The Financial Times has reported this morning that:
Businesses are being set up in the UK at a record rate, according to the government's register of national corporate activity, as criminals attempting Covid-related fraud establish companies alongside entrepreneurs creating new ventures.
As they note, this matters:
Senior bankers have raised concerns that criminals have formed companies to take out lightly checked government-backed loans. The National Audit Office this month warned that tens of billions could be lost through fraud and defaults.
And the numbers are significant:
In the second quarter of 2020, the last for which there is Companies House data, there were 176,115 new incorporations, an increase of 3.6 per cent on the same period last year.
[There are now] more than 4.5m companies are now on the register, compared with 2.7m in 2010.
The obvious concern is that some of this increase is fraudulent. It is an issue to which I have been referring for more than a decade, with almost no one paying any attention despite the very obvious contribution that the ultra-lax regulatory regime at Companies House to UK tax fraud.
With regard to this, the FT notes that:
Tackling criminal behaviour, which transparency campaigners say has long been a weakness of Companies House, is a focus of reforms agreed last month. When passed into law, these will see the most important changes to how companies are overseen in the UK for almost two centuries.
The agency will strengthen the accuracy and transparency of company ownership through more robust identification processes, use new powers to investigate suspect filings and develop better anti-fraud technology.
I beg to differ. I think that claim is, at best unsubstantiated. More likely, this is yet more token gesture regulation to p[retenmed that action is being taken on an issue when no change will really occur. This is despite the fact that:
The reforms are partly driven by a government desire to crack down on dirty money flowing into the UK. The National Crime Agency has estimated that as much as £90bn is laundered through the UK's financial system each year, including by using shell entities registered at Companies House.
That's all too easy now. As the FT notes:
Under current laws, Companies House can check records to make sure the right boxes have been filled in, but little else. No checks are made on whether information provided is correct.
And as the director of Companies House notes:
“My current powers don't allow me to take action [even when] I can see that obviously something's wrong,” Ms Smyth said.
It is now claimed that:
Companies House will also work more closely with other government departments, such as the tax authority, to try and identify suspicious behaviour.
If I am honest, I very much doubt that this will be the case. We know that there has been a substantial reduction in investigation work by HM Revenue & Customs as a result of the coronavirus crisis, and there is no evidence that the government has any intention of making up its funding to cover for the diversion of effort that it has had to make to deal with that issue. Straightforward fraud is, then, going to be investigated even more rarely in the future than it is now. Why, then, HM Revenue & Customs is going to cooperate more often with Companies House is, overall, hard to imagine.
There is an alternative, much better, solution to this problem. All that we require is that every UK bank and financial services company (including accountants) provide information annually to Companies House and HM Revenue & Customs on the companies to whom they provide services or account facilities, and then also provide information on the total sums deposited in bank accounts by those companies in each year if this information is known to them, as it would be to banks, and on the persons who have control as directors or shareholders of those companies, which information they must hold under money laundering regulation. They should, in addition, confirm the real trading address of the company in question.
With this information to hand those two agencies would be able to identify:
- Which companies are actually trading in the UK, and should therefore provide tax returns to HM Revenue & Customs. At present they have no way of knowing this, which is absurd;
- Where companies really trade, which is information that should be made available at Companies House;
- Who really controls operating companies, which is essential information if fraud is to be tackled.
There is nothing radical about this proposal: data of this sort is now automatically exchanged between tax authorities on an international basis, but despite this the UK does not require its transfer with regard to companies trading in the UK. As a consequence our company regulation system is a licensed mechanism for the supply of corruption services. And, there is no plan to change this. You could not make such a fraud generating opportunity up if you tried, but the UK has succeeded in creating it, and appears to want to do nothing about it.
From the government and the claims to be pro-business I find this amazing. Corruption undermines honest business. Seems to be what this government wants.
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You appear in Companies House data at least twice, as do some of your co-directors. I appreciate that who really controls operating companies is essential information if fraud is to be tackled, but it would help if people calling for more resources to do this didn’t also consume more resources by creating multiple identities.
A small thing, but it has to be pointed out.
I have not created multiple identities
Companies House may have created multiple identities for me
And that makes my point…the filing is by them
I agree with your analysis, Richard. It’s seemed to me over many years that UK financial regulation has been woefully awful. I had hopes that Blair would have addressed the weaknesses in City regulation, but that didn’t happen and, predictably, along came 2007-8’s GFC. I understand the GFC was a global event, but the countries which had tightened their regulations in the 1990s following localised crises (Canada, Sweden), fared better in the aftermath of the GFC. You’ve been highlighting the Companies House weaknesses, which facilitate malfeasance, for years, but like you I’m now convinced that this government deliberately seeks loose regulation in order to facilitate fraud. Kleptocracy is probably the dictionary word for it, but perhaps Gangsterocracy describes it better.
🙂
At this stage, I would much prefer that the Irish food standards agency were employed.
When the horsemeat ‘scandal’ arose – I understand the Irish asked what you might do to adulterate the food supply and went looking for it. The UK FSA, when asked why they didn’t test for horsemeat, responded that they didn’t know it was in there.
I appreciate this may not actually be the case, but it serves to illustrate the point. We need Companies House to be empowered to go looking for problems as well as having more control on setting up and managing companies.
As it stands at the moment, HMRC could do much more with the data it has to cross check companies with bank accounts and activity.
Personally, I still hold the banks responsible – they send out incomprehensible identity verification letters, literally to little old ladies who have held the same bank account for decades, whilst at the same time allowing their systems to be abused by fraudsters. There is an unwillingness on them to truly acknowledge just how badly they run their organisations.
I can never quite believe how little verification is required for the companies house returns. The annual return could be a complete work of fiction, requiring absolutely no proof of address or identity for the directors. Does anyone actually read the accounts that I submit each year?
I feel like I could just make things up, and no one would ever know.
It has always felt like they don’t care, I guess they genuinely don’t.
They check postcodes are real
That’s it
Oh, and the balance sheet has to balance: that is the only accounting check
I think we have to face the truth staring us in the face. The government actually thrives on the weakness of corporate and accounting regulation. It helps cheats prosper and that is what the members of our government, it’s hangers on and cronies actually are.
The only way we will possibly get change is from a change in government and who knows, this criminal gang may create a sufficient b*ggers muddle for the majority of the electorate to see them for what they are. Totally corrupt from the top downwards.
I think you are right
The problem with all regulation in the UK is that there are never enough resources (both financial and well-equipped, well-paid, highly motivated people) to undertake the task of inspection and interrogation of the facts. Even if we had the legislation and regulation in place (which we haven’t), there would be nobody to pursue it, or resources to support forensic investigation. This is quite deliberate. The last thing neoliberal, rip-off Government in Britain wants is real examination of what is actually going on. That would never do.
The annual filing fee for a company is £13
Suppose we made it £100
Problem solved….
I’m reading ‘Putin’s People’ by Catherine Belton and this book mentions the UK’s ‘light touch’ regulation of the finance sector as well as ‘Limited Liability Partnerships’ (LLPs, pp. 416-417) that offer ‘zero transparency’ and enable shell companies to exist in the UK even though no business takes place there and also the production of ‘fake accounts’.
According to Belton, LLPs were created after Enron and the Arthur Anderson scandal helping partners of the big 4 accounting firms to ‘avoid personal liability for the failure of their companies’.
The LLP concept arrived in the early 2000’s – under New Labour.
What an earth did they think they were doing?
EY and PWC forced it on Labour by paying Jersey to create an LLp law and threatening to leave if the U.K. did not create LLps as well
What a surprise.
Nothing courageous about that.
LLPs are much older than you think PSR. They came about via the Partnership Act of 1890 and the Limited Partnerships Act of 1907, both acts of UK Parliament. For more info see:
https://www.harpermacleod.co.uk/hm-insights/2017/july/the-review-of-scottish-limited-partnerships-and-a-guide-to-what-they-are/
There has been considerable abuse in recent times of the Scottish LLPs for money-laundering, tax evasion, and general criminality, which in turn has caused much adverse publicity for Scotland. The 2 Acts, having been passed by Westminster, can only be amended by Westminster legislation and the Scottish Government and SNP MPs have repeatedly asked UK Gov to tighten the law to prevent large-scale international malfeasance. It will come as no surprise that the Tory Gov has repeatedly ignored these requests. Clearly, vested interests are at play, so we have the the situation where the UK Gov has repeatedly refused to act to prevent massive international criminal acts which exploit UK Laws that are not fit for purpose. I stick by my description that the UK is a Gangsterocracy.
You need to be careful to distinguish different forms of partnership, and in particular LPs and LLPs.
Partnerships – that is, general partnerships, where all partners have unlimited liability for partnership debts – have been around for a very long time; the Partnership Act 1890 largely codified rules of common law.
Limited partnerships (LPs) were created by the 1907 Act. They must have at least one general partner (with unlimited liability for partnership debts, but that general partner is often a limited company) plus at least one limited partner. A limited partners is not allowed to be involved in the management of the partnership, at risk of losing their limited liability and becoming a general partner instead (effectively, their liability was only limited while they were silent investors not active participants). Or at least until the Legislative Reform (Private Fund Limited Partnerships) Order 2017 created the “private fund limited partnership” and allowed the limited partners to participate in certain decisions.
In the UK, limited liability partnerships (LLPs) were only created under the Limited Liability Partnerships Act 2000. They are incorporated legal entities, but internally the members in principle have rights similar to partners. The members have limited liability for partnership debts, with limited exceptions.
“More likely, this is yet more token gesture regulation to pretend that action is being taken on an issue when no change will really occur”
Apparently there is a word for this. Virtual policy making. It looks like a policy but it doesn’t really exist. Another term is pseudo -transformation.
I went to a conference in Amsterdam on maritime policy and its a big issue.
I can send you a paper presented which attempts to theorise the issue.
Please…