an active and ongoing reform agenda in this area.

Photo of Hannah Bardell Hannah Bardell Shadow SNP Spokesperson (Trade and Investment) 3:45 pm, 1st March 2018

Does the Minister recognise the reputational damage to Scotland? We have a Liberal Chancellor to thank for that, but it is very important that we make these changes, because Scotland’s reputation is being damaged through no fault of its own and by legislation over which we have no power.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

Absolutely, and that is why it is important that the UK Government act. In June last year, Scottish limited partnerships were brought into the scope of the public register of corporate beneficial ownership maintained by Companies House. That was welcomed by the former Member for Kirkcaldy and Cowdenbeath, who is a leading campaigner on the issue, as was mentioned earlier. He said it was

“the first practical recognition SLPs have been a significant problem”.

That reform further required SLPs to submit an annual confirmation statement that information held on the register is accurate, and to keep the information updated on an ongoing basis. In cases of non-compliance with the duties to deliver information about people with significant control—PSC information—to Companies House and to keep it up to date, officers of Scottish limited partnerships convicted on indictment can face a sentence of up to two years’ imprisonment, a fine, or both.

Additionally, the Department for Business, Energy and Industrial Strategy sought views last year on whether changes need to be made to limited partnership law to further address the concerns that have been raised about misuse of structures, including Scottish limited partnerships. Responses to that call for views are being analysed and options for reform actively considered. BEIS will announce its next steps shortly, and after a response to the call for evidence is published, identified options for reform will be subject to public consultation in the usual way. That process will be used to inform any necessary further reforms to the UK’s treatment of limited partnerships, including Scottish limited partnerships.

I hope that I have addressed in detail the range of concerns about Scottish limited partnerships.

Photo of Alex Norris Alex Norris Labour/Co-operative, Nottingham North

Does the Minister feel that it is possible for just 20 Companies House staff to have oversight of perhaps 400,000 entities under these arrangements?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I would hope that BEIS will address the issue of what resourcing is necessary to do that sort of work. That will be something that the Department will seek to respond to in the consultation.

Photo of Jo Stevens Jo Stevens Labour, Cardiff Central

Is the Minister aware that Companies House has been making large-scale redundancies for the past few years?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

The issue is really about the effectiveness of the regime. As I said, it is matter of what BEIS determines it needs to do to address the problem. Clearly, questions can be asked about the plans that will be put in place when they are forthcoming.

As clause 43 already gives the Government the power to make provision for the purposes of combating money laundering by Scottish limited partnerships, I ask the hon. Member for Oxford East to withdraw the amendment.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury)

I am grateful to the Minister for his comments. I know that he is a very sincere and engaged Minister, but I am concerned that the direct questions that we levelled have not been answered. We asked for an indication of exactly how many of these SLPs had provided that beneficial ownership information. We asked for an update on that, but we have not had it. I also asked for an indication of how many of these SLPs have been prosecuted; I did not receive that, either. I did not receive an indication of how many have been fined under this new regime, which was set up last June. Surely we have had a number of months of operation of that new regime in order to adjudge whether it is truly effective.

I appreciate what the Minister said about BEIS conducting a review, but if the existing system is not working correctly, or if we have doubts about its operation, given the huge damage that these structures already seem to have inflicted, surely we need to have a reference to them in the Bill? We need to show that we are taking this matter seriously, and particularly that the Westminster Government are taking it seriously, in the light of comments from Government figures in other nations and their concerns about the use of SLPs.

I give the Minister one last chance to answer those questions and give that information: the number of prosecutions, the number of fines, and the number of SLPs indicating beneficial ownership information. If we do not get that information, we will have no choice but to press our amendment to a vote.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I am very sorry but I cannot give those precise details at this point. I undertake to write to the hon. Lady, as soon as I can with that information, but I can do nothing from this place at this moment to provide it.

Question put, That the amendment be made.

The Committee divided:

Ayes 9, Noes 10.

Division number 9 Caledonian Pinewood Forest — Money laundering and terrorist financing etc

Aye: 9 MPs

No: 10 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly negatived.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I beg to move Government amendment 7, in clause 43, page 33, line 13, leave out subsection (2).

This amendment removes the provision that prevents contraventions of regulations under Clause 43 (money laundering and terrorist financing etc) from being enforceable by criminal proceedings.

In moving this amendment, I acknowledge the recognition that this House has given to the importance of a rigorous anti-money laundering regime. To ensure the robustness of future anti-money laundering regulations, corresponding powers to create criminal offences are necessary. At the same time, I recognise that Lord Judge and others in the other place expressed significant concerns about the scope of criminal offence powers in the Bill upon its introduction. It is important to note that those concerns were not about the existence of offences for breaching anti-money laundering regimes; instead, they were concerns about the unchecked ability of Ministers to create offences.

The amendment reinstates the power to create criminal offences, while the package of amendments as a whole directly addresses those concerns through additional safeguards, which narrow the scope of and the ability to use these powers. I shall elaborate upon these safeguards, which the Government have discussed with Lord Judge since the passage of this Bill through the other place, and then I will turn to amendments 10, 11 and 12. Before I do so, however, it would be useful to consider how anti-money laundering regulations have operated with criminal offence powers in the past.

In accordance with standard practice, when implementing EU directives on money laundering, criminal offences in this area have been created by Ministers in secondary legislation made under the powers in the European Communities Act 1972. That was done under the negative procedure, with no prior consultation with Parliament and no need to seek Parliament’s consent. That position will be improved for future money laundering regulations made under the Bill. They will now be made under the draft affirmative procedure, so Parliament will consider and vote on them before they come into force. Using the affirmative procedure is a direct response to the concerns raised, to ensure that where changes need to be made, they will be properly scrutinised.

Criminal offences were created by both the Money Laundering Regulations 2017 and their predecessors, the Money Laundering Regulations 2007, which were brought into force by the then Labour Government. As hon. Members can see, the approach has been supported on a cross-party basis in the past. The detailed provisions in such regulations set standards and procedures for regulated businesses. They are designed to prevent money laundering and terrorist financing and to help law enforcement authorities to investigate those crimes, and should also be seen in the context of a separate penalty regime for the key substantive money laundering offences. Such offences are established under part 7 of the Proceeds of Crime Act 2002, which provides for more punitive prison sentences of up to 14 years, for example for those guilty of directly laundering the proceeds of crime. Money launderers are typically prosecuted through those offences as they allow for longer sentences.

Without the power to create new criminal offences in secondary legislation, the enforceability of new regulations would be seriously weakened. That would dramatically lower the effectiveness of the UK’s anti-money laundering regime. More generally, it is not unusual for requirements to be set in delegated legislation that can be enforced using criminal penalties, In the area of financial services, for example, the regulated activities order, made under the Financial Services and Markets Act 2000, specifies which activities are or are not regulated. Carrying on such activities without permission from the regulator is a criminal offence. It remains the position of the Government that it is neither unusual nor improper for Parliament to confer powers of that type to Ministers.

Photo of Helen Goodman Helen Goodman Shadow Minister (Foreign and Commonwealth Affairs)

I just want to clarify with the Minister the status of his conversations with Lord Judge. I do not know if he was trying to give us the impression that Lord Judge had agreed the amendments. I felt on Tuesday that he was trying to give that impression, so I spoke to Lord Judge, who told me that he had indeed had conversations with Ministers, but he did not say to me that he had approved the amendments. Is the Minister now trying to tell us that Lord Judge has agreed Government amendment 7?

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

What I can tell the Committee is that officials have had sensitive conversations with Lord Judge. It is not for us to presume the outcome of his deliberations at this point. I am setting out what we have discussed and the consequence of those discussions. Clearly, Lord Judge will make his position known in his own way in due course.

I would like to set out why the ability to create criminal offences for the UK’s anti-money laundering regimes is necessary. The issue has been considered previously, when the Government consulted specifically on whether to remove the criminal offence provisions in the Money Laundering Regulations 2007. The British Bankers Association stated that removing such provisions would be at odds with the objective of driving an effective anti-money laundering regime.

Further, the Crown Prosecution Service argued that provisions for creating criminal offences in the Money Laundering Regulations that are different from those of the Proceeds of Crime Act 2002 serve a separate and useful function in tackling money laundering. In some instances, prosecuting according to the Proceeds of Crime Act could jeopardise ongoing investigations. It said that in such cases, the ability to prosecute for a regulatory offence relating to defective anti-money laundering counter-terrorist financing systems can be an important tool. Finally, HMRC noted in response to the same consultation that abolishing criminal sanctions for breaches of regulations carries significant risk to its ability to tackle money laundering.

Those organisations, representing industry, law enforcement and AML supervisors, were all clearly of the view that the criminal offences contained within money laundering regulations are a valuable tool in the UK’s wider work to combat illicit finance. Removing the power to create further, appropriately targeted criminal offences through secondary legislation would simply restrict future Governments’ abilities to continue the UK’s existing approach to criminalising breaches of anti-money laundering requirements. The effect would be to preserve the existing criminal offences contained in our current regulations but to weaken our anti-money laundering regime as future regulations are brought into force, whether to address emerging risks or to comply with new international standards.

Hon. Members should also be aware that the amendment is part of a wider package. Government amendment 11, to which I hope to speak very shortly, provides appropriate safeguards around the use of the power. When it is to be used, the appropriate Minister must report to Parliament that, on consideration, there are good reasons for creating an offence and for setting penalties at the given levels; and the Minister must inform Parliament what those good reasons are. Parliament may then consider those reasons before voting to bring the regulations into force. The safeguards were created specifically to address concerns expressed by Lord Judge in the other place. We listened carefully and Government amendment 11 is our response.

Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 4:00 pm, 1st March 2018

I am grateful to the Minister for his clarification. I do not want to go around the houses again, as we did at some length on Tuesday. I am grateful to my hon. Friend the Member for Bishop Auckland for explaining why we are concerned about the lack of accountability in general for measures imposing criminal sanctions throughout the Bill. I recognise what the Minister said about this being a separate regime; it is obviously not the same one as is applied in the case of sanctions. The offences that can be applied are lesser in their extent—for example, we are talking about shorter prison sentences in the Bill—but we still have many of the same concerns that we expressed previously.

There has been some shift on the part of the Government, but I suppose it is difficult for any of us to judge whether the spirit of Lord Judge has been complied with, or whether there has merely been some kind of interpretation of a clutch of some of his words. Certainly we will look at what is written on the tin, but to us it does not appear to constitute recognition of the concerns expressed or the kind of meaningful engagement that we need. We are doing something very significant in the Bill, which in effect creates de novo a sanctions and anti- money laundering regime. Much stronger accountability is needed than is in the Bill, even as amended by the Government. We have the same concerns as we expressed previously, so we will resist the amendment.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury

I acknowledge the outstanding concerns. I think I have set out clearly the rationale, why we need the provisions and how they respond suitably to Lord Judge’s concerns. I acknowledge the genuine difference of opinion, but I have set out the Government’s position and it is now for the Opposition to do as they wish.

Question put, That the amendment be made.

The Committee divided:

Ayes 10, Noes 9.

Division number 10 Caledonian Pinewood Forest — Money laundering and terrorist financing etc

Aye: 10 MPs

No: 9 MPs

Ayes: A-Z by last name

Nos: A-Z by last name

Question accordingly agreed to.

Amendment 7 agreed to.

Clause 43 ordered to stand part of the Bill.

Schedule 2