Corporate vehicles and the organisation of serious crimes for profit: key definitions and legal asymmetries

by | May 26, 2017 | Corporate vehicles, Illicit finance, Law, Regulation | 0 comments

A central element of our project into the misuse of “corporate vehicles” for criminal purposes concerns the legal/policy meaning of these mechanisms and structures, and the extent to which their definitional parameters influence their use in managing illicit finances. We’re especially interested in whether “legal asymmetries”, both across the EU as well as within the UK, impact on the selection, creation and use of particular corporate vehicles in particular jurisdictions for illegitimate purposes. In this post, Liz Campbell outlines some legal/policy definitions that are key to our project, and begins to systematise cross-jurisdictional differences and similarities.

Corporate vehicles

First, “corporate vehicles” means “legal entities through which a wide variety of commercial activities are conducted and assets are held”, including corporations, trusts, and partnerships (OECD, 2001, 12-13). This is an overarching policy term rather than a legal definition. Corporate vehicles are an essential part of a capitalist, free-market economy as they are the means by which investments are made, enterprises are run, and wealth is managed and inherited. In most cases, they are deployed legally, but they can also be used for illegal purposes, to hide the existence of assets, so as to prevent their seizure or taxation. They can also be used to launder money, and to conceal the proceeds or payments from bribery.

Corporate vehicles share common features like separate legal personality, that is, they are legal persons separate from members or shareholders, and they often have limited liability characteristics, in that partners or shareholders are liable only for their investment but their personal assets will not be reachable by the entity’s creditors.

Beneficial ownership

The crux of the issue in relation to corporate vehicles in this context is their capacity to hide the true or ultimate beneficial owner of property, whether illegally obtained or otherwise. There is a lack of clarity in and inconsistency between jurisdictions as to the meaning of “beneficial ownership”. The term, familiar to lawyers in the common law world, is now used much more broadly than its original usage. It originally denoted the beneficiary of a trust, but is now the person who will benefit from or can use a particular asset.

Beneficial ownership is referred to expressly in a number of international conventions, such as Article 14(1)(a) of the United Nations Convention against Corruption and the non-binding but influential FATF Recommendations. The European Union Fourth Anti-Money Laundering Directive (AML4), (which enters into force on 26 June 2017, and will be implemented in our comparator jurisdictions, the UK and the Netherlands) defines the “beneficial owner” as “the natural person(s) who ultimately owns or controls the customer and/or the natural person on whose behalf a transaction or activity is being conducted” (Article 3 (6)). AML4 speaks of the “beneficial owner” as the natural person(s) who ultimately owns or controls 25% of legal entity, or the beneficiary of 25% or more of the property of a legal arrangement or entity. (Member States may decide that a lower percentage may indicate ownership or control).

There is an extensive literature on the scope and interpretation of beneficial ownership. Rather than rehearsing or resolving this, we take a functionalist approach, centring on the control over assets and the benefit accrued. We endorse the view that it should not be interpreted in a narrow, formally legal sense, but rather should be understood “as a material, substantive concept—referring to the de facto control over a corporate vehicle” (The Puppet Masters, p3).

Linked to this definition in the UK is the concept of persons with significant control (PSC). This derives from the Small Business, Enterprise and Employment Act 2015 which requires companies to maintain a register of people “with significant control”. “Significant control”, as defined in Schedule 1A of the Companies Act 2006, includes holding directly or indirectly more than 25% of company’s shares or voting rights, or having the right to appoint or remove a majority of the directors. It also includes an individual who exercises significant influence or control over a trust or firm which does not have separate legal personality and that has significant influence or control over the company. This follows the criteria in AML4. It appears that comparable legislation on the registration of ultimate beneficial ownership will be implemented in the Netherlands in 2018. Whether this increased uniformity in definition combined with initiatives to improve transparency of data will affect criminal behaviour is questionable.

‘Limited liability’

A further key concept is “limited liability”, which, as noted, ensures protection for the assets of partners or shareholders by limiting their liability. This feature may prove attractive for both legitimate and problematic reasons.

There is a distinctive form of partnership with such liability in Scotland only, namely the Scottish Limited Partnership (SLP). This is like a general partnership, in that it comprises two or more partners who carry on business with a view to profit. In a general partnership, however, all partners are jointly and severally liable for partnership debts, whereas in a limited partnership there are two types of partner, and there must be at least one of each. The general partners are liable for debts and obligations of the limited partnership, and the limited partners have liability limited to extent of their capital contributions. The advantage of the SLP is that it has separate legal personality, unlike limited partnerships constituted elsewhere in the UK. This means that the SLP itself can own assets, enter into contracts, sue or be sued, own property, and borrow money. For this reason, SLPs are used in investment fund structures, and in tax structuring. In addition, the SLP’s principal place of business must be in Scotland in order to become registered, but it is possible to migrate this to another jurisdiction following registration and for the SLP’s activities to be managed offshore.

The perception is that SLPs are being misused for dubious purposes, and so the Department for Business, Energy & Industrial Strategy is reviewing them. It is said their number has trebled since 2011, while there was a rise of less than 50% south of the border for general partnerships. In addition, more than 100 firms named so far in the vast Laundromat money laundering scheme are Scottish limited partnerships.

Concluding remarks

What our project will do is to ascertain the degree to which these differentials in legal definition impact on criminal behaviour. Why, and how, do criminal actors choose one corporate vehicle over another? If a “chain” of vehicles is used, where are they getting legal and financial advice? To what degree is there “jurisdiction” shopping? Ultimately, we suggest that the construction of these vehicles per se isn’t the only problem, rather it is their use in particular ways by certain people.