I rise to speak to new clauses 17, 18, 19, 101, 102 and 103 in my name, and to support new clause 20 in the name of my friend the right hon. Member for Barking (Dame Margaret Hodge). I am grateful to her and to members of the all-party groups on anti-corruption and responsible tax and on fair business banking for their support. I should say that I do not plan to press any of those new clauses to a vote today.
The Bill is the second part of a package designed to prevent the abuse of the UK’s corporate structures and to tackle economic crime. It is a good Bill which will go a long way towards achieving its aims, and I certainly welcome the Government new clauses and amendments, but we have to go beyond “good”. Those who seek to exploit our open economy and our corporate structures to enrich themselves—whether organised criminal gangs, fraudsters, kleptocrats or even terrorists—are better than “good”. They are singularly motivated to find opportunities to enrich themselves and their clients, and to abuse our systems in doing so. They are good at it because it is a profitable endeavour for them, and because it is unfortunately too easy for them to exploit the systems in which we operate.
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Companies House is, of course, one of those systems. Supposedly the first line of defence against the abuse of our corporate structures as vehicles for criminality, it is in reality ill equipped for the scale of the onslaught that it faces. Because those who seek to use our structures against us are so very good at it, we must push back, and we must do so robustly. These new clauses seek to provide the tools to do just that, turning Companies House into a resourced, proactive agent that prevents and detects economic crime.
The University of Portsmouth estimates that economic crime costs the UK economy £350 billion every year. I know that we often have a race to the bottom in this place, but I think I am slightly topping the figure given earlier by the right hon. Member for Barking. In any event, these are not small sums. However, although economic crime represents such a high cost and such a threat to the UK’s economic system and our national security, we spend the equivalent of just 0.042% of our GDP on funding core national-level economic crime enforcement bodies, and although it is the single largest crime type in England and Wales, constituting 40% of all crime, less than 1% of law enforcement resource is dedicated to tackling it. We have to change that.
The common-sense fixes proposed in the new clauses are designed to close loopholes in existing legislation and create new obligations for the registrar to verify, proactively and on the basis of a risk-based approach, the accuracy of the data that companies submit. Allied to new clause 20, those new clauses obligate Companies House to perform checks and resource them, as well as providing the wider economic crime-fighting community with the funding that it requires.
New clause 17 requires the registrar to cross-check statements attesting to the identity of the person of significant control against company records in order to verify the status of beneficial owners. That is in line with the latest recommendations from the Financial Action Task Force. The power to reject documents, require information, remove documents or rectify the register is already in the Bill, so the new clause does not require the creation of additional powers; rather, it requires the registrar to use them more proactively. This obligation should come into force only when the registrar determines that there is sufficient risk, according to a risk-based assessment that the registrar must carry out. It is not good enough to verify the ID of the individual purporting to be the company’s owner, but not their status as the owner of the company. That leaves in place the risk that frontpeople and nominees will continue to be put forward as the “owners” of companies, despite real control being held elsewhere.
Members may ask why this matters. The Azerbaijani laundromat used a series of UK shell companies to launder more than $2.9 billion. Those funds were used to silence journalists and buy influence, among other purposes. Of the four companies involved in slushing money, all had one thing in common: the beneficial owners and directors listed were not real. In one instance, more than $1.7 billion was transferred to a man who was listed as a director, but was a modest driver in Baku and had no idea of the transactions being conducted in his name.
New clause 18 requires any person holding 5% or more of the shares in a public company to disclose their shares, and creates a duty for the registrar to check that a person does indeed hold 5% or more by cross-checking company records on the basis of a risk- based approach. As Duncan Hames of Transparency International said in Committee, when the Bill comes into force there will be a risk that
“shareholder information will become the poor relation on the company register.”––[Official Report, Economic Crime and Corporate Transparency Public Bill Committee, 27 October 2022; c. 91.]
That is of particular concern in circumstances in which companies claim not to have a person of significant control, and shareholder information becomes the next most useful source when it comes to understanding who is really behind some of these businesses.
The lack of transparency over who owns and controls UK-registered companies makes it entirely possible to obfuscate and hide criminally obtained money. The current state of shareholder data in Companies House information about shareholders of UK companies is difficult to access. For most companies, the information is spread over multiple PDF documents spanning several years. This means that there is no single place where we can go to see an up-to-date picture of a company’s shareholders, never mind a single place where all companies’ shareholders are listed so that we can see the connections between them. Where it can be found, shareholder information is also extremely limited, often with just a name given for either a person or a company. No additional information is required that would clarify who that person is and, unlike with company directors, there is no information on address, month or year of birth, nationality or country of incorporation. This makes it impossible to know with any certainty exactly who the shareholders are.
Shareholder information is also not verified. Neither Companies House nor the third-party agents setting up companies there need to verify that their company’s shareholders are who they say they are. This reduces the reliability of shareholder information published by Companies House and in turn the accuracy of Companies House data as a whole. To give an example of why this matters, in September last year, Companies House registered Atlas Integrate Services LLP, which declared a person of significant control whose date of birth showed her to be just two months old at the time. In her two months, she had apparently found the time not only to get started in the business but to get married, as she was listed as “Mrs”. Cases such as these make a mockery of Companies House and the notion that the information there is reliable.
New clause 19 creates an obligation for the registrar to examine the accounts of dissolved companies with a view to establishing whether economic crime has been committed, using a risk-based approach. Removing the ability for companies to go bust one day and reappear the next with a very similar name and very similar directors is one of the most important issues in tackling economic crime. This practice—the presence and disappearance of corporate entities—is often referred to as phoenixing, and it is linked to a good deal of fraud, as my right hon. Friend the Member for South Northamptonshire (Dame Andrea Leadsom) so eloquently laid out earlier.
Beyond fraud, dissolution is used by criminals to move dirty money through UK companies and evade investigation by law enforcement. The new clause would ensure that Companies House does effective due diligence to examine accounts to investigate whether fraud has occurred and actively pass information on to the relevant authorities if a company is dissolved. I am a pragmatist and I do not expect Companies House to check the accounts of every single dissolved company. The new clause takes a similarly pragmatic approach to fighting fraud and economic crime. Companies House should use a risk-based approach and investigate only when red flags are raised.
This matters. In the case of the Troika laundromat, billions of dollars flowed into Europe through lightly regulated UK companies with bank accounts in the Baltic region. More than 1,000 limited liability partnerships incorporated at Companies House handled transactions totalling an estimated $13 billion. Most of the money flowed into the companies via Lithuania’s now-defunct Ukio Bank. Several companies connected to the Troika laundromat were found to have abused Companies House processes through the striking-off process or the filing of dormant company accounts.
One UK-based company connected to the scheme was found to have made payments totalling £360 million despite having filed identical accounts each year and declared itself as dormant. Another UK company handled over £150 million-worth of transactions after applying for the company to be struck off. For example, Roberta Transit LLP never filed accounts at Companies House after it was set up in 2007. A year later, the agents who acted as members applied for it to be struck off. The application stated that the LLP had not traded or carried on business in the previous three months. However, the data shows that its bank accounts handled $36 million-worth of transactions over that period and $139 million
in the three months after the strike-off application. Stranger Agency LLP was another Ukio customer, dissolved in 2014 but not linked to Troika. It filed identical accounts each year, telling Companies House that it was
“dormant throughout the current year and previous year”.
However, the data shows that it made payments totalling €421 million during that same period.
New clause 101 will ensure that corporate service providers are not authorised to carry out ID verification until the consultation on anti-money laundering supervision promised by the Government is completed and implemented. As the right hon. Member for Barking said, a 2021 review of the professional body supervisors responsible for the legal and accountancy sectors found that 81% of them were not supervising their members effectively. Half of the supervisors were found not to be ensuring that their members were taking timely action to improve their anti-money laundering procedures, and a third of the supervisors were found not to have effective separation between their advocacy and regulatory functions, creating a conflict of interest.
These are very real problems that the Government have identified. If we hope to deter, identify and prosecute those who seek to abuse our economic system for their own ends, we must tighten up our AML regime and ensure that those performing ID verification are well equipped to do so. Given the evidence and the Government’s assessment of our existing supervisory framework, the consistent thing to do would be to pause any expansion of outsourced IDV checks until supervision improves.
Amendment 102 would establish the risk-based approach used by the registrar to decide when to carry out certain duties, such as the “person with significant control” checks I mentioned earlier.
Amendment 103 builds on amendment 101 by creating an obligation on the registrar to check whether the identity checks carried out by authorised corporate service providers are accurate and valid, based on a risk-based approach. Amendment 103 empowers Companies House to request and review documents for ID checks done by authorised corporate service providers. As I have outlined, ID verification is an essential safeguard that ensures our companies register is accurate and reliable. The amendment is designed to address the loophole introduced by the Bill that will allow authorised corporate service providers to carry out ID verification unchecked.
As it stands, ACSPs will simply have to submit a document saying that a person is who they say they are. No actual proof will need to be submitted to support the accuracy of that statement. Amendment 103 empowers Companies House to check ACSPs’ homework, if it determines that a person poses a real risk of money laundering. This is a common-sense solution. I recognise that systematically carrying out IDV checks would be too onerous, so once again it is left to the registrar to determine where the risks are and to use the verification powers on a risk-based approach.
This matters, so tightening up the regime is crucial. I have already mentioned Atlas Integrate Services LLP and its two-month-old company director, but she is not alone. Some 4,000 beneficial owners are listed as being under the age of two, including one who has yet to be born. Although an entrepreneurial toddler can technically be listed as a beneficial owner, it seems impossible that
they could be exercising effective control over a company. That said, my one-year-old seems to have effective control over my family.
In addition, it is worth noting that five beneficial owners control more than 6,000 companies registered at Companies House, raising the question of whether some of them are simply stooges put in place by the real owners. Trust or company service providers pose a particularly high risk of money laundering due to their role in setting up shell companies, but they rarely see fines above £1,000 for such activity. Approximately half the corporate entities in the UK are established through TCSPs, a practice that continues despite 2020’s national risk assessment finding that they carry one of the highest risks of money laundering.
It is simply intolerable that people abuse our economy to fund criminality, to give succour to kleptocrats or even to support terrorism. We have the capacity to make it much harder for them to do so. This Bill is an important part of our arsenal, but I return to my opening point: being good simply will not cut it. The people who abuse our economy and our corporate entities have every incentive to continue doing so and to innovate around any tweaks we put in place, which is why we have to use every tool available to tighten this regime to a point where the effort of abusing Companies House is simply not worth it.
My amendments and new clause 20 are a glimpse of the improvements we need to make to get us there. Put simply, these amendments would give Companies House the tools to proactively monitor registrations and to identify and defend against economic crime.
I am grateful to the Minister for his kind and thorough engagement on these issues amendments. I hope he will bring his deep knowledge and pragmatism to those points when the Bill reaches the other place. He was a doughty champion before assuming office, and I am certain he will remain so now that he has a firm grip on the levers of power.
I fear that I have already taken up too much of the House’s time, so I will end there.