EXPLAINER VIDEO: How sham companies are created in the UK to benefit money launderers

If you are a criminal with a big pile of “dirty” money, you can’t spend it until you’ve “cleaned” it. If you don’t clean it, you will quickly end up behind bars.

But cleaning isn’t easy. You probably ought to take some advice from a specialist money launderer.

The launderer will first explain how clean money behaves: it pings between company bank accounts as legitimate businesses buy and sell from one another.

“Make your dirty money look like this,” the launderer will tell you. “Then you can spend it freely.”

So, what you need is a network of sham companies that can circulate money through bank accounts, passing these payments off as genuine trading. The bigger and more complex the network, the more convincing it will be.

The biggest networks are often called “laundromats”.

For the last two decades, several laundromats have been linked to hundreds of billions of dollars in suspected dirty money flooding out of the former Soviet Union, including nations blighted by corruption and organised crime — Russia, Ukraine, Moldova, Kazakhstan, Azerbaijan and others.

As more details have emerged about these laundromats, it has become clear that their most common component parts are not Eastern European or Central Asian companies. Nor are they shell companies in well-known secrecy havens such as Panama, Belize or the Seychelles. They are companies formed in the United Kingdom.

Why? One reason is that using a UK company is a great way to simulate legitimate commerce. Banks have fewer qualms about opening accounts and processing payments for companies from large, bustling and relatively scandal-free economies such as Britain. They are more wary when asked to move big sums of money for firms in notorious offshore secrecy havens.

But there is another, stand-out advantage that UK companies offer.

Specialist company formation agencies have found a way to exploit lax UK partnership law in order to set up anonymous UK shell firms. Though technically registered in Britain, these companies behave very like offshore secrecy companies.

Watch this short video to see how they work:

Here is how they work:

  1. A shell company is set up under UK partnership law, registered to the address of a mail-forwarding firm. This registered address is not the shell company’s actual place of business. In fact, beyond accepting letters in the post, it has no connection to the shell company at all. It is a front.
  2. The shell company is nominally owned by two partners, both named in public documents. That’s not a problem, however, since the partners are not people, they too are companies, usually based in offshore secrecy havens. Though, on paper, they are the shell company’s immediate owners, the two partners, in truth, have no power over it at all. They are nominees, or fronts.
  3. Paperwork for the shell company must be signed by someone who represents the nominee partners. Typically, this is an inexperienced businessperson, a hired proxy who is told little or nothing about the partnership’s real activities. These proxies, too, are fronts.
  4. Together, the three fronts hide the basic information you’d expect to be able to discover about a UK company: its location, its owners and its managers. And all this has been carefully masterminded by the formation agency.
  5. Finally, the set up is completed when a side agreement is issued by the nominee owners, assigning full control of the new shell company to the ultimate customer, who remains in the shadows.

And that’s it! That’s how you can create a UK shell company with all the secrecy of the offshore world but none of the stigma. Pick the right bank, now, and you shouldn’t face too many awkward questions when opening a company account.

This way of setting up an anonymous UK shell company has been replicated tens of thousands of times in the last 20 years, packing Britian’s corporate register with an army of companies about which there is almost no public information.

It’s important to note, however, that not all anonymous UK companies are used to launder dirty money. Creating companies is a recognised and necessary legal activity. And even in cases where laundering is present, there is no suggestion that formation agencies ever knew their customers were up to no good.

As one veteran from the secrecy industry put it, a formation agency is like a Texas gun store: yes, it’s products can be misused by criminals, but the products themselves are not unlawful — indeed they may be popular with many law-abiding business owners.

So, you might be wondering why hasn’t the British government hasn’t stepped in to stop the industrial-scale misuse of anonymous UK companies?

Actually, it has. Well, sort of.

In 2016, Britain became the first country in the world to require companies to publicly name their true owners. This new transparency law was designed to pierce nominee ownership arrangements, shining a spotlight directly onto the ultimate owner.

Problem solved, right? Wrong.

There were many weaknesses with the new law, one of which was that it applied only to certain types of UK companies. While it included modern partnerships, known as LLPs, it excluded partnerships known as LPs, set up using older laws dating back to 1907.

As soon as the 2016 transparency rules came into effect, there was a sharp decline in the popularity of LLPs and a surge in numbers of LPs, especially in Scotland, where local partnership laws were most attractive.

A year later, the UK government extended the ownership transparency laws to LPs in Scotland. And sure enough, the popularity of Scottish LPs fell by 80 percent. At the same time, however, there was a record rise in the number of LPs set up in other parts of the UK, including England and Wales.

At every turn, international money launderers always seem one step ahead of UK law-makers, regulators and law enforcement officers.

Helena Wood, an anti money laundering expert at the Royal United Services Institute, a UK defence and security think tank, says this is because Britain’s political leaders have for years taken a “no-questions-asked approach to money flowing into corporate Britain”.

This has had consequences. “I think the Russia-Ukraine crisis has just brought to the fore the extent to which you cannot separate what is happening ‘over there’ from what impacts ‘here’ [in the UK],” she said.

“It’s part of the cost of living crisis that is affecting UK citizens. This is impacting now on people not being able to pay their bills and not being able to eat. We [in the UK] have, in some ways, propped up a regime by allowing it to use our jurisdiction to wash its money through.”