A report from Transparency International UK has revealed how the British systems designed to protect the country from illicit finance are badly failing – and it makes for difficult reading.
The report states that hundreds of British shell companies are implicated in nearly £80bn of money laundering, and that the UK has insufficient controls when it comes to setting up companies.
It argues that there are practically no barriers to UK companies being incorporated by money launderers, and no way of tracing their use after they have been established.
Transparency International says it has found 766 companies registered in the UK that have been directly involved in laundering stolen money out of at least 13 countries. These companies are used as layers to hide money that would otherwise appear suspicious, and have the added advantage of providing a respectability uniquely associated with being registered in the UK.
The situation would be sizeable at any time. But with Brexit looming, the government must immediately tackle the causes behind the global role the UK currently plays in both money laundering and cleaning corrupt finance.
Each pound laundered is a dent on Britain’s business reputation.
However, it is the government’s own loophole that is allowing so much of this illegal finance to pass through the country unregulated. Companies House, the government’s official registrar, remains exempt from the EU anti-money laundering directive that was introduced in July this year.
The decision was made because Companies House is deemed not to be a business provider, as it does not form companies as a way of business. Rather it fulfils a statutory role to register businesses and issue an incorporation certificate.
What this means in essence 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.
This is because Companies House checks only to see if forms are completed, not whether the application is accurate.
The consequence of this is that any rogue company or anyone with a criminal background (which would legally have to be checked if they were to visit a lawyer, an accountant, or a regulated formations agent) is free to set up a company without being identified, simply by going direct to the government’s Companies House – safe in the knowledge there are currently only six members of staff responsible for policing over four 4m UK companies.
The report makes uncomfortable reading for Trust and Company Service Providers (TCSPs), but the Fourth Money Laundering Directive brought in this year tightened the regulations by which these companies operate. All companies registered via a TCSP are now subject to due diligence, whereas a company registered direct with Companies House is not.
The reports conclude that “Companies House has neither the power nor the resources it needs to ensure the integrity of the UK company register”. It states: “there is a clear money laundering risk posed by the lack of due diligence carried out by Companies House on individuals seeking to form UK companies. This currently allows 40 per cent of incorporations to happen without any background checks on those forming the company.”
It recommends that “the UK government should empower Companies House to carry out obligatory due diligence on those seeking to incorporate new companies, just as is currently the case for regulated TCSPs”.
Yet, the government currently does not have any plans to implement any regulatory checks or director verifications at Companies House, because it believes this inexpensive and simple method is the quickest way to allow companies to set up, create jobs, and contribute to the UK economy.
These goals are commendable, but they cannot come at the cost of making the UK as vulnerable to illicit finance and money laundering.
Britain has a spate of challenges heading its way through Brexit. Credibility will be key for business, for politics, for Britain.
While London remains the world’s laundromat, its credibility is undermined.
The government needs to quickly start playing by its own rules. Companies House must be held accountable for not following the money laundering rules set out in the European Union Fourth Anti-Money Laundering directive and resolve this simple problem by closing the gaping holes through which dirty money is flushed through in waves.