Corruption: the Price of Dependency

“When plunder becomes a way of life for a group of men in a society, over the course of time they create for themselves a legal system that authorises it and a moral code that glorifies it”. 

Claude-Frédéric Bastiat

This quotation, from the French economist, comes from an earlier time, but it could have been written for the UK of today. Corruption is part of the price Scotland is paying for her current state of political dependence within the UK.

State Capture

This is a story of ‘state capture’ in the UK. Apparently unconnected events, from the appointment of a new member of the House of Lords, to providing a safe haven for international criminals, to avoiding paying taxes, to rewriting the ministerial code, are all part of the same picture. This is a picture of a decaying UK. A picture often ignored by perfectly honourable politicians, economists and others – not out of malice, but because it doesn’t fit with their theories of how they see our world. They do not see the dangers posed.

What then is ‘state capture’? Professor Elizabeth David-Barrett, director of Sussex University’s Centre for the Study of Corruption, describes it thus:

“It’s a type of systematic corruption where narrow interest groups take control of the institutions and processes that make public policy, buying influence not just to disregard the rules but also to rewrite the rules…

“State capture alters the rules by which we all live and any behaviour within the new rules is legal, not subject to challenge.” ¹

State capture is, unfortunately, a developing feature of UK economic and political life, which runs the risk of eventually crowding out legitimate economic and political pursuits. At its heart is massive economic crime and corruption. To understand the significance of this we need to start by answering a very basic question:

Why should we care?

Corruption and large scale financial crime such as money laundering have huge negative impacts on the working of economies and on the politics of democracies. It also has huge impacts on the lives of ordinary people. 

Individuals are the Victims of Corruption

Corruption and financial crime are not victimless crimes. Writing about the opaque and often misunderstood world of money laundering, investigative journalist Oliver Bullough, in his book ‘Butler to the World’, quoted Alison Barker², Director of Specialist Supervision at the UK’s Financial Conduct Authority from 2019, as follows:

“Why does money laundering matter?… It pays for human trafficking. It facilitates drugs. It cheats society of a legitimate economy. Money laundering deprives our schools, hospitals and roads. It causes violence and intimidation – it makes our communities unsafe.”

How can money laundering do all of that and more? Because it is the method by which criminal money is made to look legitimate. It is carried out with the connivance of banks, large accountancy companies and legal firms, and a political elite, including successive UK governments, willing at best to turn a blind eye but all too often to accept fat fees or party political donations from serving the interests of those with criminal assets needing laundering services.

It impacts Scots every day of the week, such as the vulnerable elderly who are defrauded of their savings by organised crime, or the communities that are being exploited by drugs barons. And every year billions of pounds of potential tax revenues are lost due to large scale tax evasion, reducing the amount of money available for public services and investment. We should care more and do more.

Why Does the UK Not Have an Anti-Corruption Authority?

There is no country in the world completely free from financial crime and corruption. In some countries, when corruption is exposed it can lead to seismic political change. For example, The Maidan revolution³ of early 2014 in Ukraine saw the overthrow of then President Victor Yanukovych who, among other matters, was accused of huge levels of financial corruption⁴ and cronyism⁵. After his overthrow, Ukraine established a significantly resourced National Anti- Corruption Bureau in October 2014. 

The UK, despite the scale of financial crime, money laundering and political corruption, has no equivalent overarching anti-corruption authority with sufficient resources to act to prevent corruption and track down the corrupt and criminal. Indeed, the UK Government has specifically rejected calls to establish one. The UK has a great deal of legislation and regulations that look good on paper, but which are not sufficiently enforced.

Alarmingly, the devolution settlement for Scotland specifically excludes the Scottish Parliament from having any powers over money laundering and over a range of important institutions such as Companies House and HMRC, which are supposed to be bulwarks against large scale, institutionally-based financial crime. That is why business vehicles used to front criminal activities, such as Scottish Limited Partnerships (SLPs), cannot be controlled from Scotland under the current constitutional arrangements. Politically, the buck stops entirely with the UK Government. This encourages a political helplessness that is harmful to Scotland’s economy and society. SLPs harm Scotland’s reputation abroad, but the UK Government denies Scotland the powers to act.

In terms of the most significant of political change in recent years, Brexit, there has been much speculation about the involvement of Russian money in the referendum of 2016. This has carried over to post-referendum concerns about the way in which a hard Brexit was encouraged. Take one example. The Tory Government from around 2016 onwards became very close to the Legatum Institute, a Mayfair based think tank. According to news reports, it was funded largely by the Legatum Foundation, registered in Bermuda and controlled by a company in the Cayman Islands⁶. It is alleged that some of its funding emanated from Russian money made in the aftermath of the fall of the Soviet Union: a period sometimes referred to as ‘disaster capitalism’⁷.

This think tank (which reportedly breached its charitable objectives by publishing a report about the benefits of free trade after Brexit⁸) has according to reports helped shape the approach to a hard Brexit, supplied staff to assist government, and had particularly strong connections to key former cabinet ministers including Michael Gove MP. In a remarkably short space of time, it grew to be a significant force in the thinking of senior Tory MPs and UK Government Ministers⁹. It has been alleged that the institute was behind a letter from Boris Johnson and Michael Gove to then Prime Minister Theresa May encouraging a hard Brexit¹⁰. When Michael Gove was challenged about his connections, he gave the remarkable response that “The blessed sponge of amnesia wipes the memory slate clean.”¹¹ This style of influence on government policy is a good example of state capture.

Lest the reader think this is a rare and perhaps untypical example, the UK Parliament’s Intelligence and Security Committee published a report on Russia in 2020¹². Although significant parts were redacted, the following extracts from paragraphs 51 and 54 confirm the extent of concerns.

“51. It is not just the oligarchs either: the arrival of Russian money resulted in a growth industry of enablers – individuals and organisations who manage and lobby for the Russian elite in the UK. Lawyers, accountants, estate agents and PR professionals have played a role, wittingly or unwittingly, in the extension of Russian influence which is often linked to promoting the nefarious interests of the Russian state. A large private security industry has developed in the UK to service the needs of the Russian elite, in which British companies protect the oligarchs and their families, seek kompromat¹³ on competitors, and on occasion help launder money through offshore shell companies and fabricate ‘due diligence’ reports, while lawyers provide litigation support…

“54. Several members of the Russian elite who are closely linked to Putin are identified as being involved with charitable and/or political organisations in the UK, having donated to political parties, with a public profile which positions them to assist Russian influence operations. It is notable that a number of Members of the House of Lords have business interests linked to Russia, or work directly for major Russian companies linked to the Russian state – these relationships should be carefully scrutinised, given the potential for the Russian state to exploit them.”

Recent sanctions announced on Russia and Russian Oligarchs in the wake of the Russia-Ukraine war, however welcome, have not eliminated concerns about the continuing connections of the UK elite, including outgoing Prime Minister Boris Johnson¹⁴, to Russian oligarchs.

Economics

Corruption, money laundering and related economic crimes are massive in scale and endemic in the UK. They distort the operation of markets to the disadvantage of those honest businesses and consumers that play by the rules. At the end of the day, it is the ordinary citizen who has to pay the price.

Most studies have tended to conclude that corruption reduces the rate of economic growth¹⁵ by a considerable margin. By doing so, it reduces the amount Scotland has to invest in health treatments, in schools, in the cultural sector. This matters for our day-to-day lives. 

For example, if improved economic performance led to a mere 1% increase in the Scottish Government’s current devolved budget, it would pay each year for the equivalent of 1,000 additional hip replacements plus 1,000 additional breast cancer treatments, plus building 100 state of the art inclusive play parks, plus 10 new schools, plus increased investment elsewhere or tax cuts. The gains from closing down financial corruption and crime would be considerable.

Where lowering the level of corruption promotes economic growth, citizens and policymakers have the means, the agency, to influence the process: fighting corruption, improving governance, advocating democracy and attracting trustworthy foreign investors. 

Unethical Behaviour

Another form of financial wrongdoing is unethical behaviour. The scale of such behaviour, manifested in particular by banks, large accountancy firms, legal firms and others towards their clients, has been growing in the last 20 years and became particularly evident following the financial crash of 2008.

Ian Fraser’s magnificent book “Shredded: Inside RBS the bank that broke Britain”¹⁶ details the unethical behaviour of RBS and others. This unethical and at times illegal behaviour of banks resulted in putting large numbers of viable law abiding firms out of business has been clearly documented in the film “Banksters”¹⁷.

Such behaviour has done much to undermine consumer trust in the whole financial sector. It is damaging to potential customers because it deters them, for example, from taking out insurance policies that they really need, or from investing their savings in advantageous ways.

However, matters such as corruption and ethics no longer feature in the world of many academic economists and economic analysts, who believe everything can be reduced to linear equations and spreadsheets. This is a failure of modern economics.

We need to recapture the Scottish tradition of political economy. Adam Smith had a profound understanding of the importance and connectedness of ethics, the law, individual and institutional behaviour. To understand what is happening to the Scottish economy today, why dependency has bred a helplessness in the Scottish psyche, we need to recapture this broader understanding of the economy.

Undermining Society

There is much evidence that in recent years people have been losing trust in political and financial institutions. When a Prime Minister consistently lies, trust in those elected to govern is tarnished. When he seeks to re-write and water down the Ministerial Code, he is seen to act in his own self-interest, not the public good. When billionaire chancellors and oligarchs seem able with little effort to avoid the rules and laws of the land while enriching themselves at the expense of the typical law abiding citizen, is it any wonder trust is being destroyed? 

Until very recent times, the thought that a Prime Minister could blatantly lie to Parliament, or that ministers such as Home Secretary Priti Patel could break the ministerial code¹⁸ with no consequences, would have been unimaginable. Yet, this is now the world we live in. Similarly, the appointment of Boris Johnson’s associate Evgeny Lebedev, son of the Russian oligarch and former high-ranking KGB officer Alexander Lebedev, to the House of Lords, despite warnings from MI5¹⁹, seems typical of how cronyism can now trump security in the UK.

As recently as 6 November 2021, an Insight investigation by The Sunday Times and Open Democracy was published. It reported further evidence of the abuse of appointments to the House of Lords.  It said of the Conservative Party:

“wealthy benefactors appear to be guaranteed a peerage if they take on the temporary role as the party treasurer and increase their own donations beyond £3 million. In the past two decades, all 16 of the party’s main treasurers – apart from the most recent… have been offered a seat in the Lords.

The role of Conservative treasurer has become the most ennobled job in Britain — ahead of holders of the great offices of state, leaders of the country’s institutions and charitable organisations and even former prime ministers.”

Indeed, since 2010 up to the end of 2021, the same story revealed 22 major Tory Party donors, 5 Liberal Democrat donors and 2 Labour Party donors were ennobled.

It is not possible to put a price on ethics, but that does not make it any less valuable. It is the law-abiding citizens who are doing most to protect our democratic system, and it is for them that we must tackle the corruption in our midst.

Scale of UK Economic Crime

It is well-nigh impossible to put an accurate figure on economic crime in the UK. Much of it is hidden from view. The UK Government’s National Crime Agency (NCA) estimated in 2017 that the current annual extent of UK fraud was £190 billion per year²⁰. 

It is a similar picture with money laundering. Even the National Crime Agency is far from clear about the scale. In one publication, the NCA has estimated there is £100 billion per year of money laundering²¹. However, as the NCA’s own 2020 National Strategic Assessment recognises, London’s position as a major international financial sector makes it likely that “there is a realistic possibility [money laundering] is in the hundreds of billions of pounds annually“²². Put simply, the scale of economic crime and money laundering dwarfs the entire annual budget of the Scottish Government.

The UK economic system has become very vulnerable to tax evasion. Not by the average citizen who is directly taxed on their wages, and who pays the VAT on their individual purchases, but by those behind economic crime, money laundering, or who use every device available to dodge paying taxes in this country. The so-called tax gap – how much should be gathered in taxes minus what is actually collected – is estimated at £34.8 billion for the year 2019-20 by the UK Treasury²³. Scotland, of course, carries part of this burden: and this gap represents money lost that could have been used to invest in the country, or to fund tax cuts.

A European Union report of December 2017 dealing with corruption among member states, defined it in the following terms.

“Corruption takes many forms, such as bribery, trading in influence, abuse of functions, but can also hide behind nepotism, conflicts of interest, or revolving doors between the public and the private sectors. It constitutes a threat to security, as a potential enabler for crime. It acts as a drag on economic growth, by creating business uncertainty, slowing processes, and imposing additional costs.”

In recent times, the awarding of contracts for equipment needed due to the Covid 19 pandemic has come in for much criticism on the grounds of corruption. For example, according to a report by anti-corruption organisation Transparency International on UK Government contracts, potential corruption concerns included:

“Twenty-four PPE contracts worth £1.6 billion [which] were awarded to those with known political connections to [the] Conservative Party.

“Three contracts worth £536 million [which] went to politically connected companies for testing related services.

“Between February and November 2020, 98.9 percent of COVID-19 related contracts by value (£17.8 billion) were awarded without any form of competition.

“Fourteen companies incorporated in 2020 received contracts worth more than £620 million, of which 13 contracts totalling £255 million went to 10 firms that were less than 60 days old.”

As recently as April 2022, London Economics claimed that PPE equipment procured by the UK Government which subsequently proved unusable cost every family in the country the equivalent of £310²⁴. 

It could be argued, of course, that examples relating to the pandemic may be highly untypical. But the 2017 report from the European Union (cited earlier), was the largest pre-pandemic comparative survey of the 28 EU states – when the UK was still a member – and over 28,000 respondents provided responses to a series of detailed questions. Its findings included the following.

The range of respondents who believed it is unacceptable to give a gift, do a favour or pay extra money to secure a public sector contract ranged from 84% from Finland, at one end of the spectrum, to a low of 34% in Latvia.  Some 65% of UK respondents considered it unacceptable. Finland had the strongest ethical views by this measure. Perceptions of the UK (well before the controversies regarding Covid 19 contracts), point to considerable scope for strengthening.

When asked the extent to which respondents considered corruption to be widespread, Finland again led the way, with only 21% of respondents believing corruption was widespread. This compares with the extreme of Greece where 96% thought it was widespread. Surprisingly, perhaps, more than half, 55%, of UK respondents considered corruption to be widespread.

A related concern is the ‘revolving door syndrome’ in the UK where politicians and senior civil servants have conflicts of interests as they use their contacts in the business world to secure directorships or other favourable business positions. Sometimes, this includes providing favours to businesses by way of access to government decision-makers in the hope of some reciprocal benefits. Professor Elizabeth David-Barrett has written compellingly on the subject²⁵.

Corruption Index

Each year since 1995, Transparency International has published its Corruption Perception Index²⁶. This ranks countries in terms of perceived public sector corruption. For each of the 27 years from 1995 to 2021 inclusive, small-medium sized countries have dominated the top ten least corrupt countries. Indeed, Denmark, Finland, New Zealand, Singapore and Sweden have been in the top 10 least corrupt countries each and every year. Countries of similar size and with advanced economies like Scotland have been able to make decisions and act in such a manner as to ensure they are leading the way in terms of limiting the extent of public sector corruption.

It is also relevant to note that such less corrupt countries are also among the most successful economies in the world. It is good for business to eliminate corruption.

International Corruption Impacts Lives

International corruption has far more than economic consequences. For example, Transparency International have claimed that corruption within health services alone costs the lives of 140,000 children across the world each year²⁷.

There is no country in the world that is devoid of financial crimes and corruption. But that is not an argument for turning a blind eye as the UK authorities at times do, in the following specific ways.

Westminster Facilitates International Financial Crime

The Westminster Government has a track record of being unwilling or very slow to react against agents of corruption within the UK. Indeed at times it could be said to have facilitated corruption. Although a long-standing issue, a key moment came in 2008 in the wake of the banking crisis. Two events highlight this.

The first was the introduction of so-called ‘Golden Visas’ by Gordon Brown’s Labour Government in 2008 during the financial crisis.  There was nothing new in having visas established to attract very rich investors. Many countries do it. But the Labour Government failed to attach to the measure sufficiently effective screening of applicants and the sources of their wealth. It was easy for those who had amassed billions in ill-gotten gains to find a protective home in the UK because the UK Government had opened the floodgates. More than 12,600 have been issued since 2008 and many commentators, from investigative journalist Oliver Bullough to The Daily Telegraph, have identified loopholes that are attractive to those with dubious assets.  Recently, The Daily Telegraph²⁸ wrote that,

“Websites now allow the global rich to scan through different citizenships like items on a menu, with each country listed by price and various benefits on offer.

Visitors to Best Citizenships, for example, are told that the UK golden visa scheme is “the fastest in the world”, with a typical application turnaround time of one to three weeks.”

Little wonder it is so fast given there are inadequate checks. Unsurprisingly then, it was 2008 that opened the floodgates to oligarchs and kleptocrats. But that was not all.

In 2008 the hundred-year-old Scottish Limited Partnerships (SLPs) saw a burgeoning of registrations in Companies House. What had been a rather specialist form of partnership, established in 1907, suddenly saw thousands upon thousands registered each year – because it had become the opaque business vehicle of choice for international corruption, money laundering and crime. As reported by The Herald newspaper’s David Leask over a number of years, SLPs have come to be at the heart of large-scale international crime.

For example, 113 SLPs played critical roles in the massive Russian ‘Laundromat’ money laundering scheme that moved $20.8 billion out of Russian banks between January 2011 and October 2014²⁹. One of those allegedly involved was Igor Putin, cousin to the Russian President.

It is worth noting here that ordinary citizens have to produce two official documents, one to confirm their identity and a second to confirm their address to satisfy money laundering requirements before opening a simple High Street bank account.  Once opened, banks are able to monitor the accounts of ordinary individuals on an ongoing basis. In contrast, however, people like oligarchs, kleptocrats or leaders of crime syndicates, have been able register a Scottish Limited Partnership at Companies House, to be used as a front for large scale money laundering, without having to state, let alone prove, their identity. Nor is there any check that a registered address is legitimate. In addition, financial transactions can be conducted, and kept, in secret.

Besides the massive Russian Laundromat example, SLPs have been found to be involved in:

• Operating paedophile websites;
• International mail frauds targeting the vulnerable elderly;
• A major Moldovan banking fraud;
• Ukrainian arms deal kick-backs;
• A major corruption scandal in Latvia involving the nephew of Uzbekistan’s President Islam Karimov; and
• A billion-dollar copyright case in the United States.

And so the list could go on. All dragging the good name of Scotland through the mud.

Despite all of these examples being put on the record during a debate on the Criminal Finances Bill at Westminster in 2017³⁰, not only did the UK Government fail to act to effectively deal with SLPs, but they moved to introduce private fund limited partnerships (to satisfy the requests of City of London financiers) that are no better regulated than SLPs!³¹ 

We are far from aware of all the countries that are the bases for some form of nefarious association with SLPs, but we are aware of the following countries being involved since 2008: Belize, Dominica, Estonia, Hungary, Israel, Latvia, Lithuania, Marshall Islands, Moldova, Nevis, Russia, Seychelles, Ukraine, and Uzbekistan.

Given the recent events in Ukraine, it is useful to point out that in early 2017 The Herald³² revealed that the Ukraine National Anti-Corruption Bureau accused a SLP, Portvilla Trading, as acting as a fictitious intermediary and skimming large sums from an arms deals.  This was part of a much wider crackdown on corruption in Ukraine. Calls on the UK Government to intervene fell on deaf ears. Astonishingly, Portvilla Trading is still registered as an active SLP at Companies House, but with no named directors, no persons of significant control and no financial filings. In other words it is completely opaque, but still registered as active. The only record made in its 10 years of registration was a change of addresses from Edinburgh to 44 Main Street, Douglas, South Lanarkshire, in 2017³³.  This same address is the registered address of many hundreds of SLPs, but is used without the permission of the actual owners.  Companies House have refused to act.

The abuse continues. As an article in The Times in October 2021 by David Leask, Richard Smith and Thomas Rowley pointed out, German prosecutors have claimed a SLP was being used to launder tens of millions of pounds scammed from Britons and other Europeans over the internet. As the article states³⁴,

“The German-led investigators say more than €10 million a month was stolen through fake get-rich-quick websites promising returns of up to a hundredfold. They have identified hundreds of victims, including many in the UK.”

These are not victimless crimes. It is the innocent, the vulnerable, the law-abiding citizen who is paying the price of allowing such corruption to thrive.  But the voices of those people carry little weight against those in the financial world who are happy to profit regardless of the damage to society. It is still possible to register SLPs connected to offshore companies; to maintain a shroud of secrecy and to have no requirement to share any financial information with the authorities.

Legal Threats Used Against Journalists

Why is more attention not being paid? Why are there not more David Leasks and Richard Smiths out there writing and speaking about such matters? Part of the answer is that laws exist in the UK that allow the very rich to threaten private prosecutions in the knowledge that they can ruin journalists and newspapers very readily for exposing their actions. They don’t even need to win at trial, as in many cases the defending journalists and newspapers can’t afford the huge costs of mounting a defence. Put simply, if someone like a Russian oligarch hires an army of leading QCs, solicitors, private eyes, all willing to take fat fees to support the corrupt and launch a private action against a journalist, what chance has an individual journalist or an impoverished newspaper got? We are aware of at least three cases of stories being suppressed in Scotland in such circumstances. 

This is a significant threat to investigative journalism and indeed to our democracy.  It is also an example of Claude-Frédéric Bastiat’s dictum that “over the course of time they (the corrupt) create for themselves a legal system that authorises it”.

In recent times there have been growing concerns about the threat posed by litigation known as Strategic Law Suits Against Public Participation (SLAPPs), where oligarchs, for example, have considerable protection to launch expensive actions against journalists and others. This poses a potential threat to a society that values free expression and access to information in the public interest. It is an example of how state capture can involve the creation and use of a legal system that protects those wanting to hide the truth of corrupt activity.

Mini Umbrella Companies

SLPs are not the only type of business vehicle to pose a threat to Scotland. Others, such as Mini Umbrella Companies (MUCs), also make Scotland susceptible to corruption and organised crime. MUCs have been actively involved in defrauding the tax system of hundreds of millions of pounds, and – according to reports from the BBC radio programme File on 4³⁵  and The Guardian³⁶  – in England thousands of them have been involved in organised crime, ripping off huge sums from England’s Test and Trace system at the taxpayers’ expense.

MUCs are positioned between workers and recruitment agencies supplying staff to other private companies. This has included supplying thousands of staff to private firms awarded large test and trace contracts in England. These umbrella companies can then create further subsidiary opaque MUCs which become the means of defrauding the taxpayer by enabling illegal tax breaks and other avenues for taxpayer fraud.  Because of their exploitative nature, the TUC has called for their abolition³⁷.

Worryingly, MUCs with a similar modus operandi to those in England have been appearing in Scotland. These are Scottish-registered companies, with a single Philippines-based director, that make no financial disclosures before being voluntarily dissolved and often replaced by yet another MUC. A merry-go-round of exploitation. The Times (Scotland) had a front page article reporting on the encroachment of MUCs into Scotland³⁸. This article included the revelation that over two hundred MUCs were registered at a single address in Kirkcaldy and over 100 at a private address in Lochgilphead.

However, although complaints were made to the police, since no crime had as yet been identified within Scotland, current constitutional arrangements mean that MUCs remain solely the responsibility of the UK authorities, specifically HMRC and Companies House. There is no overarching body in Scotland with the task, authority and resources to undertake anti-corruption prevention work. We may suspect MUCs are created for nefarious purposes, but nothing is being done to investigate and prevent their possible criminal activity.

Big UK Firms Behaving Badly

Lest it be thought that bad behaviour is the preserve of traditional types of organised criminals, in the UK there are major culprits within the UK’s established financial sector. This claim is based on published data from UK regulators that can be readily accessed using ‘Violation Tracker UK’³⁹. 

There has already been much written, not least by the Scottish investigative journalist Ian Fraser⁴⁰, about the questionable behaviour of banks, since the crash of 2008 in particular. The work of investigative journalist Oliver Bullough, which included exposing the role of some within the legal profession, has also been referenced here.

And, in this context, the role of some major accountancy firms should also be questioned. Considering only the offence of ‘Accounting Fraud or Deficiencies’, we find that six major accountancy firms have faced multi-million pound penalties from regulators over the period 2015 to mid-year 2022. The following table summarises this.

This raises concerns as to the extent to which these firms continue to receive lucrative government contracts across a wide range of activities. It would appear to indicate that offence histories are not taken into account in the procurement process.

However, there is some indication that the Scottish Government is beginning to act even if the UK Government is not. An article in The Herald revealed Scottish Government action has led to KPMG stepping back from future Scottish Government contracts⁴¹.

In January of 2022 Professor Prem Sikka summarised the situation in these terms.

“Corruption is institutionalised in the UK. The finance industry routinely fleeces people by mis-selling financial products, money laundering and forging customer signatures. The corporate sector has its own private police force in the form of auditing firms who supposedly act as watchdogs highlighting financial irregularities. Accounting firms don’t bite the hand that feeds them and it is hard to recall any malpractices exposed by them. Even worse, they themselves engage in frauds and irregular practices.

“Big accounting firms dominate the state guaranteed markets of external auditing and insolvency. Fees are guaranteed even though the regulator, the Financial Reporting Council (FRC), says that 29% of the audits delivered by the seven largest audit firms – BDO, Deloitte, Ernst & Young (EY), Grant Thornton, KPMG, Mazars and PricewaterhouseCoopers (PwC) – fail to meet the basic standards.

“Accounting firms have been doing audits for over a century, but still can’t deliver robust and honest audits. Accounting scandals at BHS, Carillion, Thomas Cook, Patisserie Valerie, London Capital and Finance, Quindell, Autonomy, Rolls Royce, BT and Tesco provide a glimpse of audit failures. Puny regulatory fines have emboldened the firms”.⁴²

The price of dependence on the UK has been huge. But this also raises the question of what we should do with the powers of independence.

What Can Be Done?

“Every time we turn our heads the other way when we see the law flouted, when we tolerate what we know to be wrong, when we close our eyes and ears to the corrupt because we are too busy or too frightened, when we fail to speak up and speak out, we strike a blow against freedom and decency and justice.”

Robert F. Kennedy

Scotland must not turn its head the other way.  We have been paying too high a price for our political dependence, and it is time for change. We must look to the future.

There are many possible actions open to an independent Scotland. For example, 

1. Establish an Anti-Corruption Authority

Article 6 of the United Nations Convention Against Corruption stipulates that States Parties should ensure the existence of a preventive anti-corruption body⁴³.

The UK, like most other countries, is a signatory, but relies on a disparate grouping of regulators and crime enforcement bodies. These include: Companies House, HMRC, the Financial Conduct Authority, Financial Reporting Authority, Financial Services Authority, Gangmasters and Labour Abuse Authority, Office of Financial Sanctions Implementation, Prudential Regulation Authority and Serious Fraud Office. However, there is no over-riding authority with the necessary powers and the necessary resources to undertake the task of joined up corruption prevention.

And there are constitutional issues. At present, none of the above agencies is devolved. This prevents the Scottish Government from dealing in an effective way with a wide range of financial crimes and corruption, as witnessed by the earlier examples relating to SLPs, MUCs and accountancy firms.

An independent Scotland could enforce key standards of behaviour, and set up a single Anti-Corruption Authority to be responsible for upholding them. If Ukraine can have an anti-corruption body, so can we.

2. Duty of Care

Scotland could establish in law a strengthened duty of care regime to regulate major financial institutions such as banks. This should cover not just individuals, but businesses, too, and would have the specific aim of ensuring the interests of customers – both large and small – are protected from unethical behaviour. 

3. Reform Limited Partnerships

Scotland could, and should, act to ensure Scottish Limited Partnerships and similar business vehicles are either abolished completely or fully reformed once independence is achieved. Reforms should include full and transparent registration data, full and transparent annual financial statements, and full and transparent information on where ownership lies. There should be serious penalties for fraudulent attempts to register.

4. Strengthen ‘Unexplained Wealth Orders’

Since 2017 Unexplained Wealth Order legislation has been in place in the UK, and recently updated in wake of Russia’s invasion of Ukraine. But it has had, at best, very modest success. Most large unexplained wealth remains untouched. Scotland could set up its own regime come independence, but one that is more strongly focused and, importantly, appropriately resourced. 

Properly resourcing such efforts could deliver considerable returns.  In evidence to a House of Lords committee hearing on 3 March 2022, Lord Agnew of Oulton claimed that at the very least a return of £5 for every £1 invested could be expected, and indeed he argued if properly management would deliver much more.  It is worthy of note that Lord Agnew had resigned from government in January 2022 over fraudulent Covid business loans claiming the Treasury had “little interest in the consequences of fraud to our society“. We agree.

5. Establish a Review of the Law

An anti-SLAPP law review could be commissioned by the Scottish Government, which might be considered taking account of the recently enacted Defamation and Malicious Public Publication (Scotland) Act 2021, existing privacy laws, and of the other reforms proposed here. It should be possible to undertake at least part of such a review under current devolved powers

The review aims might include strengthening procedural protection for defendants, ensuring safeguards to reduce opportunities for abuse of the 2021 Act, the tightening of ethical standards for those who facilitate SLAPPs or make baseless legal threats, and expanding access to legal aid for defendants acting in the public interest.

6. Tackle the Revolving Door Problem

A review of standards in relation to the so-called ‘revolving door syndrome’ could be undertaken, to ensure the elected politicians and senior civil servants in an independent Scotland do not expose themselves to conflicts of interest in terms of their associations with business. Such a review may look at whether there should be some form of time bar on taking up business directorships.

7. Procurement

The Scottish Government could review its procurement standards to ensure checks are made regarding firms’ histories of regulatory compliance and ethical behaviour.

Conclusions

This paper gives a glimpse of how far and how fast the UK is progressing along a road leading to state capture by non-democratic and malign actors. The more firmly entrenched this becomes, the more danger it poses to a democratic society, and the more it inhibits effective economic development. The more too it punishes law abiding individuals and firms. Scotland has no interest in being thirled to such a society.

Doing the right thing is not just morally superior. Acting to eliminate corruption, economic crime and money laundering will have multiple benefits to Scotland as she moves forward.

References

1. Liz David-Barrett (Nov 2021) Open Democracy Johnson’s UK, Bolsonaro’s Brazil and Orbán’s Hungary: Peas in a State-Captured Pod.
2. Oliver Bullough (2022) Butler to the World.
3. David Marples and Frederick Mills (2015) Ukraine’s Euromaidan.
4. Sergii Leshchenko (8 June 2012) Open Democracy Yanukovych, the luxury residence and the money trail that leads to London.
5. Anders Aslund(11 December 2013) BBC News  “Ukraine crisis: Yanukovych and the tycoons”. Retrieved March 2022.
6. Peter Geoghegan (26 Nov 2017) Open Democracy Legatum: the Brexiteer’s favourite think tank. Who is behind them? Also, EUReferendum.com (31 July 2017) Brexit: disaster capitalism.
7. Simon Walters and Glen Owen (26 Nov 2017) The Mail on Sunday Putin’s link to Boris and Gove’s Brexit coup revealed.
8. Cynthia O’Murchu (31 May 2018) Financial Times Legatum Institute criticised by Charity Commission Also, Holly Watt (1 June 2018) The Guardian Pro-Brexit think tank broke charity rules on politics, watchdog says.
9. Peter Geoghegan (5 Dec. 2017) The New European The Brexit web with Legatum at the centre.
10. Simon Walters and Glen Owen (26 Nov 2016) The Irish Mail on Sunday Secret letter uncovers a Russian link to British ministers Brexit ‘coup’.
11. Simon Walters and Glen Owen op.cit.
12. Intelligence and Security Committee of Parliament (2020) Russia.
13. Kompromat – compromising information collected for use in blackmailing, discrediting or manipulating someone, typically for political purposes.
14. Camila Turner (7 July 2022) The Telegraph Boris Johnson accused of misleading parliament over meeting with Alexander Lebedev.
15. Klaus Grunde and Niklas  Portafke (2019), IFO Institute Corruption and Economic Growth, Report 109.
16. An account of egregious banking behaving that should be required reading,  Ian Fraser (2019), Shredded: Inside RBS the bank that broke Bitain.
17. See https://vimeo.com/542074145 accessed August 2022.
18. Kate Proctor and John Johnston  (20 Nov 2020) Politics Home An Inquiry Found Priti Patel Broke The Ministerial Code But Boris Johnson Will Take No Further Action.
19. Dan Sabbagh (20 April 2022) The Guardian Evgeny Lebedev’s nomination for peerage ‘paused’ after MI5 advice.
20. See  https://www.nationalcrimeagency.gov.uk/what-we-do/crime-threats/fraud-and-economic-crime?highlight=WyJmcmF1ZCIsImZyYXVkcyJd Retrieved April 2022.
21. See the National Crime Agency’s news item at  https://www.nationalcrimeagency.gov.uk/news/national-economic-crime-centre-leads-push-to-identify-money-laundering-activity Retrieved April 2022.
22. National Crime Agency (2020) National Strategic Assessment of Serious and Organised Crime.
23. HMRC (2021) Measuring tax gaps 2021 edition: tax gap estimates for 2019-2020.
24. Henry Goodwin (17 April 2022) The London Economic Tory PPE waste cost every household £310 shocking analysis reveals.
25. Liz David-Barrett (2011) Fixing the Revolving Door. 
26. Transparency International (2022) Corruption Perceptions Index.
27. Transparency International UK (2017) The Fifth Column.
28. Matt Oliver (22 Jan 2022) The Daily Telegraph British citizenship: the £2m must-have for wealthy foreigners with few questions asked.
29. Vanja Lakic (26 June 2017) OCCRP New UK Laws Combat Money Laundering Through Scottish Limited Partnerships.
30. See Hansard record at https://hansard.parliament.uk/Commons/2017-02-21/debates/E346156E-E862-4E5B-8233-C17ECF374C21/CriminalFinancesBill#contribution-641BF69F-3D81-4292-84A7-338937184699 Accessed June 2022
31. Bullouh, O. Op.Cit. pp 145-146.
32. David Leask (27 January 2017) The Herald Scots firm named in Ukraine arms deal corruption probe.
33. See https://find-and-update.company-information.service.gov.uk/company/SL010934 Accessed August 2022
34. David Leask, Richard Smith, Thomas Rowley (7 October 2021) The Times Scottish shell firm ‘holding €36m from scams’
35. See Radio 4 online article here https://www.bbc.co.uk/news/uk-57021128 Accessed February 2022
36. Jasper Jolly, Simon Goodley, Joseph Smith (10 May 2021) The Guardian Tax dodging concerns over small firms used to pay NHS test-and-trace workers.  Also this later article, Jasper Jolly (14 June 2021) The Guardian Serco and G4S order test-and-trace suppliers to clean up act on tax.
37. Jasper Jolly (29 July 2021) The Guardian TUC calls for ban on use of umbrella companies to employ agency workers
38. Kieran Andrews (2 June 2021) The Times Fraud Claims over Scottish ‘mini-umbrella’ firms with directors in Philippines.
39. See https://violationtrackeruk.goodjobsfirst.org Accessed July 2022
40. Ian Fraser. Op. Cit.
41. Martin Williams (30 Jan 2022) The Herald KPMG withdraws from Scot Gov contract bids after string of scandals.
42. Prem Sikka (14 Jan 2022) LFF Accounting firms are at the heart of corruption in the UK
43. See https://www.unodc.org/documents/treaties/UNCAC/Publications/Convention/08-50026_E.pdf Accessed May 2022