Economic Crime and Corporate Transparency Bill (Third sitting)

James Daly Excerpts

Committee stage
Thursday 27th October 2022 Public Bill Committees

[Tom Tugendhat]

Hear, hear!

Duncan Hames: Thank you. I think it is important that we should continue to respect the rule of law and have a judicial basis for asset recovery. Too often, it is tempting to have a more administrative approach, and with that comes risks. It is very important that, as well as having the clarity of purpose to designate a whole substantial raft of individuals and entities for Russia sanctions, we have the determination to make those sanctions work.

We published some research just last month that found hundreds of millions of pounds’ worth of UK real estate that we were fairly sure was owned and controlled by individual entities that have been named under Russia sanctions. However, if you check on the Land Registry, there are not any of the typical markers to say that you cannot sell or transfer or trade this property. That is partly because of some of the very clever and complicated arrangements for their ownership, including using trusts.

In the work you are doing on the Bill, there is an opportunity to ensure that really important measures for global security, such as our Russian sanctions, actually work, bite and make it impossible for those who have moved large amounts of wealth out of Russia to continue to control it in the interests of their political sponsors.

Helena Wood: I could not agree more that we need to start moving from freeze to seize, but I echo Duncan’s sentiments that we must do so in a way that protects the very things we are trying to protect and do: the rule of law, due process and democracy. We should not push towards measures that effectively put in place a ministerial decree for confiscating individual assets and run roughshod over A1P1 principles.

That said, there is further we could go in UK legislation. Even with the advent of the much vaunted unexplained wealth order, our law enforcement agencies remain on the back foot. There is more we can do within the confines of European rights compliance-tested laws of reverse burden mechanisms to put law enforcement on the front foot.

Fundamentally, though, it is not going to be an easy fight to link those assets back to the criminality from which they once derived, given the difficulties of gaining evidence across borders. However, there are models we could replicate that have been tested for ECHR compliance, such as in Italy and Switzerland—I could name others. If the Committee will forgive me for trailing some forthcoming RUSI work, a paper is coming in November or December this year that sets out some recommendations of where part 5 of the Proceeds of Crime Act 2002 could replicate some of the principles of other regimes and push forward to at least put law enforcement on the front foot.

The other issue I would point to, which has already been partly legislated for, is cost protection for our law enforcement agencies. We have legislated for cost capping in cases involving UWOs, but they are not the right tool to use in all cases; I particularly point to the oligarchs, who do not fit under the definition of PEPs in UWO legislation. There is an argument for the Bill to potentially push for full cost capping of part 5 cases to increase the risk appetite of our law enforcement agencies to take those cases on in the first place.

[James Daly (Bury North) (Con)]

Q I want to go back to information sharing. My understanding of the Bill—please tell me if I am wrong—is that the clauses will allow

“direct sharing between two businesses in the AML regulated sector”

and

“indirect sharing through a third-party intermediary for businesses in the financial sector”.

That is what the Bill does. Putting it bluntly, what is wrong with that? What is the criticism of those aims and the things it allows businesses to do?

Helena Wood: Civil liability for confidentiality is one barrier. It is an important one, and removing it will hugely increase appetite, but it is not the only barrier. The boundaries within our data protection legislation are not explicitly clear; they are open to interpretation. We need more guidance, potentially from the Information Commissioner, to make clear what those boundaries are. We potentially need further clarification in the data protection legislation that is currently going through—

[James Daly]

Q I am sorry to interrupt you—we are short of time. Subject to that, the things I have just read out are good, are they not? We should welcome them.

Helena Wood: They absolutely are, and I would not—

[The Chair]

Very briefly, because I have two more people to bring in.

[James Daly]

Can we very quickly come to you, Mr Hames?

Duncan Hames: Helena is the expert on this particular subject.

Helena Wood: This is a welcome step forward. Others are going much further. The legislation that has been put forward in Singapore and Holland basically removes any barrier to information sharing by making it mandatory to share private-to-private in the context of the shared utilities that are being set up in those jurisdictions. Whether we should go down mandatory sharing is, as I have said, something that requires much further and longer public consultation. But we do need to look at that.

[Liam Byrne (Birmingham, Hodge Hill) (Lab)]

Q Duncan, I think I heard you say that UK corporate structures were the structure of choice for money laundering in what was the biggest money laundering scandal in Europe. That chimes with a piece of work you put out on 10 October, which said that there are more than 21,000 limited liability partnerships that have red flags—characteristics of organisations associated with economic crime—and that economic crime could have cost tens or hundreds of billions of pounds. That is a hell of a state for this country to be in. Does the Bill fix the problem you have identified?

Duncan Hames: It is a serious matter, and this Bill doesn’t. Although, as you say, we published that report very recently.

--- Later in debate ---

[Alison Thewliss]

Q Is there an amendment you would make to make that clearer?

Elspeth Berry: In terms of the historic record? I would think 20 years; I understand that has been done for a lot of company information. If we are now going to have a registry power to dissolve and/or deregister, it is a little problematic. All of that needs to be clear. We know that there has been a pattern of limited partnerships appearing and disappearing, perhaps ceasing to trade and perhaps coming back. We know that that is a pattern, which we want to see, and if 20 years has been the standard at various times for companies, why not for everybody?

[James Daly]

Q I want to pick up on the question about Companies House. On Tuesday, Companies House described themselves as a passive organisation at this moment in time; potentially, they are now turning into—I do not know if this the correct word—an investigative or certainly proactive organisation. All that we have heard so far, which I fully accept, is that it has to be resourced. How do you think this change of culture and investigation will work with some of the problems that you talked about?

Chris Taggart: That is a good question. Certainly, we have been dealing with Companies House on quite a close level since we were founded 10 years ago. I have huge respect for them; they do really good work incredibly efficiently and so on. The challenge is that they are good people, but the people we are trying to stop are not good people, and they think in a different way.

What Companies House think they are doing is creating companies—when people think of companies, they think of a factory, a shop, a company providing services or manufacturing things, and so on—but what they actually do is create legal entities; they create things that have a distinct legal personality and limited liability. The criminals know that, they are using it and they are using networks of these things. More than that, we are talking about a situation where you start to think about things from a traditional company point of view—what we all used to think of as companies—but, actually, the legal reality is one of legal entities, so you need to start thinking about this in an entirely digital way, an entirely data way and an entirely legal way.

I will give you an example. Where a company has got assets—it has got things—there is a downside to it being struck off. If you are overseas and you create a UK company, and the company is struck off, as long as the money has come in and out before that, that is fine—you have done the job for the company. We need to have a change of mindset, and that change of culture will be as important as the powers that Companies House actually have.

[James Daly]

Q The reason I ask is that the example was given on Tuesday of a chip shop in Barnsley—great town that it is—has 50 legal entities registered to it. There are thousands of examples all over the country. It would take one investigator months to investigate the information for every separate legal structure attached to that chip shop. What do you feel about that, Ms Berry?

Elspeth Berry: There will always be a problem, but that does not mean we should not tackle it and it does not mean that we cannot tackle it, and I appreciate that the Bill is attempting to tackle it. All of the things it is trying to do are good, but almost all of them could be significantly improved. We have to deter the wrongdoers. We have to stop looking as though this is a good jurisdiction to do this in. For example, there have been arguments about the fees. It is generally accepted that they should go up, and if your business plan cannot cope with £100 or £500, what kind of businesses are being set up here?

If we are not checking the identity of shareholders and applying PSC legislation to partners, there are still so many loopholes. It is not that there is something there that would be a sanction if they ever caught you—we know this from police and crime; if people think there is only a vanishingly small chance of anyone ever noticing, it is worth taking the risk. I suppose that brings us back to the point about the registrar’s powers, which are great, but they are not duties in most cases. How will we know if she has done it, or what she can reasonably do to minimise the risks of various things—to check information?

One of the things we need is a clear database of things that are red flags—things that Transparency International and lots of journalists have identified that the registrar should be looking for, some of which the legislation still allows, such as things like overseas registries and multiple formations, and the use of company service providers. The problems with those were talked about during the earlier session, and the Bill is not going to entirely resolve those, if at all. If we can tighten down on a lot of those, we will reduce—never eliminate, but reduce—the amount of wrongdoing that is here because of problems we have either created or left in our laws.

[Dame Margaret Hodge]

Q I very much take your point, and I hope some of the amendments we put in address what you said about wanting to tighten up on the proactive role of Companies House.

I wanted to ask about shareholders and then about the disappearance of limited companies if they dissolve. I agree that shareholder information is really important—Usmanov brought that home to me. When we sanctioned Usmanov, he just gave everything to one of his daughters or something—anyway, it disappeared into other people’s hands. Can you explain a little what we need to do on shareholder information? At the moment, there is a 25% shareholding barrier. Should that be reduced to 5% or 10%? That is my question.

Then, on limited partnerships disappearing, that was brought home to me very much as a result of the terrible incident in Lebanon—the explosion in Lebanon. It was found that a British-owned company was behind that, with a beneficial owner in Cyprus who happened to be a corporate service provider. It then turned out that it was a nasty situation where the actual owners were some Syrians, and the fertiliser was not going anywhere near Mozambique—which was where it was meant for—but was being used for barrel bombs to kill Syrian citizens. The moment that happened, they tried to dissolve the company and get it to disappear, and obviously in that area of wrongdoing, we need to hang on to any knowledge that we have.

This is for both of you: what amendments do you think are necessary to enable us to stop people dissolving companies and to force information out, so that where there has been that terrible terrorist wrongdoing, we can pursue the wrongdoers? That said, I take the view that a lot of what we are trying to do is prevent these things from happening in future.

Elspeth Berry: On the PSC point, a reduced percentage would be a vast improvement, but I think a zero percentage could be considered. You can have a lot of influence in all sorts of ways while not necessarily hitting those targets, because you are connected with somebody else in a way that we do not catch through the legislation. But I certainly think that a reduction would be a big improvement to try and catch more people who are de facto PSCs, but not in law.

On the limited partnerships point, there are a lot of things we could do. The Bill makes a start in doing those, but given that a lot of this started with the limited partnerships consultations, I am slightly concerned that they got put aside because it was a case of, “Here comes all the corporate stuff,” and that is where all the money and excitement is. There is this small area of limited partnerships where there is a strong lobby for those people dealing with limited partnerships for particular purposes—quite legitimately—who do not necessarily want this to be made too difficult, but we get things like the restrictions on corporate partners not being applied to LPs. I had to read the provisions several times. I dread explaining them to my students, because of the difficulty in trying to get at who owns limited partnerships and who is in control of what is going on in them.

That level of “corporate partner on corporate partner on corporate partner” exists, and we know it is a problem. It is going to continue, depending on what we do with LLPs, and it is a big problem that they are just not in the Bill at all. It is like, “Oh, well, we’ll just apply the legislation to them later,” but which bit of the legislation? The corporate bit? The partnership bit? LLPs have a history of having the bits they want—the nice bits of corporate law and the nice bits of partnership law. Things can get missed because we think, “We have done the big task with the Bill.” PSCs can be applied to partnerships; they haven’t been here, and there is an assertion that it is not possible legally, but as a lawyer I would say that that is not correct.

You even have a provision here saying that people who have been disqualified under the company directors disqualification legislation can still act as limited partners. Limited partners have a limited role by definition if they are behaving properly—of course, they may not be—but even if they are behaving properly, a limited role is not no role for someone who has actually been disqualified from acting as a company director.

Chris Taggart: To pick up on an earlier question, the best information sharing is going to be information sharing in public. A lot of the great work that was done on people after the invasion of Ukraine was done using public domain information. There is a risk to lying in public. The fact that criminals will lie is also an opportunity to catch them out, because it is quite hard to lie consistently.

We get people all the time saying, “We don’t want our information to be on OpenCorporates”—even though it has come directly from Companies House and other places—“I don’t want people to know that my last two companies went bust,” “I used to have a company running a brothel in Germany, and I don’t want my new employees to know that” or, “I don’t want people to know that I am running a company on the side or working for someone else.” There is a cross-over here with data usage. When something is in the public domain, it needs to be functionally public. “Functionally public” means that you can use it and reuse it, and have it as data so that you can combine it with other datasets.

The shareholding data is so important, not just in and of itself, but because it allows you to ask, “Wait a minute. How is that happening with that?” Having it as data allows you to do that programmatically so that you can see trends.

--- Later in debate ---

[Gavin Newlands]

Q What specific amendments would you suggest for the Bill to address it a lot better?

Graham Barrow: Being clear that a company will not be allowed on to the register until those full checks have been made would be one. I would also be a lot stricter about the ability for people to register a company that has significant similarities to a previously registered and dissolved company. That may need a bit of crafting, in terms of the words, but I do not think that is beyond the wit and wisdom of people.

Companies House refused to dissolve or eject Asda Ltd because it was not close enough to Asda Stores Ltd, which is the actual name of the well-known supermarket. That seemed to be a bit of a nonsense. I am not saying that Companies House did not apply the law correctly; it suggests the law is not very good in terms of the intellectual capital.

There is a guy in Cheam who has legitimately registered Renault Ltd, Volkswagen Ltd, Adidas Ltd and Asda Ltd—which he re-registered after Asda Ltd in Huddersfield got struck off. That is simply nonsense. Intellectual capital is clearly being compromised by those registrations, yet we do not currently have the powers to deal with it. I know there is wording in the Bill on this. Obviously, the proof of the pudding is in the application of that, but I would like to see it tightened.

[James Daly]

Q Thank you, Graham. I think you have answered this question, but, in layman’s terms, if Fred Bloggs from Bury—my constituency—who has led a blameless life and is 95 years of age, finds that his name is down as a director of, or linked to, any company or legal entity that has sent a supporting application to Companies House, how does this Bill assist him?

Graham Barrow: I guess the Bill is trying to assist by not allowing that to happen in the first place. That is the premise, is it not—that you should not be able to get somebody without their clear permission?

[James Daly]

Q Forgive me for interrupting, Graham—it is just because of time. When we look at red flags in various ways, we obviously talk about identification, but if the information produced is “Fred Bloggs of this address”, where would the red flag come?

Graham Barrow: That is a difficult one to answer, because very often the address that appears on the public register is not their own address. However, it is potentially likely that a residential address appears on the non-public aspect of the register, because that is often the conduit for getting access to banking, as they will do electronic identification checks against somebody’s residential address rather than other elements.

At the moment, there is one piece that is rightly hidden from public view, which is the director’s residential address. That is almost certainly used by criminals where they have access to it, because that opens up access to banking. If we are not successful in stopping fraudulent use of directors’ names and addresses, the Bill needs to be looked at carefully in its ability to give redress to that, without, of course, allowing people with rather ulterior motives trying to remove legitimate directors because they have some sort of vendetta.

We should always remind ourselves that, in our attempts to correct all of the bad stuff, we must not make it possible for people to use those corrections to then make life harder for the people who are doing the job legitimately. That is an ongoing discussion, I think.

[James Daly]

Thank you, Graham.

[Tom Tugendhat]

Q Could you give some live examples as to how you would use various aspects of the powers in the Bill to improve your ability to track? Of course, we have spoken on numerous occasions about the partnership that we need. If I may say so, Graham, you are an extremely active tracker of companies, and, I would therefore say, one of the top of the class in the public-private partnership.

Graham Barrow: That is kind. You must understand that I am a private citizen, so I do not have access to huge swathes of information that I would love to be able to get hold of to give a much rounder view of that. Companies House, of course, does, so there are some interesting things that it will have, such as email addresses, IP addresses and credit card details.

There are some important provisos there. Do not allow people to pay for their enrolment through a pre-paid credit card. That would be a bad thing. Do not allow people to apply through a virtual private network—a VPN. That would be a bad thing. Do not allow people to apply through something like Proton Mail or an encrypted mail account. That would be a bad thing. What we need is transparency in all those things so that we can aggregate that data with, for example, data from His Majesty’s Revenue and Customs, voter roll data and other data, to get a much more rounded picture of people who are applying for company directorships.

Now, that only works here in the UK. It is worth bearing in mind that about 150,000 company incorporations every year emanate from outside the UK. That adds further difficulty. There were 50,000 applications from China last year, so that is clearly a problem. Incidentally, those numbers soared after China banned cryptocurrency at the end of September last year. There was an extremely easy to observe uptick in UK corporate registrations from Chinese individuals.

The Bill will start to address such a range of issues. I think it will be the first of many if we are really going to make our corporate environment safe and secure, and start tackling economic crime and the abuse.