Wednesday January 29, 2020

Fast-track law could create more secret hiding places for dirty money

Limited partnership structures are due a makeover, but obscure ownership structures, insufficient transparency requirements and evidence of international money laundering should sound the alarm

Daniel Murray

Business Reporter

@danieltmurray
9th June, 2019
2
The increase in the registration of limited partnerships in Ireland since 2015 is seen by some observers as an ‘ominous’ development. Picture: Getty

Minister of State at the Department of Finance Michael D’Arcy is preparing to bring a new bill before cabinet which, it is hoped, will result in the popularisation of revamped international investment fund vehicles in Ireland.

The Investment Limited Partnership Bill is an update of a 1994 act, bringing investment limited partnerships (ILPs) in line with ‘international best practice’ and ensuring Ireland remains ‘competitive’ with similar vehicles offered in the likes of Luxembourg and Britain.

Separately, the Department of Business, Enterprise and Innovation has announced a review of the Limited Partnerships Act 1907, which governs the limited partnerships (LPs) from which the ILP structure was developed.

The registration of LPs has skyrocketed at home and abroad in the last few years. They have been heavily implicated in money laundering throughout Britain. LPs and ILPs are the vehicles of choice for private capital in Delaware, the Cayman Islands and Luxembourg.

The Irish government’s forthcoming bill is expected to be very similar to a recent British one. None of this has been discussed in the Oireachtas because the Irish bill was marked as urgent and skipped pre-legislative scrutiny. The Sunday Business Post has not seen details of the new bill.

Limited partnerships are non-regulated entities established to allow for partnerships where some members may have limited liability. LPs are able to carry out business activities in a far less transparent way than regular companies. They are not required to publish accounts, or hold agms. They are tax transparent, meaning they are not taxed directly. Their members can be offshore companies.

Investment limited partnerships are Central Bank-regulated entities currently governed by the 1994 act, which attempted to tweak the limited partnerships structure into an investment vehicle.

Introducing the bill in 1994, then Minister of State at the Department of Finance Séamus Brennan said: “Those intimately involved in the funds industry inform me that the absence of a particular structure has serious contrary effects”. Correcting issues with the original LPs and setting up the structures under a new act would, in his view, make the ILP an appropriate and attractive investment vehicle for international capital.

However, the act proved to be a complete failure. As of last year, there were just seven ILPs registered in Ireland. Well-placed sources say this is broadly blamed on superior ILP-like structures being offered in Luxembourg and Britain.

Open to abuse

Which brings us neatly to the bill currently waiting in the wings. The Irish Funds Industry Association (IFIA) –which has lobbied heavily on the bill – in a recent blog post said it hoped the new bill would “align the structure fully with AIFMD ( the alternative investment fund managers’ directive) and allow for the establishment of umbrella ILPs and the migration of ILPs”.

Umbrella ILPs would allow multiple sub-funds to exist under one fund. The migration of ILPs would allow foreign investors using LP structures elsewhere to move their funds into and out of Ireland easily.

Speaking to this newspaper, IFIA chief executive Pat Lardner said the new legislation was eagerly anticipated by the funds industry.

“The overall objective is to modernise the legislation to enable fund managers seeking to set up regulated investment limited partnerships to choose Ireland, something they are not doing at present,” he said. “The ILP act is widely regarded as outdated relative to European and international norms and needs a refresh to provide greater certainty for investors.”

The concern is whether this legislation is going to facilitate the creation of yet another complex investment vehicle, with vulnerability to tax exploitation and even money laundering. It is suspected that other LP structures in Ireland are already being exploited for these purposes. Those concerns have already played out in relation to LPs in Britain.

Scottish limited partnerships (SLPs) were found in 2017 by the British government to be facilitating a massive Russian money laundering operation that saw billions of proceeds from corruption and crime moved through the country. Separately, SLPs were found to be used extensively in an Azerbaijani money laundering scheme. According to research by Transparency International UK and Bellingcat, “71 per cent of all SLPs registered in 2016 were controlled by anonymous companies based in secrecy jurisdictions such as Belize, Seychelles and Dominica”.

The number of limited partnerships registered per year in Britain jumped from 2,769 in 2012 to 5,650 in 2017. When new beneficial ownership rules arrived in Scotland last year in reaction to the money laundering scandals, research by Richard Smith of the Scottish Herald found that the drop-off in SLP registrations corresponded with dramatic increases in LPs registered in England and the North.

Here in Ireland, those increases were evident as well. Just 87 LPs were registered during 2015, making a total of 1,100. In 2016, the same year that the government closed loopholes to do with Section 110 vehicles, the number of registrations more than quadrupled to 431. In 2017, another 676 were registered. The total number of LPs registered in Ireland has doubled in four years. They now number 2,500.

Journalist Richard Smith has done extensive research for the Scottish Herald on LPs, and has been keeping a close eye on LP activity in other jurisdictions.

“The increase in the registration of LPs in Ireland since 2015 is an ominous development. It is strongly synchronised with a similar rise in abusive LP structures in Britain. It is very possible that many of the new Irish LPs have been created by persons overseas, and purely as secrecy vehicles,” he said.

Michael D’Arcy’s bill is intended to bring Ireland in line with international best practice. Bryan Meade a

British reforms

Britain has moved to implement reforms that include registration of beneficial ownership, transparency requirements for LPs and a new requirement for LPs to show a connection with Britain. However, concerns persist that the structures remain open to abuse.

A spokesperson for the Irish Department of Business, Enterprise and Innovation (DBEI) confirmed to this newspaper that Irish LPs will not be subject to newly transposed European anti-money laundering regulations that require disclosure of beneficial ownership.

The logic here is that because LPs are not legal entities, they escape the rules on beneficial ownership and their partners must register their legal ownership with the Companies Registration Office anyway. However, legal ownership is different to beneficial ownership, and because partners can be offshore companies’ ultimate beneficial ownership in many cases may be impossible to identify.

The Department of Finance said that ILPs as they currently exist are also not subject to new beneficial ownership legislation.

Smith of the Scottish Herald says that the Irish government’s introduction of new ILP legislation chimes with the recent passing of the Private Fund Limited Partnerships Bill in Britain.

“The Irish government bringing forward legislation for bespoke investment limited partnerships looks to me to be the exact same as what happened here in the UK with the private fund limited partnerships,” he said.

“That legislation was basically concocted by American lawyers and steamrolled through the British parliament last year without debate. This is how the industry operates. They are always a few steps ahead.”

Expert witness to the regulatory reform committee of the House of Commons Elspeth Berry and Scottish National Party MP Roger Mullin, both raised their concerns back in 2017 about the PFLP legislation, saying that the abuse of SLPs should have set off alarm bells. Despite this, the legislation was guillotined through the British parliament.

John Devitt of Transparency International Ireland expressed his concern about Irish developments and called for beneficial ownership disclosure rules to be explicitly extended to Irish LPs and ILPs.

“There are few reasons to keep the real owners of investments secret other than to lend assurance to money launderers, corrupt officials and tax evaders that their money is safe,” he said. “Opaque structures like LPs and ILPs have the potential to attract a lot more dirty money into the jurisdiction.”

With such drastic growth in Irish LP numbers, the evident abuse of LP structures in other jurisdictions and the pending introduction of new ILP legislation, a robust debate on the use and potential abuse of these vehicles is urgently needed.

What’s in a name? Partnership types

Partnerships

Partnerships in Ireland are defined as “the relation which subsists between persons carrying on business in common with a view to profit”. They are the default legal status of any business activity between two or more people.

Limited partnerships

Limited partnerships (LPs) are non-regulated entities governed by the Limited Partnerships Act 1907. They were established to allow for partnerships where some members may have limited liability. They are intended for wide commercial use by a range of trading enterprises and fall under the remit of the Department of Business, Enterprise and Innovation. The department has announced a review of the 1907 legislation.

Limited partnership numbers have more than doubled from 1,100 in 2015 to 2,500 today.

Where a limited partnership established under the Limited Partnerships Act 1907 meets the definition of an alternative investment fund (AIF), it is meant to fall within the EU’s Alternative Investment Fund Managers Directive (AIFMD) regulatory regime.

Investment limited partnerships

The Investment limited partnership (ILP) is a regulated partnership structure available for investment fund purposes only. Originally conceived in the Investment Limited Partnerships Act 1994, it is authorised and supervised by the Central Bank of Ireland and subject to the provisions of the EU’s Alternative Investment Fund Managers Directive (AIFMD).

ILP structures have proved unpopular, with only six registered today. The government has drafted a new ILP bill which is due before cabinet shortly.

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