Corporate Structures and Financial Crime

Tessa Munt Excerpts

Thursday 4th July 2013 Commons Chamber

[John Mann]

My right hon. Friend makes a valid and relevant point about criminal sanctions. The banks’ uniqueness is that they are the channel for funds. Because things are recorded in this technological age, it is straightforward for banks to investigate themselves and see what is going on, so the plea of ignorance by those at the top is inexcusable.

What my right hon. Friend and I are saying, and what I interpret the Financial Services Authority to be saying, is that responsibility must be taken at the top. Pleading ignorance is simply not good enough. We are talking not about small, missed operations but about huge major operations that funnel vast amounts of money. It is easy for banks to identify and track such operations, yet they choose not to do so. There seems to be a particular problem of huge reputational risk to the City of London because banks based in the UK have been those most often caught out. However, I have produced a document that demonstrates that this is not simply a UK problem. In recent years, every one of the top 50 banks in the world has had this problem and experienced prosecutions or ongoing investigations into prosecutions.

[Tessa Munt (Wells) (LD)]

I thank the hon. Gentleman for securing a debate on this subject. Does he agree that a board member should be made explicitly responsibly for each bank’s compliance? Anti-money laundering and due diligence provisions should be used effectively by the authorities to apply existing rules and ensure that people even go to jail if they have committed such crimes.

[John Mann]

The hon. Lady makes a valuable point about the importance of compliance and how that must take place at senior level. Everyone at senior level in a bank must take responsibility and be held accountable for the structures within it.

This is not simply a banking problem. Money laundering and some aspects of criminality are the biggest problems in terms of the volume of money involved, but there is also an issue of percentages and actuality of individual companies. Banks are not setting up opaque structures to create criminality; they are turning a blind eye while their structures facilitate criminality. Others are using weaknesses in corporate structure to create criminality.

Of the half a million companies that struck themselves off the UK corporate register in 2010, 40% had never filled in accounts with Companies House, and 33% had paid no corporation tax that year. If large numbers of companies are not submitting accounts and returns to Companies House, we have a fundamental problem. Our problem in dealing with this issue is demonstrated, rather ironically, if we look at the two Front Benches. The hon. Members present are excellently and diligently representing their parties, but one notes that they come from different Departments. That is part of the problem when it comes to Companies House, and I hope the Minister will clarify—we hope on behalf of the Government —who is responsible for Companies House and who should be holding it to account in Parliament.

Companies House is underfunded, under-resourced and perhaps under-specialised, and such opaqueness in our country has grown dramatically, allowing the creation of opaque corporate entities. That encourages criminality and discourages transparency for the general public, decision makers in Parliament and others.

On the impact of such actions, valid estimates indicate that Africa is losing twice as much in tax it cannot collect because of opaque corporate structures as it gets in development aid. In other words, if we cracked this problem, the amount of development aid required from the west to Africa would diminish dramatically because the tax base itself would be generating income, which is, of course, a key component of a vibrant democracy.

[John Mann]

Let me come on to that. In Davos in 2010, the Prime Minister said that he wished to “shine a light” on corporate ownership. In the Lough Erne declaration, the calls were for more transparency, more international co-operation and stopping firms shifting profits to avoid tax.

What needs to be done by Government in these areas? On transparency, it is essential that the Government follow up their G8 commitment and create a UK register of beneficial owners, making things transparent and traceable and deterring people from using this country for illegal purposes. All major countries—not least those in the G8 and the EU—need to collaborate. I note that Italy is already suggesting that it will not collaborate, and we need to tackle those countries that are suggesting that they will not co-operate even with the modest proposals emanating from the G8.

We need effective enforcement with, as we have heard, clear sanctions for law breaking; we need criminal sanctions; we need the collecting of fines. On the corporate structure, I suggest that raising the cost of setting up a company from the current £15 and hypoth—[Interruption]—and using that money explicitly and exclusively to ensure better regulation and policing. Hon. Members know which word I mean but I will not try to spit it out; we might be here for the rest of the afternoon. Hypothecating is the word. [Hon. Members: “Hear, hear.”]

Firms that have not filed up-to-date tax returns need much greater sanction for not doing so. The fact that so many choose not to do so and get away with it is a fundamental and major weakness. This is where this House needs to put its beady eye on what is going on at Companies House. Is it properly resourced? Are its powers great enough? Is it doing the job properly? I would suggest that out of those, at least two must be at issue; perhaps all three. We must get on top of this in the near future.

The question of tax liabilities and of how much liability and responsibility are needed for directors in relation to the law needs to be reconsidered. As a specific micro-proposal that I think could have a huge impact, it should be illegal for anyone to set up a bank account outside this country without informing HMRC and Companies House first. In other words, if people are using British corporate structure, we should stop letting them set up overseas operation without anybody knowing what is going on.

We need legislation relating to the Crown dependencies. I have made this point on many occasions and I will make it again briefly now. It is unacceptable that our taxpayers provide defence and legal structures for those countries when they have an opaqueness that, whatever tax system and regime they end up having, does not allow anyone to know what is going on. The football industry in this country provides a good example. In vast numbers of football clubs nobody, including the spectators and those who are owed money when the clubs go bust, has a clue who owns what bit and where and how. These major institutions are an example of how deep the problem has become and how we have failed to deal with it. We need to look to our regulations, such as those being introduced on banking, and think about how they can be applied to UK dependencies. Leaving them as they are is simply unacceptable, and it is becoming increasingly counter-productive for this country.

[Tessa Munt]

I thank the hon. Gentleman for giving way again. I wanted to draw it to his attention that the power has been used several times by the UK already to make the dependencies comply with other parts of regulation, so we could just require them to do what they should do. I would give as examples the banning of the death penalty, the rules on acceptance of homosexuality, and, on a slightly minor level, an acceptance that they should ban pirate radio.

[Madam Deputy Speaker (Dawn Primarolo)]

Order. The hon. Lady knows, because it is repeatedly pointed out to her by occupants of the Chair, that interventions must be brief. That was another very long intervention. I think she has made her point. While I am on my feet, may I also say to the hon. Gentleman that he has been speaking for quite a long time? This is a short debate and a lot of people want to get in, including, funnily enough, the hon. Member for Wells (Tessa Munt).

--- Later in debate ---

[Tessa Munt (Wells) (LD)]

As I said earlier, I thank the hon. Member for Bassetlaw (John Mann) for bringing this issue to everyone’s attention and for providing an opportunity for us to debate it this afternoon. He has already raised the effect that anonymous shell companies have on facilitating the corruption that keeps many poor countries poor. Hidden company ownership may be a particular problem. I welcome the efforts of the Prime Minister during his G8 presidency, particularly his calling on the EU and the G8 to work together to break through the walls of corporate secrecy and to ensure much more transparency.

Any move that can clean this whole business up will have a major impact on the world’s efforts to tackle poverty. If we are to commit regularly to having a substantial percentage—0.7%—of moneys being put into aid, we need to make sure that the money is used effectively and that there is a clean-up. It has been noted that a third of the world’s poorest 1 billion people live in resource-rich countries, but as a result of weak governance and widespread corruption, finances do not always reach Government accounts. In fact, many of those resource-rich countries have been looted by the very politicians who are meant to be running them and developing their economies.

It is primarily companies that are used to move dirty money. The World Bank reviewed 213 large cases of corruption between 1980 and 2010, more than 70% of which were found to have relied on anonymous shell companies. Companies registered in the United States topped the list, but the United Kingdom and its Crown dependencies and overseas territories came second.

It seems to be terribly easy to set up anonymous companies and trusts. It is very cheap to create complex corporate structures, and the practice of using “nominees” does not help at all. I hope that the Minister will emphasise the need to put beneficial share ownership into the public domain. A “many eyes” procedure would ensure that company ownership was subjected to continuous tests. I agree with the hon. Member for Bassetlaw that we should not just leave it to HMRC. Beneficial owners are individuals—living people, real-life human beings. We are not talking about yet another company and yet another trust.

The financial action task force, the intergovernmental body that sets global anti-money laundering standards and makes recommendations, has said that the system does not work, and that it is much too easy to avoid due diligence. In many countries, company service providers are all too willing to flout the law. A large number of the world’s major economies are ineffective in preventing companies from being misused by money launderers. Six of the G8 countries and 18 of the 27 European Union member states are listed as being “not compliant” or only “partially compliant” with the new recommendations on beneficial ownership.

Many countries do not require banks, lawyers or company service providers to identify beneficial owners of corporate clients. The penalty in the United Kingdom and the United States for having a fake identity in the form of a passport is up to 10 years in prison, yet anyone who is willing to pay a small amount—I think it is £200 or £300—can create a fake ID through a company and then use the company to hide behind, and the penalties for that are very small.

One way of preventing abuse of anonymous companies is for countries to require all information about beneficial owners, the names of all people behind trusts and foundations, to be put into the public domain. It is essential for such information to be public, rather than being accessible only to the police and other law enforcement agencies. There is no interrelationship between most of these countries, and they cannot carry out the necessary tests. If only HMRC or the police can gain access to our information when fraud is suspected, it will not be possible for us to check other countries’ systems, or for them to check ours.

It is cheap to put beneficial ownership into the public domain. It has been suggested that 99% of companies that are registered in this country are family companies or micro, small or medium-sized businesses. There is a clear relationship between the ownership of companies and individuals. Only 1% of companies registered in this country have a complex financial structure.

We have said that banks could be charged with greater duties to ensure that they are more compliant and rigorous in exercising their duties to ensure that money laundering does not take place, but they have a conflict in that they stand to make very big profits in accepting the business of rich and dodgy customers. Our anti-money laundering laws sound fairly stringent, but, as has been said already, they bear down heavily on smaller companies and it is the big, professional organisations that are trying to launder money through the system on a major scale and that can do that quite easily.

There is little personal responsibility from individual bankers—HSBC is a strong example. In 2012, it agreed to pay a record $1.9 billion fine levied by the US authorities after admitting that its anti-money laundering systems had failed; it laundered hundreds of millions of dollars at least for drugs cartels, terrorists and pariah states such as Mexico. The Senate sub-committee that carried out the investigation described HSBC’s cultures as “'pervasively polluted”.

During that time, over 47,000 people died in Mexico at the hands of drug traffickers, so it is important that we deal swiftly and effectively with such companies. The penalties could be toughened greatly. As I said earlier, we should make individual people on the board responsible for looking after that part of the business. However, I accept the point made by the hon. Member for Bassetlaw that every bank executive should be responsible and made liable for the damage that they cause and that there should be a rigorous system of penalties, which should include the option of imprisonment.

I do not want to go on too much longer. The most important point is that bringing in a public register of beneficial ownership will not involve a huge amount of red tape. The point has been made already that a number of individuals are clear that it would be easy for this country to make such a move. I cannot stress enough how important it is to small businesses to ensure that everyone gets a fair deal, that taxes are paid and that there is absolute clarity when money passes back and forth across the world.