‘Scotland has become a money-laundering factory for Soviet criminal gun-runners’

The Scottish Government has become so alarmed about such shell firms – usually limited partnerships or SLPs advertised as “zero-tax offshore companies” across eastern Europe – that the Sunday Herald can reveal that last week Finance Secretary Derek Mackay wrote to his UK counterparts urging a crackdown.

Now Mafia monitoring group CRiME has warned that Scotland has become a money-laundering factory for criminal gun-runners hiding behind SLPs.

Journalist Andriy Lavryk, who heads CRiME, said: “For some reason the interests of arms dealers from Ukraine, Russia and the Middle East – and their customers – are concentrated in Scotland.”
Lavryk stressed how hard it is to get infallible information on Scottish arms links but confirmed that corrupt officials and businessmen from across the former Soviet Union – not just the so-called “arms Mafia” – use SLPs and other British “offshore structures”. He cites a source as saying: “All the arms dealers gather in Scotland. Arms billionaires live there.”

Some law enforcement and political sources in Scotland have long been concerned that SLPs – which often exist only on paper – were putting this country on the radar of very serious international criminals.

SLPs are businesses that often start of their lives advertised online in eastern Europe as “Scottish offshore companies”, firms registered in Scotland but with parent companies in the world’s shadiest fiscal paradises such as Belize or Panama.

The Sunday Herald last month revealed there are now more than 25,000 such firms registered, none of which has filed accounts and almost all of which have ownership in secretive offshore jurisdictions.

Tax Haven Scotland

We first exposed SLPs as money-laundering vehicles last year when it emerged such firms had been used to help funnel $1bn (£773m) allegedly stolen from Moldovan banks.

The Herald and Sunday Herald have since revealed SLPs have been allegedly implicated in a Latvian scandal involving the now-jailed nephew of the president of Uzbekistan, and as fronts for websites peddling diet pills dubbed a scam, as well as sites offering to write essays for students.

Lavryk stressed that criminals and corrupt officials and politicians in the former Soviet Union were attracted to “offshore” companies with addresses in the EU, not just Scotland.

Former Soviet criminals – and nervous legitimate business people – will choose any jurisdiction that provides a way of hiding the ultimate owner of assets – and protecting those assets from potential threats, including the taxman.

But he added that there was a “specific” arms element to organised criminals who had shown an interest in Scotland.

Lavryk said: “Scottish offshores have only started to crop up relatively recently in the investigations of law enforcement and independent journalists. "Some offshore companies registered in Scotland have appeared in dubious contracts involving Ukroboronprom, a group of companies belonging to the government of Ukraine and specialising in the production and trading of military hardware, from Kalashnikovs and mortars to tanks, planes and missiles.”

Ukraine: the former Soviet republic is currently in a 'frozen' conflict with Russian-backed separatists

Other sources in Ukraine stress that the prestige and kudos of Scotland and the UK also plays a role in prompting tax evaders and gangsters to use SLPs or English limited liability partnerships.

Anybody controlling an SLP or LLP – which have legal personality – can open an EU bank account. Firms marketing SLPs for around £1,000 off-the-shelf claim the Scottish model has the added advantage of not having to file financial accounts if neither of its partners is a limited company.

Police Scotland and Her Majesty’s Revenue and Customs have raided addresses where thousands of SLPs are registered. Senior law enforcement figures have been aware of the issue for some time – although sources stress any crimes committed tend to be outside their jurisdiction.

The SLPs are routinely used in conjunction with banks in countries like Latvia or Cyprus. So the money they launder may never move through Scottish accounts, sources say. Scottish politicians across party lines have become increasingly concerned about the boom in SLPs – amid fears the country’s international reputation could be tarnished.

How this story looks in print

Holyrood cannot legislate because corporate law is reserved to London.

Roger Mullin, SNP Treasury spokesman in Westminster, said: “It is not acceptable that despite being raised over a year ago no action has been taken to close these loopholes.

“The SNP proposed a Fair Tax Bill to take action against tax avoidance and the UK Government needs to get on with the job of stopping criminals using these methods to move and conceal their money. The Scottish Government has asked the UK to make these changes and the SNP at Westminster will be pushing for urgent action.”

Labour MSP Jackie Baillie agreed. She said: “It appears there has been very little movement on this issue since the Sunday Herald revealed the problems over a year ago. Scottish Labour believes the UK Government must consider whether the law covering limited partnerships needs to be tightened and whether it is being abused by criminals.

“Scotland shouldn’t be in danger of becoming the money-laundering capital of UK.”

Jackie Baillie

Ross Greer MSP, of the Scottish Greens added: “This obscure legal vehicle has made Scotland a haven for a conflict industry the Scottish public want nothing to do with. The Scottish and Westminster governments must take action to prevent SLPs being used for unethical purposes.”

COMMENT: Mafia monitor Andriy Lavryk on why EU must give aid to Ukraine in its battle against corruption

FORMER Soviet mafia adore tax havens. They are keen on “offshore zones” in the whole of the European Union – but they are especially drawn to British ones.
Corrupt officials, business people and politicians in Ukraine use offshore companies to conceal their ownership of assets.
Their wealth – often created through not entirely legal means – is constantly under threat of seizure.
But they can make it harder for authorities to freeze their assets by hiding their ultimate beneficial ownership through a complex web of corporations in, for example, a British offshore jurisdiction.
In Ukraine there was (and probably still is) a tried-and-tested system for skimming from government international contracts using tax haven intermediaries or consultants.
Usually the services of such middlemen consist of nothing more than a signature from a front man. However, such firms receive between 10 and 20 per cent of the value of the deal. In the courts it is very hard to prove that there were no real services provided and that some bureaucrat simply stole the money. But at the same time a government clerk responsible for the deal suddenly acquires some luxury out-of-town real estate.

Kiev

So why does the Ukrainian mafia use European offshore firms?
Well, first, in many countries, such an investment comes with the right to remain in that country and the ability to move around the Schengen zone. Our corrupt officials love the high life in Monaco, loud parties in Ibiza and, above all, London.
Second, European offshore companies escape tough financial monitoring, because our state watchdogs do not suspect anything dodgy when they encounter a little-known firm with an office in London or Edinburgh.
In fact, regulators in Ukraine will only twig what has happened after money has been stolen and evaporated into complex offshore schemes. Right now it is impossible to calculate exactly how much money has been funnelled out of Ukraine using offshore structures registered in the EU or Commonwealth, but it is probably billions.
Basically, this is money stolen from the people of Ukraine and which could have been spent on infrastructure, education, science and health. In the final analysis, people can die because of this.

CRiME's website, with its slogan "Take a look on the dark side".

Moreover, criminal capital undoubtedly seeks to corrupt officials in the EU. This has already happened in, for example, Spain.
But there is also another side to the coin of why EU “tax havens” are booming.
Thanks to rife corruption throughout the post-Soviet space – where property rights are not always
respected – legal businesses do not always feel their assets are safe.
So they try to find some shelter for their property in those places where there is rule of law, such as European offshore zones.
And we should not forget that offshore firms are used by legal Western capital to invest in Ukraine.
So I do not think Europeans should close down their offshore zones.
But they must tighten controls on the companies that work in them. They should demand that such firms show who their ultimate owners are. They should carefully monitor their business.
But Ukrainian corruption is ultimately our problem, not that of the EU or Scotland. So we have to fix it ourselves. And that is what we are doing. Despite stiff opposition from a corrupt bureaucracy, Ukraine is carrying out anti-corruption reforms. And not just because this will please the European Union, which we aspire to join.
Simply the country, effectively at war with a nuclear power, cannot afford to let its treasury be robbed.

Andriy Lavryk is a Ukrainian journalist and the leader of the CRiME project, which documents corruption and criminality.

Translation: David Leask

Picture: How The Herald told of Scottish links to Ukrainian arms export corruption cases