Scottish Limited Partnerships (SLPs) were first created in 1907 for farm holdings, but ministers say their legal structure makes them attractive money laundering vehicles for international crime groups.
Government research shows one laundering scheme used 100 SLPs to move up to £60bn out of Russia.
They have also been linked to criminal networks in Eastern Europe and allegedly used in international arms trafficking deals.
While SLPs are used by thousands of legitimate businesses – particularly in the private equity and pensions industries – the Government is launching a consultation on further measures to prevent their abuse.
They include a requirement that users have a real connection to the UK and do business or maintain an address in Scotland, closing a loophole which means they can be used by anyone around the world.
They are also proposing that new SLPs should be registered through a company formation agent, meaning the “front men” will be subjected to anti-money 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.
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“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.”