The UK Government said thousands of British businesses use limited partnerships and SLPs legitimately but research has found they have been exploited in complex money laundering schemes, including one which used 100 SLPs to move up to $80 billion out of Russia.
They have also been linked to international criminal networks in Eastern Europe and have allegedly been used in arms deals.
Under new proposals, users will need to have a real connection to the UK and do business or maintain an address in Scotland to operate an SLP. They will also need to register through an agent who will carry out anti-laundering checks.
Business Minister Andrew Griffiths said: “The UK has taken a leading role in the fight against money laundering and is known internationally as a great place to work, invest and do business.
“But as we are seeing especially with Scottish Limited Partnerships, is that they are being abused to carry out all manner of crimes abroad - from foreign money laundering to arms dealing.
“This simply cannot continue to go unchecked and these reforms will improve their transparency and subject them to more stringent checks to ensure they can continue to be used as a legitimate way for investors and pension funds to invest in the UK.”
Limited partnerships are formed by at least two partners, one of which must be a general partner, who is liable for any debts incurred, and one limited partner, who has limited liability but cannot play a role in how the partnership is run.
SLPs differ to elsewhere in the UK as they have “legal personality”, which allows them to enter into contracts, take on debts or own property.
Figures published for the launch of a UK Government consultation on SLP reforms this week show just five frontmen were responsible for over half of 6,800 SLPs registered between January 2016 and mid-May 2017.
By June 2017, 17,000 SLPs were registered at just 10 addresses.
Last year, laws introduced requiring SLPs to report their beneficial owner and make their ownership structure more transparent led to an 80% reduction in the number registered.
The latest reforms will apply to all limited partnerships in the UK and will also include new annual reporting requirements for limited partnerships in England and Wales and Northern Ireland.
Issues around SLPs have recently been raised by The Herald newspaper.
Scottish Secretary David Mundell said: “I welcome these proposals to crack down on money laundering. The UK Government will always take strong action to protect its citizens and our interests - that’s why we introduced new laws last year to improve transparency of Scottish Limited Partnerships and help prevent them from being used for unlawful activities.
“But media reports of alleged wrongdoing involving these partnerships have continued - and with growing evidence that crime lords have been using SLPs to launder dirty money it’s clear more needs to be done. These latest reforms will help ensure Scotland and other parts of the UK continue to be known internationally as great places to work, invest and do business.”
SNP MP Alison Thewliss said: “The SNP awaits the full detail of the actions the UK Government are prepared to take, but I remain concerned that this will not go far enough to tackle money laundering on our doorstep.
“To weed out those abusing SLPs from legitimate businesses, SLPs must be tied to a real UK person, with a UK bank account. They must file accounts like other businesses, and they must be transparent and accountable.”
She added: “After the Salisbury incident, Theresa May committed to tackle corruption and the flow of criminal assets through the UK. If she is serious about this, all loopholes must be closed, and done so swiftly.”