Economic Crime and Corporate Transparency Bill (Fourth sitting)

James Daly Excerpts

Thursday 27th October 2022 Public Bill Committees

[Alison Thewliss]

Q Thank you, that is useful. As one of the organisations under the OPBAS umbrella, how do you feel that is going with anti-money laundering supervision because there has been some criticism of that regime and its efficacy? Looking at the 2019-20 figures, I understand that you cancelled 10 memberships and issued 39 fines totalling £117,000 to members. What does that stand at now, and is it an effective deterrent?

Mike Miller: I do not have the up-to-date figure with me today, but I can come back to the Committee with that in writing. Generally, in OPBAS, we are obviously very supportive on the need to have professional bodies for oversight of regulation for anti-money laundering. There is obviously a Treasury consultation going on into the potential restructuring of OPBAS. We have been working closely with it to ensure that our members are represented, but also so that it will be the most effective oversight that it can be.

ICAEW is the largest supervisory body in that space. We are very proactive in taking a risk-based approach. We cover a lot of firms, and it is necessary that a lot of those inspections are carried out based on where we assume there is a higher level of risk of illicit financial transactions. Whether that should be changed is obviously something that we will come back to in the consultation.

We have been speaking regularly to Treasury and other groups. They are collecting intelligence to try to determine, I think, some concrete proposals before they put it out to consultation, but we are very supportive of OPBAS. We continue to work closely with it and have a strong supervisory body in place for the PBSs.

[James Daly (Bury North) (Con)]

Q Under the Bill exemptions from the main money-laundering offences would apply in two sets of circumstances. One is when a regulated business ends a business relationship with a client or customer and hands over property worth less than £1,000 for that purpose. The second is where a regulated business is dealing with property for a client or customer and prevents access to property of equivalent worth. Do you have any view on those exemptions and how they would potentially affect your profession?

Angela Foyle: I am not so sure the first one will affect us, at £1,000. The second one may facilitate certain activities for our insolvency practitioners, particularly where they are appointed in circumstances where they know that there has been some form of fraud—be that tax fraud or what is often called “fresh air invoicing” or invoice discounting fraud, where there is a set amount of money that is known to be tainted—because, currently, all of the assets of the insolvent entity can often be tainted, and defence against money laundering applications have to be made for each and every transaction done. By having that, they will be able to ringfence certain amounts that they know to be tainted—they would obviously do investigations to ensure that they have got that amount correct—and then deal more quickly with creditors and others with the remainder of the funds. In that sense, we certainly welcome that amendment. It is one that we raised with the Home Office, alongside the banks and, I believe, the Prison Service may have wanted it as well.

[James Daly]

Q Time might mean that you will be not be able to answer this question as fully as you might wish. However, on where we are now, and where the Bill will take us, the general view that we have heard from witnesses is that it is good—maybe as a starting point to go forward from. In a few sentences, will you explain how you think the Bill will affect your profession, for good or for bad?

Angela Foyle: There are a number of areas in which it will affect us. We are very much in favour of the changes to Companies House, I must say, and of giving additional powers to it. We are incredibly supportive of that.

One example that we can give relates particularly to the misuse of registered offices. All the firms have found instances of people effectively putting their address as offices of accounting firms, presumably to give them credibility. In some cases, that is linked to using names similar to either regulated or existing lawful businesses. Again, that is clearly intended to facilitate fraud. Currently, it can take months to get people off that address, but with the additional powers, we are hoping that that can be done much quicker.

Similarly, with other misuses, such as the inability to contact businesses, there is also the identification of directors to ensure that you are dealing with the people that you think you are. Even if those perhaps could be strengthened in some ways, I think there is a lot that is positive in the Bill. It is a staging post, but it is a really important one.

Mike Miller: I agree with Angela, particularly on the point about Companies House. We are definitely behind the reasons for and the principles of the Bill; we are very supportive of all that it seeks to do. We have been saying for quite a while that some of these measures are overdue, particularly those on Companies House, as Angela mentioned. We have proposed some tweaks for a few areas, particularly around verification, as we have touched on before. There is going to be a two-tier verification in the sense that Companies House will be responsible in some way or another for the verification of those that are registered in the UK. For overseas entities, that is a bit more of a challenge, because they require legal verification and we currently think that the legislation is such that it does not really allow a reputable business to take on the level of risk of a new client unless they have a particularly established relationship.

We have made some recommendations to our members that they need to exercise extreme caution taking on new clients solely for the purpose of verification. That is so the system works; it is not so that they avoid it. It is so that it does not, first, stop people being able to do business in the UK when they rightly should be able to, and secondly, so that if the larger, more reputable firms do not offer that service, then it becomes something that is picked up by those that we may not necessarily want to offer that service.

We have also recommended a couple of areas where we think it could be strengthened, particularly around notifying Companies House of a change of auditors, so there is a two-pronged approach. That is so that companies themselves, for example Angela’s firm, knows that they have been assigned as an auditor, to make sure that is correct and they audit the company, and for Companies House to make sure that a company is audited as it should be. We think that would reduce the likelihood of discrepancies coming in, going forward. However, overall, we are generally supportive.

[James Daly]

That is very helpful. Thank you.

[Dame Margaret Hodge (Barking) (Lab)]

Q ICAEW represents what proportion of the accountancy profession, do you reckon?

Angela Foyle: I do not know the proportion, but there are about a hundred and something thousand members.

Mike Miller: Yes, about 110,000 members. I am not sure of the proportion.

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[James Daly]

On a point of order, Ms Bardell. As a result of Mr Tugendhat’s question, I had better declare an interest: I am a practising solicitor.

[The Chair]

Thank you very much. That will be put on the record.

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[Alison Thewliss]

Q We have heard an awful lot about deficiencies in the register in terms of the information that is on there and the practical difficulties that that causes for companies who wish to interrogate the information for their own due diligence. Is that an issue you have come across?

Peter Swabey: Yes, I think it is. It is an issue in a couple of ways. We just heard about the challenges in correcting deficient information. There are a number of plcs that have reported that their registered office address has been used for companies of whom they have never heard. If you are a plc with a large number of subsidiary companies, that could quite easily be overlooked by people. As somebody said in the last session, that is then used to give credibility to the potentially fraudulent company that is being set up. Being able to fix that more quickly is certainly an advantage.

[James Daly]

Q One of the things we have talked about with every witness—you will probably give a similar answer, Mr Swabey—is that we all want to see Companies House resourced to be able to carry out the requirements in the Bill. One witness this morning made reference to the sheer volume of companies and legal entities that are registered at Companies House on a daily basis. If one of the consequences of the Bill is that registration at Companies House takes longer because people have to go through the regulations and comply with other duties, is there any consequence to that?

Peter Swabey: I think it makes it a little more difficult for some people. I am a company secretary, so I would argue that you simply have to plan it all a bit better, and perhaps think about some of that a little more in advance. It will mean that some corporate transactions that you can currently deal with very quickly by simply having a meeting in a room and agreeing that so-and-so and so-and-so are the new directors will now have to go through a process. We are all hoping that, as promised, Companies House will manage the verification process for new directors expeditiously so that that will not hold things up unduly, but it is an additional factor to bear in mind.

[James Daly]

Q In layman’s terms, and very briefly, if I want to register a legal entity and I employ you or somebody else to do that, what information is submitted to Companies House?

Peter Swabey: You have to name the directors. You have to give some sort of evidence that the directors are real people who you know, so some piece of personal information about them. That might be their eye colour or their national insurance number. Nobody actually checks that, by the way. You just have to fill the box in. You have to have a registered address for the company and a few other details, but it is a relatively simple process.

[James Daly]

Q So such a process—light-touch regulation at its finest—is certainly open to fraudulent activities.

Peter Swabey: I think it is fair to say that at the moment it is nothing like as secure as any of us would like it to be, and the Bill is a big step forward in tightening that up. I would still like to see it go further in some ways.

[Dame Margaret Hodge]

Q It is the beneficial ownership that is revealed to Companies House, not necessarily even all the directors, as I understand it. The way you are talking, you obviously deal with big companies. The whole purpose, which I think we all share across the room, is that we want SMEs and the growth of new companies. The idea that every SME will have a company secretary is not really a viable alternative. That means it is really important that we can have faith in the company service providers, who are the people who check the data. Given the way the Bill is constructed, do you think you would have such faith, in particular given all we know from the Panama leaks onwards?

Peter Swabey: It is really important to make sure that the hoops through which those authorised company service providers go before they become authorised are significant, to make sure that we can have confidence in that.

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[The Chair]

It is a very important question, but unfortunately we have to stick to Members asking witnesses questions. However, I am sure that you can put those questions to our esteemed Members in other forums.

I will move on to James Daly now, because there are a couple of other Members who are keen to ask questions.

[James Daly]

Q Catherine, thank you very much for giving evidence; what you have said is very helpful. You have investigated these matters and looked into them. You have talked about Companies House, which is a central part of this legislation, and we have talked with other witnesses about what needs to be done there.

However, I just wanted to ask about money laundering. To make a very straightforward point, you obviously need a bank. If you have got a fake financial institution, or a legal entity set up for criminal purposes, you need a means of transferring money, either out of that body or into it. Could you talk about any thoughts or experience that you have, including regarding anything that you have investigated, that touches on that point and on what we can perhaps do to address it?

Catherine Belton: I think it goes back to this issue of LLPs and how these limited liability partnerships have really become, over the last two decades, the vehicle of choice for Russian money laundering schemes in particular—at least the ones that I have studied.

There was the “Moldovan laundromat”, which used LLPs based in the UK, including in Scotland, to move $14 billion out of Russia in illicit cash in the space of four years. That was part of a much bigger process through Danske Bank; I think the total volume of illicit Russian cash coming through Danske Bank was in the realm of $200 billion in just over a decade. That is obviously enormous amounts of cash.

However, it just goes down to the weakness of LLPs and the system that we have created, in which you can have companies established that do not even need to have any real business in the UK; they do not pay taxes here and therefore they did not have to file any accounts. They were not really having to file any beneficial ownership, either. That really means that there has been a huge gap in our legislation. Obviously, the Companies House reform will hopefully provide for more disclosure of beneficial ownership, but there are still so many ways for people to get around it, because Companies House really does not have proper funding to check whether beneficial ownership is being reported properly.

Obviously, the banking system is now under much greater pressure to investigate the source of funds, but while the banking system has become a much more complicated place for people to move illicit money through, the same demands are not placed on hedge funds or private equity funds. There are much less stringent requirements on those types of entities to disclose who their clients are and where the money is coming from. We only have to look at who the major backers of Brexit were. Hedge funds and private equity funds were major donors during the Brexit referendum, and we really had no clue where they were getting the money from.

[The Chair]

Catherine, we really want to hear from you and make sure that all our other members get to ask questions. We have two other members after James who want to ask questions, so please keep your responses as brief as possible, with all the information that is possible to get across.

[James Daly]

Q On top of all the very important points that you have made, I think one of the things that I am left with from your evidence, Catherine, is that we have to ensure that the information-sharing links between Companies House and financial institutions are strengthened. Companies House was described as being a passive organisation at the moment, but what you are saying is that that has to change and there has to be a close link with financial institutions, so that these relationships are attacked throughout the criminal justice system. Am I right?

Catherine Belton: Yes, that is exactly right.

[The Chair]

Thank you very much.

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[Alison Thewliss]

Q The Government have talked up the benefits of being able to incorporate companies fast. Do you think there needs to be a bit more grit in the system to allow for scrutiny, rather than speed?

Professor Jason Sharman: I think so. For me, it is telling that in jurisdictions for which incorporations are their lifeblood, such as the British Virgin Islands, it is much slower to incorporate. It takes close to two weeks to incorporate in the British Virgin Islands, and it takes about $1,000. The British Virgin Islands get half of their Government revenue from incorporation fees. They have a real interest in making sure their company registry works well. No one likes red tape and filling out forms, but the idea that you might have to spend a couple of hours instead of 15 minutes, or £50 instead of £12 is, to me, not unreasonable.

[James Daly]

Q Thank you for that, Jason. You have given an example already, but I was wondering about the international context. We have Companies House. Can you give me an example of the equivalent in European countries or America and the difference you perceive between our Companies House and theirs?

Professor Jason Sharman: I feel sorry for British Companies House, because it has been given a lot of work without the resources to carry it out. The mismatch between what is expected of an institution and the resources it has to achieve those ends is greater. Company registries are passive, archival organisations.

[James Daly]

Q That was my point, really. We have accepted the point about resources, but Companies House was described by one of the directors we heard from as a passive organisation in respect of these issues. I just wondered whether in other jurisdictions, say France or Germany—and I don’t know the answer to this question—they have that view of their equivalents, or do they view theirs as a proactive organisation that has to investigate the things we are talking about?

Professor Jason Sharman: No. The UK is typical.

[James Daly]

Q Forgive my naivety, but it usually takes a company or a legal entity about 15 minutes to register with Companies House. The intention behind that is for money laundering purposes. I am assuming—forgive me if I am wrong—that when Fred Bloggs and Co. was set up, the people who did so had to then open a bank account in the name of Fred Bloggs and Co. in order to transfer the money to this jurisdiction. Is that correct?

Professor Jason Sharman: Yes and no. Generally, yes, but if you want to own property, you never have to touch the banking system. If you want to own a yacht, you can set up the shell company and earn, just like that. You can break sanctions and own property with a shell company, even without a bank account.

[James Daly]

Q Just in general, using the banks as an example, should we be looking to put in the Bill requirements for them to play their part in the partnership to tackle money laundering?

Professor Jason Sharman: Again, banks have had these requirements to establish the beneficial owners for a while. I think this is good, but it is the enforcement that is key there.

[Dame Margaret Hodge]

Q Following on from that, I completely take the point about enforcement, but would a failure to prevent power make any difference, assuming it was enforced?

Professor Jason Sharman: I probably differ from many of the other people who have spoken in that I am not a fan of failure to prevent. I think that the goal of these laws is to make life hard for bad people without making life hard for good people at the same time. To the extent that you have really onerous regulation or weaken the presumption of innocence, that is something of an own goal or collateral damage. Before you put people in jail, you should be pretty serious about it. There should be a mental intention there—a mens rea.

I am not really comfortable with the strict liability. There is strict liability in anti-bribery, which means I have to do pointless anti-bribery training every year for the University of Cambridge. It does not do me any good and it does not stop corruption, but it is one of the things that Cambridge feels it has to do because of the strict liability. Again, it is a cost to society that is not included in legislation or in regulatory impact assessments.