By Chris Taggart, OpenCorporates Founder
Note: in this piece we are deliberately referring to legal entities rather than companies. Even though it’s called Companies House, it actually creates and regulates legal entities. Some of them are connected with real business activity (what a regular person would call a company) but many, as the report makes clear, are merely shells used for criminal schemes. This confusion of legal entities – legal constructs that exist only in the legal world, not the real one – with legitimate businesses is reason why companies find it so easy to use them to carry out their activities.
Yesterday, Companies House published their first strategic intelligence assessment. If I’m completely honest, I was rather blown away by it.
First, by the frankness of it. Louise Smyth, chief exec of Companies House, and her team, deserves huge praise for the candour and clarity of the report. It’s not pretty reading, but dealing with a problem first means recognizing it, and this is what the folks at Companies House have done.
“It is highly likely that limited company structures within the UK are widely used to facilitate many types of serious and organised criminality.”
– Companies House strategic intelligence assessment
Second, by the scale of the problem that it exposes. We are talking a minimum of tens of thousands of legal entities being incorporated for illicit purposes, and likely an order of magnitude greater than that.
Third, by the limits of Companies House to do something to tackle it. Make no mistake there’s an asymmetry here, where Companies House (and other company registers) are playing catchup with enemies who are better resourced than they are, who don’t need to follow the rules (Companies House does), and who only need to find a few loopholes (Companies House need to close all of them). And every pound the criminals earn can go into finding more loopholes to exploit.
So, if you are a company registrar, or a politician or senior law enforcement official, and don’t read this, then you are either living in cloud-cuckoo land, or deliberately living in ignorance. Either way, you are not doing your job, because it’s highly likely that similar activity is happening in your jurisdiction, particularly those ‘developed’ countries that say they consider the rule of law to be important.
With all that said (and I urge you to read the report in full), here are a few observations.
- Five years ago or so, OpenCorporates wrote an article called Fireflies and Algorithms, that warned of a future where company formation was done programmatically, and at scale. That future is clearly now here, based on some of the cases in the report (e.g. “Eleven thousand limited companies were incorporated and VAT-registered to a residential flat”).
- As we wrote a couple of days ago, the current penalties issued by company registers are meaningless in such cases – at best treated by criminals as a cost of doing business, and more likely unenforceable, given the perpetrators are either unidentifiable, or in jurisdictions out of the reach of the authorities in the country affected. Most of the cases identified are successful criminal schemes, as the sanction was closing the company, not recovery of the money nor imprisonment of the criminals (“Two companies … secured £230,000 worth of funding put in place to support businesses during the pandemic, despite having never traded… Following an investigation by The Insolvency Service, the companies were liquidated”). Until this is addressed, the message to criminals will be that this is an activity without consequences.
- Criminals are rational actors, and should be treated as such. If someone is incorporating thousands of legal entities, it’s not for the LOLs. If you haven’t found the fraud, it’s because it’s too sophisticated, or involving different jurisdictions or domains.
- Many of the schemes will be cross-border, but there is no real recognition of this. If the legal entities are created and controlled by legal entities in other jurisdictions, there seems little likelihood of Companies House identifying this, and the UK is in fact an enabler of many such schemes through the opacity of the Overseas Territories such as Cayman Islands and British Virgin Islands. It’s time to open up these company registers, and have their data published under the same open data regime as Companies House.
- The consequences for societies are real, and serious. There’s real money at stake here, and real lives destroyed, and often it’s the governments being defrauded, either from tax fraud schemes or grants and loans, both of which are cited in the report. And lest you think this is a UK problem, in April, the GAO estimated that between $230 billion and $530 billion *a year* was paid out by the Federal Government in fraud and wrongful payments. Much of this would have used legal entities as the vehicles for the fraud.
- The ‘enablers’ who facilitate this activity need to be a focus for the authorities, with jail time for those who profit from it.
- A week or so ago, Companies House laid out a timeline for implementing the Economic Crime & Corporate Transparency Act. They need to see if that can be accelerated in light of this report.
- We now live in a generative AI world. This needs to inform Companies House in its work and processes. It will make identity verification harder, and programmatic formation easier.
