POLICE and HMRC are moving to stamp out Scotland’s lucrative “tax haven” industry as new links with mass money-laundering operations in Eastern Europe have emerged.
Major Scottish law firms are engaged in the business of creating thousands of shell companies for the eastern European market.
Such practices are not illegal and can only be achieved because of a century-old legal loophole that makes Scotland vulnerable to money-launderers and has seen the country advertised abroad as a tax haven.
Background: Scotland as an offshore tax haven
It has led to firms registered in Scotland being linked to major corruption scandals in the former Soviet Union.
In one recent case, a “limited partnership” company in Fife – called the Brook Organisation – has been named as part of an investigation into an £8 million turf war between the nephew of Uzbekistan’s authoritarian president Islam Karimov and a business rival.
Meanwhile, last year, millionaire Ilan Shor was accused of using firms registered at modest addresses in Edinburgh and Inverness to carry out a $1 billion swindle in impoverished Moldova. Mr Shor denied having a role in the fraud that devastated the banks in the former Soviet republic.
Iain Macwhirter: Bit rich for the UK to take moral high ground on corruption
But it has emerged that police and tax authorities have raided Edinburgh and Fife properties used as the front addresses for so-called “Scottish offshore companies”.
One of the properties, in Leith, is home to more than 3,600 companies – including several named in the global probe into alleged looting of the Moldovan banks.
The other, a semi-detached home in Rosyth, was the current registered address of Brook Organisation, and more than 60 additional firms.
Andy Wightman, newly-elected Green MSP for the Lothians, has long campaigned for Scottish company laws to be tightened up, especially for limited partnerships.
In the wake of the UK Government’s corruption summit this week, he said politicians should consider looking closer to home before condemning alleged misconduct overseas.
He said: “In light of current efforts to tackle tax avoidance and evasion, it is often forgotten that Scotland itself provides an effective offshore secrecy jurisdiction. Recent revelations by The Herald highlight the urgency of action to crack down on the abuses that seem to be taking place and which threaten to tarnish the reputation of Scotland as a place to do legitimate business.”
Senior politicians are examining ways to plug the loophole, with former Scottish Justice Secretary Michael Matheson expressing concern about what is an area of law reserved to Westminster.
HMRC and Police Scotland Organised Crime and Counter-Terrorism Unit have previously said they had raided properties in Fife and the Lothians in May last year as part of a money-laundering investigation.
Sources have now confirmed that these raids were at the homes in Leith and Rosyth where Brook Organisation, a limited partnership, was registered.
This type of firm does not need to pay tax in the UK if they do no business in the UK. When owned by entities in countries such as Belize, such firms can be marketed in the former Soviet Union as “Scottish offshore zero-per-cent-tax firms”.
Law enforcement sources have confirmed they are co-operating with counterparts overseas in a bid to follow money trails to fiscal paradises of the Caribbean through Scottish paper companies and limited partnerships.
The Herald approached the occupants in the Leith flat, Edinburgh, where 3,600 firms are registered.
The owners, John Hein and his partner James Stuart McMeekin, ran a company formation business called Cosun Formations Ltd that churned out or hosted shell firms that were later allegedly used in the Moldovan and Uzbek scandals.
Mr Hein, a former Liberal Party candidate, has insisted he is now co-operating with authorities.
Asked to comment on alleged criminality conducted through companies registered at his home, he said: “Yes, it’s unfortunate but we no longer do that sort of business.”
He added: “We were acting as agent for other companies, for other company formations and their agents.
“We’ve been co-operating with the authorities throughout.”
Scottish businesses like Mr Hein’s – and several major law firms – have created thousands of companies, many to be sold as off-the-peg shells on the Eastern European market.
Investigation journalism centre Re:Baltica and Radio Livery have named the firm as part of a turf war over two hotels worth £8m between Akbar Abdullayev, the jailed former playboy nephew of Uzbek President Islam Karimov, and an Afghan tycoon currently under investigation in Latvia for bribing a judge and larceny.
Some 28 Scottish-registered companies were named by forensic accountants hired by the parliament of Moldova to investigate in to the theft of some $1bn from three of the country’s banks.
Five of those companies were registered at Mr Hein’s home at 78 Montgomery Street.
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