New rules for Scottish Limited Partnerships, seen to counter binary options fraud, face criticism

Maria Nikolova

The House of Lords and lawyers find errors and loopholes in the new rules that require enhanced transparency of Scottish Limited Partnerships, often used as corporate front for fraudulent activities, including binary options scams.

In June this year, FinanceFeeds reported of new rules demanding increased transparency in reporting by Scottish Limited Partnerships (SLPs). Scottish Partnerships (Register of People with Significant Control) Regulations 2017 came into force on June 26, 2017 with the aim to bring SLPs in line with others in the UK, as they now have to provide extra information about the persons with significant control (PSC), that is, they have to disclose the identity of their beneficial owners.

The move has been long awaited by many, as SLPs are often used as fronts for illegal activities, including binary options scams.

The new rules, however, have faced criticism, as exhibited by a recent report by the House of Lords’ Secondary Legislation Scrutiny Committee.

The Committee notes the confusion stemming from the requirements concerning PSC.

“The “person with significant control” test is set as someone with the right to receive 25% of the assets on winding up. In many partnership agreements it is not clear in advance what percentage of assets will be received by an individual partner. Many partnerships provide for the priority repayment of subscribed capital, often to the original partners, with the remaining surplus distributed in different proportions, sometimes prioritising newer younger partners. The percentage of the total assets received by each partner will therefore depend not only on the individual percentages but also on the relative balance between subscribed and retained capital”, the report says.

The report also stresses that such requirements are associated with a bureaucratic process and certain costs, and that there has been “no assessment of the effectiveness and value for money of the bureaucratic process proposed, particularly as compliance costs are inevitably passed on to the customer”.

Another point made in the report is that the regulations were laid on June 23, 2017, and brought into force on June 26, 2017, thus breaching the convention that 21 days are normally allowed between the laying of an instrument and its coming into force.

The new Scottish regulations have attracted scrutiny from law firms too, with a notable example being Shepherd and Wedderburn LLP. According to Peter Alderdice and Roderick MacLeod of Shepherd and Wedderburn LLP the new rules contain a number of drafting flaws or errors that need to be clarified or amended.

Let’s mention one of them – it concerns the Enforcement procedure. Paragraph 16(1)(a) of Schedule 2 to the Scottish Regulations states that it is an offence for any Person with Significant Control (PSC) to fail to comply with their duty to update PSC information supplied about them. However, one of the duties in the provision refers to a regulation containing no relevant duties, rather than to Regulation 13 which contains corresponding duties obliging a PSC to provide relevant information to the SLP where it has not been requested by the SLP. PSCs are still required to comply with Regulation 13 and provide the relevant PSC information, but failure to comply with this duty does not appear to attract sanction.

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