Companies House loophole exposes anti-money laundering failings

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Accountants have expressed concern at a report which exposes a loophole in anti-money laundering regulations that allows criminals to incorporate directly with Companies House.

Transparency International’s new research, Hiding in Plain Sight, found that 766 companies registered in the UK have been directly involved in laundering stolen money out of at least 13 countries.

One of the main points of frustration for accountants reading the study is that the majority of these illegal funds are allowed to flow through the country as the result of a loophole in the government’s own rules.

Due to the anti-money laundering directive introduced this year, anyone wishing to form a company by visiting an accountant, solicitor or formations agent (classified under the ‘Trust and Company Service Providers’ (TCSP) umbrella), must fulfil due diligence requirements, including having their identity confirmed.

However, as the government’s official registrar, Companies House is exempt from the rules as it occupies a statutory role to register businesses and issue incorporation certificates, and does not operate as a business itself.

The result of this is that by registering directly with Companies House, a company is free to set up without being identified.

According to Richard Osborne, managing director of eFiling, what this means is that “in just one visit to the government website, fraudsters using a throwaway email address can create a company and funnel their illicit finance through without any appropriate legal checks. All that is really required is a valid UK address and the name of a fictitious company director.”

David Stevens, integrity and law manager at the ICAEW, told AccountingWEB that this is something the Institute has been concerned about for some time.

“Regulation in the private sector is being ramped up, with TCSPs, accountants and other service providers diligently carrying out the checks required by law,” said Stevens, “and yet there is a ‘no-questions-asked’ approach when you go to Companies House directly.

Six staff for four million companies

One of the main concerns voiced about the current system is the lack of checking around incorporation application. Companies House software only checks that the forms are completed, not whether the application is a true and accurate reflection of the person(s) applying.

“As far as I understand it there isn’t even a sense-check as such,” said Stevens. “The phrase ‘check the integrity’ has been used previously, but I believe that simply means ‘have all the boxes been filled in?’”

However, Transparency International’s report flags up the fact that at Companies House there are currently only six members of staff responsible for policing over four million UK companies.

Research from campaign group Global Witness last year also flagged up some peculiarities on the people with significant control (PSC) register itself. When trying to establish the beneficial owners of companies the NGO found co-owners with dates of birth years into the future, people with countries of birth registered as ‘Cornwall’ and other similar anomalies.

Rules a ‘missed opportunity’

For the ICAEW’s David Stevens the new rules are a missed opportunity. “If there was more resourcing at Companies House there would be huge potential to save a huge amount of duplicated cost and effort,” he said.

“When entering into a transaction that might involve an accountant, solicitor and formations agent, all three entities have to do exactly the same checks: most likely at the cost of the person entering the transaction. A reformed Companies House could be the perfect mechanism to wipe out this duplicated cost.”

One approach suggested by last year’s CCAB ‘Fighting Economic Crime’ manifesto was to harness and expand the public registers of company ownership and beneficial interest held at Companies House.

“No checks are currently carried out on the identity of those wishing to set up a company in the UK,” stated the report. “A reformed and well-resourced Companies House regime could be the perfect mechanism for filling that due diligence gap and, in so doing, creating a single, centralised online information resource which banks, accountants, lawyers and other businesses could also consult to confirm identity.”

Reform is unlikely

While Stevens believes the loophole is “on the radars” of professionals familiar with the regime, many other people would be surprised at the ease a company can be set up, “particularly when we hear so much in the press about money laundering and economic crime”.

However, it appears unlikely that the loophole will be closed anytime soon. “Companies House needs considerably more resource than there is now,” said Stevens. “In a climate when more and more cost being pushed onto the private sector, whilst it might be operationally straightforward, politically and financially this is likely to be a bit more difficult.”

About Tom Herbert

Tom is editor at AccountingWEB, responsible for all editorial content on the site. If you have any comments or suggestions for us get in touch.

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01st Dec 2017 11:00

Once again the stupidity and double standards of the authorities comes to the fore. Make accountants carry out over the top checks for minor work like filing tax returns for pensioners with a little bit of extra income but allow drug barons to set up a company via their own web site with no check at all.

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By tedbuck
01st Dec 2017 11:02

Well, well there's a surprise - isn't there a precept in Government of 'Do as I say, not as I do' .

We are regulated so much that our productivity is forced down by box ticking for HMG, HMRC, ICAEW, ASB and many others and what does HMG do but open its arms to welcome the money launderers into the fray. Why on earth do we bother?

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By Ammie
01st Dec 2017 11:07

What is the surprise?
Those on a mission will find weaknesses and exploit them and there is little anyone can do but set up an expensive investigation committee after the event.
Too much compliance legislation keeps government departments busy and in work and ties up the law abiding in costly exercises of limited effect.
Wait till MTD is in full flow, there will be endless relaxations, concessions and amendments we will all need to work hard to keep up with.
Yes, we need controls, but well thought out effective ones not "pie in the sky, suck it and see" ones.

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By Thaya10
01st Dec 2017 11:14

In defense of the companies house, I must say it is the fault of the bank. If you can't open a bank account what do you do with a company. Banks are generally very strict. How do these people open a bank account? How do they operate the bank account with large sums of money transfers? Recently a friend of mine was called for an interview because he got about £200 by bank tfr from Australia. Double standards?

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By ShayaG
to Thaya10
01st Dec 2017 11:34

Open a bank account with the incorporation certificate somewhere less strict. Or use the company as a shell plaintiff to sue some government entity somewhere dismal , bribe the judge get the judgement in favor of the company, and run off with millions of looted funds and an extra , respectable jurisdiction layer in a quasi plausible story, with the actual funds paid into another company's bank account. Lots of possibilities.

There should be no weak links in the chain.

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to Thaya10
01st Dec 2017 11:58

In today's market you do not need a bank account with so many ways to manage your money, so many less restrictive account providers around the world.
You only need a place to put money, doesn't even need an account number and sort code, and these can be opened over the Internet with very little restrictions.

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to quickform
01st Dec 2017 12:24

Not only that, there's no law that says a company has to own a bank account. It can transact in cash, or via bank accounts owned by others.

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01st Dec 2017 12:50

The whole AML controls are a joke. Because I'm a qualified accountant with a practising certificate issued by CIMA (the other professional bodies are the same) they are my supervisory body and are legally required to check that I have a clean criminal record. There are also regulations covering CPD, ethics etc.

If I was unqualified and therefore 'supervised' by HMRC, for money laundering purposes, not only are there no CPD requirements or ethical guidelines, there is no requirement for a criminal records check.

Guess which of those two types are most likely to ignore AML regulations? Answer: The one with low/no qualifications who is therefore subject to less stringent checks, if indeed there are any checks at all.

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01st Dec 2017 13:31

Companies House is unfit for purpose. It should be the first obstacle for money launderers but is not. The Mafia and others have no difficulty in forming companies in the UK as this article shows
https://leftfootforward.org/2017/07/the-uk-will-continue-to-be-a-world-l...

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01st Dec 2017 15:00

So what's new ? Companies House allows rogue directors to close down companies and walk away with assets even though those companies have debts and CH have been made aware of them. Not surprised if there are only 6 staff. Pathetic !

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01st Dec 2017 15:01

So what's new ? Companies House allows rogue directors to close down companies and walk away with assets even though those companies have debts and CH have been made aware of them. Not surprised if there are only 6 staff. Pathetic !

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01st Dec 2017 16:03

Companies House is a registry, nothing more & nothing less. As others have said it is down to banks and other professional advisors to carry out AML/CDD checks.

The idea that it is easy to get more than a very basic, and currency restricted, bank account is wrong. Similarly there are limits on cash payments.

The chances of anyone being able to launder anything more than a very small amount of money is pretty nigh impossible.

Of more concern is the fact that banks & others will rely on copies of documentation which may well have been "certified" by dodgy "professionals" in the pay of crooks.

In my experience AML/CDD is not likely to catch crooks who know exactly what paperwork they need to falsify but does cause problems for honest small businesses trying to open bank accounts or do business with others.

Needs looking at again.

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01st Dec 2017 16:21

The government does not need money to fund Companies House to do the job properly. The money should be raised through the fees companies pay. Want to change a director - company should pay a fee commensurate with the cost of proper ID checks. I believe that corporate fraud is rife. Poor people struggling on benefits commit fraud and the authorities are on them like a ton of bricks. Wealthy individuals setting up a series of companies that repeatedly go bust leaving a string of unpaid creditors - no-one wants to know. This does not just apply to private companies, many AIM quoted companies are essentially frauds and the fraudsters rarely get just desserts. AIM regulation by LSE and the Nomad system is a joke. As an investor I regularly use Companies House to investigate the backgrounds of the directors of companies that I may be considering investing in. I have found a number of examples of individuals, under slightly different names, that from other sources I know to be the same individual - makes it much easier for individuals to avoid being tracked. And Companies House are proposing that the length of time they hold company records be reduced - a proposal I believe should be strongly resisted. For anyone interested, BBC File on 4 looked at this issue last year. (I've looked but can't find a link on BBC website).

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03rd Dec 2017 09:58

Companies House is a joke, they don’t seem to check that a RO address exists or that the directors exist. They even accept payment by pre paid card so that the creator can hide their identity.

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04th Dec 2017 09:58

So whats the fix. Charging to do a check will only be a box ticking excersise. If only that this was all we had to do.

The company bank account is a non-starter because payments made payable to an individual would not be paid into a company bank accounr.

Can I suggest a better system would be that only MLR registered business (accountants etc) be allowed to incorporate companies. But there would be shouts of monopolies but you cant have both. Either proper MLR checks or not. Which do the government want?

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