The Economic Crime and Corporate Transparency Bill holds the promise to reduce the abuse of UK companies for illicit purposes such as financial crime.
The bill is currently making its way through the UK Parliament, and we were pleased to contribute to the House of Commons Public Bill Committee which scrutinises the legislation, with our Founder Chris Taggart giving expert evidence.
But as we asked previously, is the bill up to scratch?
In this post, with the Public Bill Committee set to return – possibly today, we set out our view of the challenge and offer 9 recommendations to address key vulnerabilities within the current draft – which is naturally subject to change soon when the committee reports back. This is based on the supplementary written evidence we provided to inform the legislative process.
In summary, we welcome the bill as a long overdue but significant step forward in reforming Companies House to be more of an authoritative record through the verification of directors and People with Significant Control (PSCs), along with the introduction of powers to query information and financial accounts statements to be submitted as data. We also welcome that the government says it will finally act on restricting corporate directors, although we have significant concerns about how it is planning to do so.
However, as our Founder said when he gave evidence to the Public Bill Committee: the bill falls a long way short of what is needed, and the loopholes and flaws in it mean that it is like designing a better horse and cart while the criminals are driving around in fast cars.
The challenge
Most people think of companies as businesses, specifically businesses rooted in a location, region, or country. That’s obviously true for millions of companies, especially SMEs.
However, criminals of all stripes, and corporate tax lawyers, know different – companies are avatars that allow them to act at an arm’s length with impunity. More than that, these avatars are treated by the law as persons, who can enter into contracts, hold assets and liabilities and transfer those assets to other avatars with zero friction, and in an instance.
Add the fact that these avatars can be chained together and across jurisdictions and you have a perfect environment for illicit use, as the chances of anyone piecing together those chains is minimal.
If the networks are uncovered, there is little chance of holding to account those behind the companies – as they are in a different jurisdiction, and the money is long gone.
This is why they are so beloved of criminals, particularly the modern-day criminal organisations that are at the forefront of Crime As A Service: there is almost zero chance of detection, and little downside even if you are discovered.
Until we grasp this central fact – that we are talking about not companies but legal constructs that provide freedom of action, functional opacity and no liability – we will always be several steps behind the criminals.
The Bill starts to face that reality, in requiring evidence of the people behind companies, but then shies away from it, creating so many open doors that criminals, and others using companies for illicit and anti-social purposes, will have no trouble continuing their business.
Many of the expert witnesses who provided evidence discussed how the use of corporate service providers and verification process would be weaker than opening a bank account undermines the identity verification sections of the bill, and how resourcing is key. But additionally, we need to address the gaps created by occasional, infrequent filings that show a snapshot of the situation months or even years ago – entirely hopeless when it takes days for oligarchs to evade sanctions just by moving assets into other entities or trusts, or changing control to a front person in hours.
This is the basis of our recommendations set out below. Implementing these won’t solve the issues but will take significant steps along the way, and like the original PSC register, will allow us to understand the situation, and move forward.
Recommendations
1) Authoritative recording of shareholders
Shareholder data is critically important, being a potentially verifiable independent fact, compared with PSC data, which is an impossible to prove statement by the company. How for example can you prove the given PSC doesn’t have a secret contract to act on behalf of someone else? It also gives critical information about corporate structures, and allows errors, falsehoods and contradictions in PSC data to be identified.
Yet this importance is not recognized in the Bill, as multiple witnesses have testified, being partial, unverified, an out-of-date historic statement and not held in an appropriate format for analysis.
It is essential that this data is brought up to par with director and PSC data, making it contemporaneous (updated on change), verified and captured and published as data, starting to make the Companies House data an authoritative up-to-date trusted record – rather than just a historic report).
2) Duty to prevent
Require Companies House to have a duty to prevent the criminal use of companies, rather than the ability to do so. This would make them start to look at the universe of UK legal entities in a forward-thinking way (see above), that recognises that legal entities give the controllers and beneficiaries much more power than just to start a business.
3) Publish Director IDs
The proposed director ID linking one individual to multiple appointments must be made publicly available, particularly given those who are involved in economic crime misuse companies repeatedly – and should also apply to shareholders and PSCs.
As our Founder said, giving evidence to the committee, there is no good reason why this ID should not be made public: businesses need to know who they are doing business with, and what their previous companies are, whether or not the director has an unusual name. Similarly, investigators need to be able to identify common links between companies and directors to raise red flags of wrongdoing.
4) Prohibit UK corporate transparency being undermined by opaque offshore companies
Having better data on UK companies is important, but it is easily frustrated by UK companies being controlled by companies in jurisdictions where the data is locked behind a paywall, requires a court order to access or is not on the public record.
Any company doing business in the UK (including being an RLE, corporate director, LLP member, or using the courts) should register as a UK branch or on the Register of Overseas Entities, and thus have a reporting requirement to the Companies House. Additionally, branch reporting requirements should be tightened up to the level of those for UK companies.
5) Strengthen verification
Strengthen the verification of individuals to the level expected in the regulated anti-money laundering (AML) sector, including status, and either not outsource verification or require verification agents to submit a verification statement to Companies House of the steps taken to verify and copies of documents. There is no good reason why it should require less verification to start or run a company than open a bank account.
6) Corporate directors
While it is welcomed that the government is acting on corporate directors, the proposed measures make evasion trivial. It is simple enough to create a corporate directorship with an overseas company that has real people behind it, report on this, and then a day later, after it has been approved, change the directors of that company to be non-natural persons (i.e. other companies, including corporate service providers).
7) Adequately resource Companies House
Resource Companies House to allow them to utilise their new powers in detecting and investigating fraudulent information both in terms of new information submitted and in reviewing companies currently held on the register. This also extends to resourcing the public sector to investigate, prosecute and to recover assets in order to address economic crime.
8) Deal with misuse
In cases of misuse, Companies House will be able to strike companies off the register. This is wholly inadequate, as criminals have no fear of this – in fact, it is doing the job for them.
Directors of companies that are forcibly struck off for misuse, and others associated with the company, should be treated severely, including criminal action, banned from directorship and potentially put on a watchlist.
9) Timelines
Given how long it has taken for Companies House reform to reach this stage and the critical need for these reforms to be implemented, the government must continue its current pace to gain Royal Assent of the Bill and to implement the required secondary legislation and guidance required.
More to come soon
We’ll be following the Bill’s passage through the UK Parliament, including any amendments that may be introduced when the Public Bill Committee returns. Stay tuned for updates.
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