Last updated: 22 Sep 2020 01:17 Posted in: AIA

As set out by David Potts, AIA Director of Operations in his article on Corporate Transparency and Register Reform in August 2019, transparency is vital for a robust and healthy economy. However, there is substantial evidence of companies registered with Companies House being used to facilitate money laundering through a combination of simple incorporation and inadequate due diligence.

The Department for Business, Energy and Industrial Strategy (BEIS) has this month responded to the Corporate Transparency and Register Reform consultation on options to enhance the role of Companies House and increase the transparency of UK corporate entities.

These steps are part of a plan to mitigate the risk of corporate structures being used to launder the proceeds of corruption and organised crime, including where the structures are operated and controlled overseas

AIA responded to the consultation published in May 2019 on behalf of our members and in the wider public interest.

As a professional body supervisor under Schedule 1 of the Money Laundering Regulations 2017 we supervise and monitor accountants for compliance with the regulations and act where necessary to remove the benefits of non-compliance and deter future non-compliance.

Overall, we argued that any reforms should work to improve transparency and strengthen the fight against fraud and money laundering.

Why reform?

Legal arrangements and company structures play a legitimate role in global commerce; however, their status encourages the creation of complex corporate schemes designed to conceal ownership which can facilitate money laundering. Understanding an entity’s true ultimate beneficial owner is key to customer due diligence but can be difficult to trace and as Transparency International recently demonstrated it has been all too easy to set up a legal entity without providing beneficial ownership information.

The impact of this misuse can be extensive. According to the New York Times, an estimated $9 trillion of personal wealth is undeclared; in 2014 the Organisation for Economic Co-operation and Development (OECD) reviewed a significant number of bribery cases across 41 countries and found that over 25% involved illicit money channelled through opaque companies. Additionally, The World Bank estimates corrupt politicians have used company structures to conceal their identity in over 200 corruption cases.  

The reforms suggest a positive step forward towards improving the accuracy of the information held at Companies House and combating economic crime

In 2016 the leak of 11.5m files from law firm Mossack Fonseca, the ‘Panama Papers’, highlighted the extent of the issue: over 214,000 entities appeared, connected to people in over 200 territories. Further leaks including ‘the Paradise Papers’ (offshore interests of more than 120 politicians), ‘West Africa Leaks’ (secretive companies of some of West Africa’s most powerful corporate moguls), and ‘Mauritius Leaks’ (diversion of tax revenue from less economically developed nations back to Western corporations) bring in to sharp focus the extent to which corporate vehicles can be misused.

The UK’s Economic Crime Plan 2019-22 (resulting from its Financial Action Task Force Mutual Evaluation Review in 2018) includes a strategic objective to improve transparency of ownership. Enhancements include reforming Companies House and improving the transparency of overseas ownership of property. Efforts to increase transparency have been further strengthened by the introduction of the EU 5th AML Directive and amendments to the UK Money Laundering Regulations in January 2020 which require regulated individuals to report discrepancies identified with the ownership of a company during CDD to Companies House. 

Transparency supports an effective business environment and underpins the accountability of those controlling a company owe to society. It is an essential element of good corporate governance – giving businesspeople assurance over who they are doing business with and giving investors and civil society a means to hold companies to account.

Proposed reforms

Wide ranging reforms have been proposed covering four main policy areas, although a number require additional consultation:

Knowing who is setting up, managing and controlling corporate entities

  • compulsory identity verification for all directors and People with Significant Control (PSC) of UK registered companies
  • compulsory identity verification for all individuals who file information on behalf of a company
  • allow company incorporations and filings to be made either directly at Companies House or via a properly supervised agent

Improving the accuracy and usability of data on the companies register

  • reform the powers of the Registrar of Companies to allow querying of information that is submitted to Companies House
  • broaden the powers of the Registrar of Companies to remove information from the register in certain circumstances, e.g. improve accuracy
  • consult on proposals to introduce full iXBRL tagging for the submission of accounts by companies to Companies House
  • tighten regulation on amendments to accounting reference periods
  • review aspects of accounts filings, including the micro or dormant account exemptions

Protecting personal information

  • remove restrictions to enable personal information to be removed from the register 

Ensuring compliance, sharing intelligence, other measures to deter abuse of corporate entities

  • introduce an obligation on bodies that fall under the Anti-Money Laundering (AML) regulations to report discrepancies between the public register of companies and the information they hold on their customers
  • permit cross-sharing of Companies House data against other data sets
  • allow limited partnerships to be “struck off” following a court order
  • give Companies House powers to query, and possibly reject, company names before they are registered
  • reform how and under what circumstances Companies House issues certificates of good standing

Next steps

The consultation response foresees benefits resulting from the reforms to aid the UK’s fight against crime and that accountability will increase.

Economic crime in the UK is a growing problem which currently accounts for almost one third of all crime experienced by individuals. The Home Office has estimated that the social and economic cost of fraud to individuals in England and Wales is £4.7 billion per year and the social and economic cost of organised fraud against businesses and the public sector in the UK is £5.9 billion.

These additional reforms aim to strengthen the role of Companies House in the fight against economic crime

In recognition of the level of change proposed by the consultation process the Government intends to continue to develop proposals, working with professional bodies and relevant parties. Although some reforms will require legislation prior to implementation the Government has made an intention to publish a comprehensive set of proposals setting out in detail how the reforms will be implemented.

AIA looks forward to continuing to work with Companies House to strengthen corporate transparency in the UK and ensure these significant reforms can be introduced with an effective and efficient process.

The reforms suggest a positive step forward towards improving the accuracy of the information held at Companies House and combating economic crime