Money Laundering and Tax Evasion (Azerbaijan)

Nick Smith Excerpts

Thursday 19th October 2017 Commons Chamber

[Dame Margaret Hodge]

I welcome that suggestion and will do that.

Ilham Aliyev remains President to this day, and in February this year he appointed his wife Mehriban as First Vice-President, in effect anointing her his successor. According to Human Rights Watch, the ruling élite

“continues to wage a vicious crackdown on critics and dissenting voices”.

But the Azerbaijani Government do want to be respected by the international community, in part because they want to sell us their oil and gas. That is why they worked to become full members of the Council of Europe, why winning the Eurovision song contest mattered and why hosting the European games in Baku was important. The so-called Azerbaijan laundromat that we are discussing today was a scheme designed to launder money out of Azerbaijan—money used to curry influence and bribe European politicians, lobbyists and apologists, and further to line the pockets of the Aliyev family and their cronies.

The scheme was revealed by the Organized Crime and Corruption Reporting Project, working internationally with newspapers, including The Guardian. The leaked documents covered payments over a two-year period from June 2012 until the end of 2014. The payments amounted to €2.9 billion.

[Nick Smith (Blaenau Gwent) (Lab)]

I congratulate my right hon. Friend, who has shown her usual great resilience in identifying financial skulduggery whenever she can; we worked together on looking at financial chicanery as fellow members of the Public Accounts Committee. Does she agree that much more detailed research is needed on this topic so that every angle and element of this huge finagle is properly understood?

[Dame Margaret Hodge]

I completely agree with that important point.

Money came out of Azerbaijan—nearly half from an account held at the International Bank of Azerbaijan through a shell company linked to the Aliyev family. That bank recently filed for bankruptcy. The other main contributors were two offshore companies with direct connections to a regime insider. It is hard to believe that the money was held legitimately in Azerbaijan.

The money was transferred to a small Estonian branch of Denmark’s largest bank, which is where Britain comes in. The money went into the bank accounts in Estonia of four shell companies, all of which were incorporated here in the UK. Our laws that allow such companies to be established were at the heart of this nefarious scheme. Much of the money then went into the pockets of European politicians, journalists, prominent individuals in international organisations and powerful political Azerbaijani families.

The leaked data show, for instance, that Luca Volontè, an Italian politician who led the European People’s Party group in the Council of Europe, received over €2 million. We know that he was instrumental in lobbying to ensure that a report criticising Azerbaijan’s human rights record was rejected by the Council of Europe in 2013. Several months after the country achieved that veneer of respectability from the Council of Europe, the European Commission announced the construction of the controversial gas pipeline from Azerbaijan to Europe. Volontè is now facing charges of corruption and money laundering in Italy.

Eduard Lintner, a former German MP, founded the Society for the Promotion of German-Azerbaijani Relations. That organisation received €819,000 over the two years covered, and Lintner got a €61,000 cash payment two weeks after returning from observing the elections in Azerbaijan and praising them for being up to German standards. The Council of Europe said the elections marked a

“step forward taken by the Republic of Azerbaijan towards free, fair and democratic elections”.

The reality was that the opposition alliance boycotted the elections, there was voter intimidation and the press was gagged. Lintner has denied any wrongdoing.

Kalin Mitrev, a Bulgarian who lives in London, received €390,000 for so-called consultancy for Azerbaijan. He now sits on the board of the European Bank for Reconstruction and Development that only yesterday agreed a loan to the Azerbaijan Government for €500 million to build a gas pipeline. While he recused himself from the decision and has denied any wrongdoing, his presence as a board member having received money from Azerbaijan makes it very murky and uncomfortable. He is being investigated by the Bulgarian authorities. At the same time, his wife, Irina Bokova, is Director-General of UNESCO. She bestowed one of UNESCO’s highest honours, the Mozart medal, on Azerbaijan’s first lady, the wife of the President, for:

“merits in strengthening the intercultural dialogue.”

I suppose that is an innovative way of describing the use of bribes to stifle criticism and secure international support.

Those people were paid from companies incorporated in the UK: Polux Management LP, Hilux Services LP, Metastar Invest LLP and LCM Alliance LLP. All were registered at Companies House. They are shell companies, sometimes incorporated through our tax haven overseas territories, that are deliberately used to disguise the origin of the money they receive. They are set up by shady and unregulated formation agents. They can engage in transactions while hiding the identity of the real beneficial owners of the company, yet because they have the UK stamp on them they command a respectable status. Our lax controls allow them to prosper and our corporate system allows money to be moved around and used without any questions being asked. That is simply shameful and it is taking place right here, right now in our country.

I am particularly concerned by the trend for unscrupulous people to use Scottish Limited Partnerships—SLPs—to launder money, and to evade and avoid tax. SLPs were invented to help agricultural tenancies in Scotland. Creating an SLP allows the partnership to hold property and enter into contracts, because it gives them a legal personality. But SLPs do not need to name any “natural person”—an actual person—as partners. They can just name companies. They have limited reporting requirements —for instance, they do not need to file accounts at Companies House unless one of the partners is a UK limited company, and while they are supposed to file returns with HMRC, they do not need to pay UK tax and they do not need to have a UK bank account. Of course, HMRC does not check whether accounts are filed.

Our laws allow a secret vehicle to be created to smuggle unexplained wealth into the system, money that is then used for a variety of illegitimate as well as legitimate purposes. SLPs have become a byword for corruption, tax evasion and organised crime. Just look at the facts. There was a 430% increase in the creation of SLPs between 2007 and 2016. In 2016 alone—in that one year—more SLPs were registered than had been registered throughout the 100 years after they were introduced. Bellingcat has looked in detail at the 5,214 SLPs registered in 2016. Ninety four per cent. were controlled by corporate partners, not individuals, and 71% of those corporate partners were based in tax havens. Seventy per cent. were registered to just 10 mailbox addresses in Scotland. They are anonymous and untraceable obscured structures linked to corrupt jurisdictions.

--- Later in debate ---

[The Parliamentary Under-Secretary of State for Business, Energy and Industrial Strategy (Margot James)]

I congratulate the right hon. Member for Barking (Dame Margaret Hodge) on securing this important debate, from which I have learnt the shocking truth about Azerbaijan, and on her forensic analysis.

The Government are committed to making the United Kingdom’s financial system a hostile environment for illicit finance. The National Crime Agency takes allegations such as those identified by the right hon. Lady seriously, and will consider carefully whether recent information would allow an investigation to proceed. The Government pursue a targeted but proportionate level of enforcement that focuses on achieving compliance from companies. We seek to counter financial crime while protecting the dynamism of the UK’s business environment.

[Nick Smith]

Will the Minister give way?

[Margot James]

I will, but I have very little time.

[Nick Smith]

Does the Minister think that she has heard enough this evening to ask the authorities to launch an investigation?

[Margot James]

I must confess that I am not entirely aware of what my powers are in that respect, but if I am so empowered, I will certainly do as the hon. Gentleman suggests.

We want the United Kingdom to be a trusted place in which to do business, and the best place in the world in which to set up and grow a business. The UK has high standards of business behaviour and corporate governance. The overwhelming majority of its 3.9 million companies contribute productively to the economy, abide by the law, and make a valuable contribution to society. In discussing what action to take in response to the minority who abuse the system, we must not undermine its strengths or impose more burdens on the law-abiding majority without very careful consideration.

The Government are active in taking action to tackle misuse. Since 2015, we have implemented a series of reforms to increase the transparency of UK incorporated legal persons and arrangements in order to prevent their misuse for illicit purposes. The reforms include, but are not limited to: the introduction of the publicly accessible register of people with significant control, which the right hon. Member for Barking mentioned; the abolition of bearer shares; the introduction of unexplained wealth orders; and the introduction of the combined register of trust and company service providers supervised by professional bodies, as well as HMRC.

[Margot James]

I have a lot amount of material to cover. I will give way a little later if I have time.

It is too early to measure the impact of many of those reforms, but we expect them to make a significant difference in helping to prevent the misuse of companies and other entities, and in assisting law enforcement agencies with their investigations when misuse does occur.

The right hon. Lady mentioned Companies House. It carries out checks on all information that is received to ensue that it is valid, complete, correctly formatted and in compliance with company law filing requirements. The obligation to ensure the information is accurate lies with the company and its directors. The validation checks serve to help companies to get things right. A company commits an offence if it fails to maintain its registers and keep them up to date.

The UK has a robust system of publicly accessible data. The Government favour an approach that encourages transparency of information, followed by the scrutiny of company information over its lifetime. I appreciate that—

[Nick Smith]

rose—

[Margot James]

I will give way if I have time, although I might cover the points the hon. Gentleman wants to raise.

It might appear that the system is designed around the needs of law-abiding companies, which are the vast majority. I appreciate that it is open to abuse. Maintaining one of the most open and extensively accessed registers in the world is a powerful tool in identifying false, inaccurate or possibly fraudulent information. With many eyes viewing the data, as well as errors, omissions or worse, the information held on the register can be subject to significant policing by a variety of users.

Companies House is always looking at ways to further improve the quality of data. A significant recent development includes the introduction of the “report it now” function, which makes raising concerns easier than ever before.

If irregularities are raised, Companies House follows up with the company in question, and in most cases any inaccuracies are corrected immediately. There were over 2 billion searches of the Companies House register in 2016-17, which indicates that the data are available and under scrutiny. Companies House works closely with enforcement agencies such as the National Crime Agency in sharing data analysis to combat economic crime.

I will now talk about Scottish limited partnerships, which the right hon. Lady raised. I fully recognise her concerns. Over the past year or so, serious concerns have been raised about the use of these partnerships as vehicles for criminality. As a result, my Department launched a call for evidence earlier this year to collect information about the extent of the problem and how the limited partnership legal framework might therefore need to be strengthened. The Government have been considering this evidence and I can confirm that we are actively considering reform. We will announce our next steps shortly.

That said, it is important to mention that Scottish limited partnerships are a popular form of incorporation. I accept that their number has increased over the last few years, which gives rise to perfectly legitimate suspicions, but they are also used by many legitimate businesses across the economy, particularly in the investment and pensions sectors, fulfilling a genuine commercial need.

As the right hon. Lady mentioned in her letter to me at the end of last month, as of June this year, Scottish limited partnerships and a number of other legal entities were required to identify and disclose their “people with significant control”—beneficial owners—to Companies House. This information will form part of a central register that is publicly available, consistent with the requirements already placed on other forms of UK companies since 2016. Our objective is that the requirement will provide transparency over the ownership and control of Scottish limited partnerships.

Scottish limited partnerships are also required to submit a statement at least once a year confirming that their “people with significant control” information on the companies register is accurate. The right hon. Lady highlighted in her letter to me that many companies have yet to comply, but I can assure her that they will be chased down. As this is a relatively new requirement, the build-up of the names into the register of those who own and control SLPs is still under way. Companies House is undertaking compliance activity to ensure that Scottish limited partnerships comply with the new regulations.

In summary, I can confirm that the Government are actively considering options for the reform of these partnerships and will be setting out their approach soon.

Question put and agreed to.