Economic Crime and Corporate Transparency Bill

Baroness Hodge of Barking Excerpts

Consideration of Lords amendments
Monday 4th September 2023 Commons Chamber

[Kevin Hollinrake]

My hon. Friend makes the other point, and these measures are about the delicate balance that we want to strike, ensuring that the right provisions are in place to prevent fraud without putting undue burdens on business. I am pleased that those interventions reflected both those positions so that we can see the legislation holistically rather than just through the lens of failing to prevent fraud.

[Dame Margaret Hodge (Barking) (Lab)]

Will the Minister give way?

[Kevin Hollinrake]

If I may, I will make a little progress on that point.

We believe that the six non-Government amendments for debate would pose significant and disproportionate burdens on business, penalising reasonable companies and businesspeople with limited evidence that the burdens would be outweighed by any meaningful benefits. I will go into each amendment in detail, but I will begin by emphasising the Government’s position. We must insist that the balance achieved in the Bill through Government amendments made in the other place is maintained.

[Dame Margaret Hodge]

I am grateful to the Minister for saying that, because it was on that point that I wanted him to give way. Does he not think that any honest, upright business, whether large, small or micro, would aim within its own procedures to avoid fraud or money laundering?

[Kevin Hollinrake]

The vast majority of the business community is honest and upstanding—that is the point. What we are trying to ensure is that those businesses are not disproportionately affected by putting in controls, checks and balances. I speak as a businessperson who did have to implement failure to prevent bribery and tax evasion measures in our business, and I tell the right hon. Member that there were significant administrative burdens around that legislation, and I believe they would be more so for fraud. I will come to that point in more detail.

I turn to Lords amendment 23. The inclusion of lines 84 to 96 would require all UK companies to declare whether they are holding shares on behalf of or subject to the direction of another person or persons as a nominee, and if so to provide details of the person or persons. Fundamentally, that is not necessary. Provisions in the person with significant control framework, as strengthened through the Bill, already require the disclosure of a person of significant control behind a nominee on pain of criminal sanction for non-reporting. That achieves the same intent. A combination of measures already in the Bill, the material discrepancy reporting regime in the Money Laundering and Terrorist Financing Regulations 2022 and Companies House’s new intelligence hub will more effectively flush out undeclared PSCs and deter the provision of false information.

I am afraid that the proposed approach is something of a blunt instrument. It would apply to all shareholders, when we should be focusing on the transparency of individuals exerting significant influence as already provided for under the PSC framework. As such, we would risk burdening millions of companies and their shareholders with new information requirements for no useful purpose. The proposition may sound sensible, but nominee arrangements can be complex, including having multiple layers of nominees and large numbers of beneficiaries for entirely legitimate reasons. For example, pension funds that own shares in a company would be caught. Listed companies would be particularly impacted as their shares are often held by nominee arrangements for legitimate administrative reasons—for example, in stocks and shares individual savings accounts, by custodian banks and by corporate sponsored nominees.

Listed companies report similar information about those owning 3% or more of their shares to the Financial Conduct Authority, so the Lords amendment would partly duplicate existing arrangements. In summary, lines 84 to 96 of the amendment risk disproportionate burdens on legitimate actors and would most likely be ignored by illegitimate actors. Those acting as nominees on behalf of shady individuals behind the scenes are already adequately on the hook if found to have provided false information, as is the company itself.

The effect of inserting those lines into part 8 of the Companies Act 2006 would be to cut across a tenet of UK company law: those running a company—usually the directors—must know its legal owners and act in the interests of the legal owners of the company. Those legal owners are recorded on the register of members. Companies shall have regard to their members record and not, for example, to anyone holding any underlying beneficial interest in their shares.

Lords amendment 115 would introduce two new duties for overseas entities. It would first require event-driven updates on beneficial ownership information and, secondly, require overseas entities to update their record no more than 14 days before the completion of a land transaction rather than the existing requirement to do so annually. Although the amendments are well intentioned, they would significantly increase burdens on both overseas entities and third parties transacting with them, as well as introduce an element of risk in land transactions that the annual update prevents.

As my ministerial colleague Lord Johnson of Lainston explained in the other place, in the case of an overseas entity that owns large commercial premises split into units, the amendment could result in the entity needing to provide updates twice a month, which is a disproportionate burden. There are a number of other technical challenges and impracticalities with setting such a duty on these entities. The Government are not alone in those views. The Law Society of Scotland, the Law Society of England and Wales and the British Property Federation have all expressed their concerns. The Government therefore cannot support the amendment.

Lords amendment 117 would make information about trusts submitted to the register of overseas entities publicly available by removing it from the list of material listed as unavailable for public inspection. It is important to note that the information on trusts is already provided to the registrar when an overseas entity registers on the register. Furthermore, the registrar already discloses trust information to His Majesty’s Revenue and Customs, law enforcement and other persons with functions of a public nature if and when necessary and appropriate. This is not a loophole.

In the other place and in this House, including from the right hon. Member for Barking, the Government have heard and acknowledged that there is a case for broader transparency over trust arrangements beyond law enforcement agencies. The Government therefore added a regulation-making power in the law to allow third-party access to trust data in certain circumstances. That will enable individuals such as civil society organisations and investigative journalists to access such information under certain circumstances.

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If the threshold is not reinserted, the new offence will apply to every single UK business and therefore increase the cumulative burden on UK businesses more than eightfold, from just under £500 million to £4 billion. That burden would disproportionately be shared by small business owners. All Members of this House will have hard-working businesses in their constituency, so we cannot support that. It cannot be taken in isolation; we must be aware of the cumulative compliance costs for SMEs across multiple Government requirements or regulations.

[Dame Margaret Hodge]

I hear the Minister’s plea on behalf of SMEs, and I have sympathy that we do not want to overburden them with regulation, particularly small businesses. However, the threshold that the Government have chosen to set for exclusion from the failure to prevent fraud is extremely high. If I take just one example, law firms—he will know as well as I do that lawyers are among the key enablers of many schemes that lead to both fraud and money laundering—out of the 10,400 law firms in the UK, only 100 will be caught by the legislation as it is currently framed. Is he willing to negotiate with us on the Back Benches and members of the House of Lords to look again at the level at which he defines an SME in this legislation?

[Kevin Hollinrake]

The threshold is set at one of these three: 250 employees, £36 million turnover or £8 million in gross assets. We think that is the right level. We always listen to what the right hon. Lady has to say. The legal sector is covered by current money laundering regulations, as is the estate agent sector, for example. It is not right to say that they are not covered by money laundering regulations.

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[Seema Malhotra]

I think that that will be covered in the points I am going to make, including around the steps that the Government need to take further.

[Dame Margaret Hodge]

On that point, there is discussion in the Bill about reasonable arrangements, which will be decided through secondary legislation. It will be necessary to ensure that the processes through which small and medium-sized enterprises show that they are preventing fraud and money laundering can be done in a way that is not burdensome on those businesses or a detriment to them. The same arguments took place over the bribery legislation, when there was concern about an attempt to have an SME exemption. That failed at that point, and all the research since that legislation was enacted shows there has been no detriment to SMEs or to their ability to export.

[Seema Malhotra]

I thank my right hon. Friend for her intervention. Indeed, she pre-empts some of the content of my speech, which is absolutely fine—we can reference it twice. She makes an important point about the Bribery Act 2010, which has also been referred to by the right hon. and learned Member for South Swindon.

The important point here is that it is for the Government to get this right, and I think we can all agree that there should not be disproportionate costs for small businesses. Lord Vaux, an experienced professional in these areas, also expressed concern over the credibility of the Government’s figures on the estimated costs for smaller businesses. Another important argument is that these policies can also protect SMEs, which are also the victims of fraud. We can sometimes lose sight of that. In 2022, 64% of UK businesses experienced fraud, corruption or other economic crime. That is much higher than the global average of 46%, and second only to South Africa. This is a matter of a cost to businesses as much as a cost for businesses, and what the extent of that would be in reality.

We have also looked at the safeguards—particularly since my conversation with the Minister last week—that are in place to avoid disproportionate costs for SMEs, which the Government can use to get the balance right. Spotlight on Corruption has noted:

“It is open to the government to make clear in guidance issued for the offence what reasonable procedures would be proportionate for SMEs, and in what circumstances it would be reasonable not to have them at all.”

The offence also contains a defence for companies to be able to argue, in the event of legal action, that its procedures were reasonable in all the circumstances or that it was not reasonable to expect the body to have any prevention procedures in place. That is important for informing the debate today and it is the reason that, after deliberations and listening to the Minister last week, we have decided that we should support the debate in the Lords and that we do not want to see the exemption for SMEs taken out of the Bill.

Amendment 159, on failure to prevent money laundering, was tabled by the noble Lord Garnier. It would expand the scope of the Government’s new offence of failure to prevent fraud so that the offence would also cover money laundering. The Government argue that this amendment is not needed as we already have an anti-money laundering supervisory regime, but I remind the Minister that a Treasury review into our anti-money laundering regulations published in June stated that

“significant weaknesses remain in the UK’s supervision regime.”

Hugely frustratingly, the Government have responded to that with yet another consultation.

In addition, since the most recent money laundering regulations were brought in, the UK has had only one corporate criminal conviction for money laundering, so it is pretty clear that the existing safeguards against money laundering are not enough. Here is a chance to take stronger action and to include in the new offence a failure to prevent money laundering, and the Government should take it. We will be supporting this amendment to stay part of the Bill.

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[Sir Robert Buckland]

Exactly, and that is the point. What the Government have done is set up a legislative Aunt Sally. I welcome their putting in place mitigating measures to deal with parent companies and subsidiaries—Lord Bellamy explained that very well indeed—but the threshold they have set is entirely unnecessary. It does not reflect what the Law Commission said in its report. When I was in office, I was delighted to ask the Law Commission to do the work on failure to prevent fraud. It did the work and, hey presto, it produced proposals that had nothing about thresholds in them, so where on earth has that come from?

I am sorry if I might have inadvertently upset my hon. Friend the Minister by mentioning His Majesty’s Treasury, but I detect the hand of my friends in Parliament Street. I know their view about failure to prevent fraud; they do not like the offence and never have done. They have always put up arguments against it. Perhaps it is their role to do that—I do not know—but I detect their hand in this. That is an unfortunate coda to what would have been a magnificent symphony, had my hon. Friend the Minister stuck to the line and done what I thought he was going to do.

To return to the point made by my hon. Friend the Member for North East Bedfordshire, I agree that the United States is a litigious society. We, in the United Kingdom, do not necessarily want to go down that road when it comes to civil litigation, but what the United States does well is prosecution of fraud. It regularly and rigorously enforces the criminal law of fraud, particularly in the jurisdiction of New York and in other major financial centres, which enhances the reputation of that jurisdiction as a safe place to do business.

Here is the argument that you, Mr Deputy Speaker, do not hear, in contradistinction to the argument about the regulatory burden. Where there is a criminal legal framework that is clear, certain and stable, that can only encourage investment into the United Kingdom, not discourage it. A jurisdiction with a robust and independent judiciary and a fine legal tradition, which rigorously polices the law of corporate criminal liability, is one that investors can have the greatest confidence about investing in. What on earth is happening here to undermine that very powerful argument?

Prosecutors, including the Crown Prosecution Service and the Serious Fraud Office, have made the case consistently that a “failure to prevent” offence of this nature would help them in the important work they do in bringing wrongdoers to book. We do not want to be a jurisdiction where it is too easy to commit fraud that benefits corporates. We do not want to be that sort of place—that is not a healthy place within which we should be operating. If we are truly committed to a vigorous free market economy, then, in the traditions of Adam Smith, we should be absolutely committed to its policing and its boundaries. I sound a bit evangelical about this—a bit biblical, a bit Old Testament—because it is important that we get this right at this last stage of the Bill.

That brings me to my noble Friend Lord Garnier’s amendment about money laundering. He made the argument very well and, having read his entry in Lords Hansard, I will adopt it. I am in danger of sounding like a broken record, but I make no apology for that. Money laundering is already a criminal offence. The regulatory argument does not cover the full gamut of what we are dealing with, and Lord Garnier’s amendment is a sensible reflection of the importance of ensuring we cover offences of money laundering. Remember again that this is about benefiting the company; it is not money laundering in general, but a targeted offence, with the same caveats and qualifications that I mentioned in the context of the “failing to prevent fraud” offence. So I say to my hon. Friend, “Repent!”. He should follow the true path and come back and finish the job. We can all then take equal pride in the work that he and others have done to make sure that this jurisdiction is a fairer and better place in which to do business.

Let me end on this note. I will not dwell too much on the rather milquetoast amendment about the capping of cost orders for proceedings for civil recovery. We know that it is a problem. We know that it is a disincentive to the bringing of civil proceedings under the Proceeds of Crime Act 2002. We should just get on with it. The particular rules and proposals about costs are well reflected in other parts of legal procedure and other types of proceedings, so this is nothing new. I think that it is time that we grasped the nettle rather than having yet another report.

Finally, Lord Agnew made a very powerful point: just a few words is all it takes to make a difference when it comes to trusts and the arguments that have been very cogently made about that by others. Only a few small steps need to be taken by my hon. Friend and His Majesty’s Government to allow us to reach that promised land. I urge him to take us there and then we can all celebrate in a land of milk and honey.

[Dame Margaret Hodge]

I shall start where that brilliant speech by the right hon. and learned Member for South Swindon (Sir Robert Buckland) ended. I would also say to the Minister, and also to the Minister for Security, the right hon. Member for Tonbridge and Malling (Tom Tugendhat) were he still in his place, that they have shown from their time as Back Benchers a real understanding of all the issues around economic crime. They knew what needed to be done. They helped to develop the agenda that would work through smart regulation, transparency, tough enforcement and proper accountability. When the Bill arrived in the House, it was, I hope the Minister will agree, a bit half-baked. I am not blaming the civil servants in the box, but it was a bit half-baked. It was full of loopholes and serious omissions. But in this year that we have been considering the legislation, it has gone through tremendous transformations, so I salute the Minister for what he has done, but urge him to go that step further. I thank the Labour Front-Bench team for their assiduous and detailed work on this, but I particularly salute the Back Benchers—Back Benchers from all parts of this House who have joined together to bring forward a set of pragmatic, practical amendments that really will make this Bill fit for purpose. I also thank those in the House of Lords who have worked across parties, with the Cross Benchers, to ensure that we have some serious amendments that will give us a good framework to start the eradication of the malignant infection that we have with dirty money.

I say to the Minister: do not undo that good work; do not emasculate what has happened and where we have got to; and do not give into the voices of enablers who want to make a fortune on the back of dirty money. I wonder, as the right hon. and learned Member for South Swindon has wondered, why on earth is the Minister not listening to what we are saying. Everybody in Parliament wants this. Everybody in the country wants this. Nobody supports dirty money. As I have said time and again, the country will not sustain economic prosperity and wealth on the back of dirty money. There is no future in that. I give the Minister another commitment, which I really regret having to say. I will not be here, but I want a future Labour Government to commit to never having a system that allows any political party to exist on the back of donations of dirty money. I say: do not let this opportunity go. Do not betray the principles and do not cave into the lobbying. The Government should look at the excellent amendments and please go forward.

I wish to focus on some new points. Lord Agnew’s excellent amendment in relation to trusts needs to be considered. The Minister said that he did not accept the research that was published today by really respected academics. These are people I have worked with over the years in whose work I have total and utter confidence. I challenge the Minister to bring them in and talk to them and then see if he comes to the view that what they are saying is not true. What they are saying is that we do not know the beneficial owner of 70% of the properties identified as owned by an overseas entity. And we do not know the beneficial owner of two thirds of that 70% because there is a trust that hides the real beneficial ownership. The Minister should have regard to what they say, as they are distinguished. I urge him to talk to them. I am happy to join in a meeting with them. In 87% of cases where information is either missing or inaccessible, it is because of Government choices in the design of the scheme. It is not because people are not obeying the law. It is because the Government have chosen to design the scheme in that way.

[Kevin Hollinrake]

rose—

[Dame Margaret Hodge]

I am conscious of time, but I will give way to the Minister.

[Kevin Hollinrake]

When the LSE looked at beneficial ownership, I think that it included tenants of properties rather than the ownership of properties, and the register of overseas entities only deals with the ownership of those properties. There is definitely some disconnect between the Government’s position on this and the legislation and the interpretation that has been taken with this research from LSE.

[Dame Margaret Hodge]

I have met the key academics involved in this on a number of occasions, and I urge the Minister to do so as well. I think the differences are between the entities and the properties. We started asking for a register of properties that were owned by overseas entities in 2012, 2014 and 2016. It was absolutely ages ago. It was when David Cameron was Prime Minister. It was finally enacted last year, but it has been enacted badly. I have to say that it is the secrecy that matters. We can have transparency and we can protect vulnerable people. Transparency will enable all eyes—many, many more eyes—to interrogate the data and the Minister knows that to be true.

Let me put in this basic point. He and I own properties. We are not ashamed of showing the ownership of those properties. Why should we reveal the ownership of the properties in which we live, when rich people—often kleptocrats, often criminals, often money launderers—are able to use trusts as a mechanism to hide their ownership? That is a basic unfairness that the Minister should deal with. May I quote to him the words of one of the firms of lawyers that is exploiting the loophole? It is Payne Hicks Beach—Baroness Fiona Shackleton is a member of that firm. The firm says:

“On the face of it, the lacuna would seem to defeat the purpose of the legislation”—

this is lawyers saying this—

“so may be tightened up”—

hopefully tonight—

“in the future, but for the time being, using a nominee to hold UK property will continue to provide privacy as far as the ROE is concerned.”

Lawyers are exploiting that loophole, and we should stop it because—I hope that the Minster will agree with this—it is damaging our sanctions policy. Usmanov has been able to hide a lot of his wealth in property through trusts. Abramovich has done it, Fedotov has done it, and it is time that we brought it to a stop.

The other key issue is the failure to prevent. I will quote to the Minister what he said time and again. This is not about additional burdens on SMEs, or filling the courts with criminal cases; this is about trying to change the behaviour in our society, so that preventing fraud and money laundering becomes embedded in our culture, in the same way that preventing bribery has become embedded in business culture. The example that the Minister used when he was on the Back Benches is very potent. When we used to have a lot of accidents and deaths on construction sites, we reformed the health and safety at work legislation. We did not suddenly fill the courts with builders and construction people being taken to court, but overnight the number of accidents went down by over 90%. That is the principle that we are working on. That is the evidence that we want to use, and it is vital that we do it here.