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How Scotland unwittingly became a tax haven for internet scams

At least 30 binary options companies, many Israeli, are incorporated in Scotland due to a loophole in British law that some lawmakers now want to close

Isle of Skye, Scotland (CC BY Moyan Brenn, Flickr)
Isle of Skye, Scotland (CC BY Moyan Brenn, Flickr)

As a thick frost stings Scotland, it is hard to imagine our little corner of northern Europe as a traditional tax haven.

This country certainly does not look or feel like the cliche of a fiscal paradise, a palm-fringed island in the Pacific or Caribbean.

But that is exactly what Scotland has become, despite all its traditions of rule of law and reputation for boring but sound financial probity.

A quirk in our company regulations has made a certain kind of Scottish firm hugely popular with anybody — including, it appears, Israelis — who wants to hide their assets.

The firms concerned are called Scottish limited partnerships or SLPs Their owners can remain secret, file no accounts and pay no tax, just as long as, at least on paper, they do no business in the United Kingdom, the union of England, Scotland, Wales and Northern Ireland.

Over the last decade the number of SLPs has mushroomed as non-residents saw the advantages of such a structure. An SLP has the legal personality needed to own and manage assets but tax liabilities lie with its partners, always based in traditional secrecy jurisdictions, like Belize or Panama.

My paper, The Herald, has reported on scores of cases of SLPs being part of various scandals. SLPs, for example, were used to as part of the looting of £1bn looting from banks in tiny Moldova. They have also acted as fronts for arms-dealing gangsters in Ukraine and the kind of websites which are used to exchange bootlegged Hollywood blockbusters and images of child abuse.

Recently they have also featured regularly in investigations into all sorts of unethical, unregulated or illegal e-commerce. This includes scams flogging one set of pills that are supposed to make women thin and another which is supposed to improve men’s sexual performance. One SLP even marketed a comb — for around 500 euros or pounds — that it claimed would make bald men’s hair grow back.

Many of these businesses appear to have a link back to the former Soviet Union, where off-the-peg shelf SLPs are advertised as “Scottish zero-tax offshore companies.”

Some of those who buy or create SLPs are clearly seeking to exploit what agencies who create them refer to as Scotland’s “high-prestige”. Ironically, this country both has a reputation as a stand-up place and a regulatory regime that does not quite live up to that reputation.

Perhaps it was only a matter of time before those operating binary options saw the potential of SLPs.

There are now at least 30 of these instruments providing fronts for binary options websites of the kind exposed in The Times of Israel in the course of this year. There are also, at the same maildrop addresses, SLPs doing the same job for unregulated payment systems.

Ben Wallace MP (Courtesy)
Ben Wallace MP (Courtesy)

The pro-independence authorities in Scotland — which controls most of its own laws but not those on company formation — have been concerned about SLPs for some time. UK ministers, who oppose full independence for Scotland, now agree.

This issue has been one of very few on which the two rival governments have found any common ground. Speaking about SLPs in the United Kingdom Parliament last week, Ben Wallace, Britain’s Security Minister, said “intelligence assessments I have received from our law enforcement agencies are very concerning.”

Will Scotland remain a de-facto tax haven and secrecy jurisdiction for much longer? That will depend on how successful Mr Wallace and his colleagues are in closing SLP loopholes. I suspect this will be of more interest in Moscow, Riga, Kiev and Tel Aviv than it is in Glasgow, Edinburgh or Aberdeen, where SLPs remain virtually unknown.

David Leask is chief reporter of The Herald, Scotland’s national quality daily newspaper.

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The Times of Israel has been exposing Israel’s fraudulent binary options industry in a series of articles since March, beginning with an article entitled “The Wolves of Tel Aviv,” and has estimated that the industry here numbers over 100 companies, most of which are fraudulent and employ a variety of ruses to steal their clients’ money. These firms lure their victims into making what they are duped into believing will be profitable short-term investments, but in the overwhelming majority of cases the clients wind up losing all or almost all of their money. Thousands of Israelis work in the field, which is estimated to have fleeced billions of dollars from victims all over the world in the past decade.

The Prime Minister’s Office last month condemned the industry’s “unscrupulous practices” and called for it to be outlawed worldwide.

Two weeks ago, ISA chairman Shmuel Hauser told The Times of Israel that consultations had begun on the framing of legislation to bar all Israel-based binary options operations from targeting anybody, anywhere. (Israeli firms are already banned from targeting Israelis.) The consultations have extended to Attorney General Avichai Mandelblit and to the government, he said.

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