Trust and Transparency in UK Companies

Trust and Transparency in UK Companies; Why the changes are long overdue

I was at the conference in Brussels for the launch of the European 4th Directive on Money Laundering. The mornings panel debates focused on the past and present and the realisation that despite all the best efforts to combat money laundering statistics show that we are failing. 3.5% of global GDP is criminal proceeds, this equates to 3 trillion euro a year, a massive amount and a rise on previous years. The UK took a bashing at this point concerning the City of London and their practices aiding money laundering, backed up by tax lawyers and tax specialists using contrived schemes and hiding behind privilege. 80% of European financial transactions flow through the City of London. This also highlighted tax evasion of both direct and indirect taxes which are now reportable across all jurisdictions was common place in European jurisdictions and will mean there will be a major focus of European Governments placing a greater emphasis on the accounting and legal sectors and the transparency of entities.

By the end of the day Cyprus was coming in for quite a bit of stick because in another building a short distance away as their bailout was being agreed by the European heads of state. Questions were being raised in our hall about why he EU should even bail them out since the feeling in the hall was that Cyprus was an embarrassing ‘off-shore’ tax haven within the euro zone, whose practices left a lot to desire.

This point has been given credence in a report prepared by Deloitte.  In the leaked EU report it states almost 60 percent of one of the bailed out Cypriot bank’s clients are “high risk” in terms of money laundering and almost a third of all bank depositors’ records contain errors.

The report which was published by the Cypriot website stockwatch.com.cy – was drawn up in April 2013 by Moneyval, a unit of the Strasbourg-based Council of Europe, and by accountancy firm Deloitte on the request of eurozone finance ministers.

The leaked four-page resume paints a damning picture of what goes on in the mini financial centre which just got €2 billion of EU taxpayers’ money. The full version, containing banks and customers’ names, is still firmly under lock and key.

In terms of knowing who their customers really are, Deloitte said 27 percent of all depositors’ files and 11 percent of borrowers’ files “showed inaccurate information on the customer and beneficial owner.” It noted that banks rely on “introducers” or professional enablers, that is firms of lawyers and accountants who work for the real owners of accounts for 75 percent of their international business, muddying the water on customer identity.

It added that when dealing with more “complex” structures – that is accounts held by firms with three or more layers of nominal owners between the bank and the real customer – the banks only did proper ID and KYC checks in just 9 percent of cases.

I also have the privilege of being a part of the UK National Risk Advisory panel, a requirement of the latest FATF recommendations for jurisdictions, the panel comprises of representative from law enforcement agencies, Government departments, supervisory bodies and of regulated businesses of all sizes such as large banks and my small firm dealing with companies and taxation.  Here we discuss the specific risks to the UK for money laundering. A constant concern by law enforcement agencies is, as with the Cyprus scenario, that there are professional enablers in the UK creating oblique structures, with the use of nominees and service addresses for tax evasion purposes and outright criminality, most of this by the creation and use of UK limited Companies.

Successive governments, especially over the past 25 years, have given a lighter and lighter touch to UK companies and the enforcement of any legislation, Companies House simply accept all filings in ‘good faith’.

This has also been backed up recently by an expose called ‘where there’s muck there’s a brass plate’ by Private Eye (No. 1340), who state ‘the answer lies in the historic relaxation of British company law, and almost non-existent regulation and financial policing, that has turned Britain into the capital of international organised crime’.

A few simple facts were uncovered in this expose, only 45% of companies registered in the UK actually submitted a tax return and many trading companies just simply filed dormant accounts to disguise that fact they had traded. It also made us aware that 97% of those companies who actually filed accounts were SME’s so only filed abbreviated accounts with limited information. It is also highlighted that the team from HMRC who are charged with the supervision of the 2,300 firms in the TCSP sector also have a further 20,000 other business such as accountancy service providers, high value dealers and around 3,600 money service businesses such as money transmitters, bureau-de-change and cheque cashers, this on just a staffing level of 50, it is hard is cast much blame onto a team so woefully under resourced by Government, but charged with supervising compliance with Money Laundering Regulations on those types of business who have no professional standing or body. 

This problem with limited companies was also highlighted in a recent document issued by Global Witness entitled ‘An idiot’s guide to money laundering’, which focuses on registration of companies and the weakness of the UK Registry as well as company agents in particular.

Since the economic downturn in 2007 the number of UK incorporations has actually risen contrary to the economic outlook, Companies House is predicting an 11% growth in the number of incorporations in the 2013/14 year to almost 500,000, of which about 145,000 will be formed by Companies House directly, bypassing the Money Laundering Regulations, whereas the UK economy may grow only between 0.8 and 1.5%, yet as statistics show that Companies House will strike off and help dissolve over 300,000 companies this year, which will be almost 100,000 more than all real business of all structures that will go out over business, which includes unincorporated businesses such as sole traders as well. 

The one thing that is clear is that there is too many companies on the register, a far high company per capita count than most EU countries, we have 1 company for every 23 men, women and children in the UK active on the Registry, this compares to Germany’s 1 in 2,000 per head of capita.

When we look at 1.6 million potential ’ghost’ companies at any one time with no declared trade and off the radar of HMRC we have to ask ourselves does the UK economy benefit in any way from these entities. It is almost impossible to estimate how many of these ghosts are genuine and how many have tax evasion or any other type of criminal intent at their core or indeed how many are used by criminals around the world, but it is in this murky area the world’s criminals do operate in and through the UK.

So against this back drop, there should be a discouragement of the frivolous throw away company, Companies are serious entities in their own right and must be treated as such, real businesses should be encouraged to be fully legitimate and on the radar of the correct Government departments and it should be harder (it will never be impossible) for the criminal to operate. This can only be done by implementing the Trust and Transparency proposals in full and then stop Companies House accepting all documents in good faith, linking HMRC to Companies House, regulate my sector of Trust and Company Service providers properly and put more emphasis and education about the professional advice for Companies and their Directors which can be obtained from a reputable accountant, this should be given by Government Departments such as HMRC and Companies House.

We can never stop the abuse of companies or the works of professional enablers, however we need to stop the rot of the past 25 years that has made the UK the money laundering capital of the world.