30 Sep 2020
What links the Azerbaijani laundromat, the Danske Bank scandal and a fraudulent enterprise run by the Mafia from a caravan park in Lancashire? Aside from the egregious amounts of money involved, the common thread in all of these cases is the use (and abuse) of UK corporate structures to provide the necessary veneer of respectability needed to shift dirty cash through the global economy.
These cases are just the tip of the iceberg. Over the past decade, increasing numbers of cases have come to light – including the recent disclosure of 3,000 potentially suspicious UK company structures in the so-called ‘FinCEN files’ – which have led many, including the author, to question whether it is right that you can form a company in the UK, without any proof of identity within 24 hours for a mere £12.
As the picture of UK company involvement in global criminality has built, so the domestic and international pressure on the UK government to clean up its act has increased, leading the government to finally announce, 14 months on from the original consultation, the first major reforms of the UK company registry in the 170 years since its creation.
Although many of the proposed reforms are merely long-overdue technical updates to an antiquated company formation regime, the report puts down a clear marker for a new role for Companies House (the body responsible for maintaining the corporate register) ‘in our wider efforts to tackle economic crime’. But in what ways? And, importantly, do these efforts go far enough to protect the integrity of the UK corporate system?
THE PLAN OF ATTACK
From the wide-ranging reforms proposed, there are four areas which have the most potential in reducing the role of UK companies as the money launderers’ vehicle of choice.
First, perhaps the most significant proposal is the introduction of mandatory ID verification for directors of companies, company formation agents and ‘persons of significant control’. This change will certainly bring the UK into line with many other European jurisdictions (and indeed its own Overseas Territories and Crown Dependencies) and go some way to deterring the use of UK companies in future money laundering scandals, by reducing the ability to use fictitious or stolen identities to set up companies.
However, this proposal has its limitations in that it will only apply to those incorporating companies directly with Companies House, rather than the estimated 60% who choose to incorporate via third-party agents known as trust and company service providers (TCSP). The rationale for this is that TCSPs are required under money laundering regulations (MLRs) to verify the identity of those on behalf of which they are operating. The implicit inference from the proposal is that these checks can be relied on. However, given the widespread concerns regarding weak compliance with MLRs in this sector, this perhaps displays an unwarranted level of confidence in the sector.
Second, the government proposes to give new powers to the registrar of companies (the CEO of Companies House) to query information presented to them. To put the proposal in context, the registrar, as the ultimate custodian of the UK’s company formation regime, previously had no legal power to query information presented to them and had to accept all information on trust. While this may have been appropriate in 1844, when the position of registrar was created, it is an overdue update for a system which now deals with the more than four million companies on the register today.
However, the scope of the power and the ways in which this will be operationalised remain subject to future consultation – further delaying a vital element of the much-needed reform package. For the future power to have real impact in tackling economic crime, it will need to be backed by sophisticated monitoring systems, populated with ‘red flags’ informed by a live intelligence picture and subject to human analysis. In this way, the registrar would do well to learn from the experience and tools deployed by the financial sector who face similar ‘needle in a haystack’ problems in spotting financial crime.
Third, the report makes a number of proposals in relation to improving intelligence sharing and data exploitation with regards to the information contained within the company register. This is not insignificant; although Companies House does share information with law enforcement, including formal suspicious activity reports, this has hitherto been on a largely reactive basis and as an ancillary rather than core function. The proposed reforms – such as bulk data-sharing exercises between Companies House and other public sector datasets and more proactive mining of company registry data to identify anomalies and potential risk – put a marker down for a role for Companies House in ‘policing’ the register, rather than simply as a repository of company data.
Finally, underpinning all of the proposed reforms are plans for an operational transformation of Companies House, primarily aimed at meeting the challenges it faces in processing an increasing volume of data, but also as a means of integrating Companies House with partners within the UK’s anti-money laundering (AML) regime. However, while the proposals recognise that this will require ‘new digital technologies and process capabilities alongside improved staffing and resource functions’, they remain silent on the scale of the ambition and, importantly, the funding model.
These issues combined demonstrate that, after years of prevarication, the UK government has finally conceded that Companies House’s role cannot be confined to maintaining the register, but must encompass some role in ensuring the integrity of the data it compiles. But do these proposals go far enough?
The answer is ‘perhaps’. While the government notes a conceived role for Companies House in tackling economic crime, it is not clear how far this ambition extends. To mark its clear intention, the government should go further by transforming the statutory role of the registrar of companies to include a duty to maintain public trust and confidence in UK corporate integrity, akin to the duties conferred on the registrar of charities.
This needs to be accompanied by a properly resourced intelligence and analytical capability, equipped with the staff and state-of-the-art data analytics needed to properly interrogate the vast trove of data held. This costs money, and in a spending review unlikely to be characterised by its generosity, a plan B is needed. Companies House must look for a funding source outside of unsustainable central government grants; given that, by international comparison, £12 is a low cost of entry, even a modest increase in the cost of forming one of the 600,000 companies formed in the UK every year could raise a substantial sum to fund reforms. The prevailing argument against this to date has been that it would deter business formation in the UK; an argument which wears thin when considering that the £55 cost of registering a vehicle has hardly deterred car ownership.
In summary, the proposed reforms are significant, but do not signal the necessary scale of ambition needed to clean up the UK corporate register. There is room to go further and deeper. Doing so is not only the right thing to do in AML terms, but also provides wider reputational benefits for the UK on the international stage. Adding a few pounds onto the cost of incorporating a company in the UK seems like a small price to pay for such a big reward.
By Helena Wood, RUSI, 29 September 2020
Read the original article here
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