June 21, 2013 Is Companies House capable of monitoring beneficial owners?
Following the G8 summit, Companies House are due to create a central register of companies’ beneficial ownership, but can this really work? Here we take a look at the proposals and give our view on some of the challenges facing the government.
The Action Plan
On 18 June 2013, as part of the G8 conference, the UK government bravely announced an action plan to prevent the misuse of companies and legal arrangements. The full set of proposals can be found here, but the key proposals are as follows:
- Require companies to obtain and hold adequate, accurate and current information on their beneficial ownership;
- Create a central registry of information on companies’ beneficial ownership, maintained by Companies House and to consult on whether this information should be publicly available or limited to the authorities;
- Improve the supervision and enforcement of those who facilitate company formation; and
- Review of corporate transparency, including bearer shares and nominee directors.
It was hoped that this Action Plan would trigger an agreement by the members of the G8 to adopt similar measures, though this has not been as successful as hoped. The other members of the G8 did agree to certain steps, but no comprehensive agreement was made. It is hoped that the UK will continue on the path it has committed to, despite the lack of initial enthusiasm from the other members of the G8.
Companies House
Companies House is the body intended to maintain this register, but is it up to the job?
UK Companies House is, in our view, a very efficient government body (although we know of many people who would disagree with this). To provide some context, there are currently over 3 million companies on the register and in 2011/12 Companies House processed 144 million search requests (according to its own annual report). This was achieved with administration costs of just £58 million in 2011/12.
This is a spectacular feat and great value to the UK taxpayer. It means that the UK is now one of the quickest and easiest jurisdictions to form a company, obtain information and process filings. However, Companies House has largely achieved this by automation and removing any requirement for investigation. If the form and content of a document appears to be correct, they will accept it and will rarely, if ever, challenge the contents.
This is perhaps inevitable with the number of transactions they are dealing with, but it does lead to the obvious conclusion that Companies House are not set up to be an ‘enforcer’ of this register. We cannot see how they can do anything more than collect information voluntarily declared to them by the companies. They are not capable of verifying this information which means they have to rely on the honesty of those declaring it. When you are targeting money launders and fraudsters, this seems to be a dubious tactic.
The role of Trust and Company service providers
Currently, trust and company service providers (including Elemental CoSec) are required to comply with the Money Laundering Regulations 2007. These, broadly, require them to identify their client (though not always the beneficial owner). As we have previously discussed in our article, ‘Is the UK complying with its International Anti-Money Laundering Obligations?‘, trust and company service providers are not required to carry out due diligence checks on a client when all they are doing is forming a company. Things are different when a business relationship is formed, but there are many occasions when this is not the case.
One of the proposals of the government’s plan, is to increase the regulation of trust and company service providers. This is something Elemental CoSec applauds and encourages. We believe this an area that has long needed looking at and the lack of regulation has allowed a minority to tarnish the reputation of the entire industry. However, the value of this is limited if the role of the trust and company service provider remains as is.
At the moment, it is possible to form and operate a company directly through Companies House. Although, many companies operated in this way are not compliant with many areas of UK Company law, they do meet the minimum requirements of Companies House to stay on the register. For those persons that do wish to use the expertise of an intermediary, but not be subject to UK anti-money laundering regulations, they can use an overseas intermediary, who is not subject to the Money Laundering Regulations 2007.
These two options, mean that the increased regulation of trust and company service providers will not dramatically improve the issue of shell companies.
Elemental CoSec’s View
We welcome the government’s proposals and we especially applaud the unilateral stance taken by the UK. We believe it is the right approach and that it shows a true belief in transparency and openness. We particularly feel that the consultation on the abolition of bearer shares is long overdue.
We will wait to see the detail of the proposals, but we do have grave doubts about the effectiveness of any regime run by Companies House. The jurisdictions that have taken the greatest steps towards a comprehensive beneficial owner system are often the ‘offshore’ jurisdictions. These jurisdictions tend to rely on their trust and company service providers to carry out the relevant due diligence. In order to do this, it is often mandatory for every company to have a registered or appointed agent to act on behalf of the company. These agents are then required to carry out relevant due diligence checks on their clients.
This approach may not be considered practicable in the UK as it would add considerable cost and burden to compliance, but it shows what is required to manage and monitor beneficial ownership. The government’s proposals are better than nothing but, without more, we do not believe they will solve the problem of shell companies and a lack of transparency.
