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House of Horrors: What leaked documents tell us about the UK’s fight against dirty money

Written by Ben Cowdock on Wednesday, 4 December 2019

Today, a joint investigation between OCCRP, Finance Uncovered and The Times exposed the alleged questionable business practices and clients of a UK company service provider, Formations House. A trail of leaked emails and documents relating to the firm give an insight into how Formations House set up 400,000 companies around the world since 2001, many for those with dubious pasts and assets to hide.

It is a genuinely shocking series of revelations. There are some who like to claim this is a small case of just one rogue agent, which has little to do with the wider reputation of UK PLC. However, rather than being a single ‘bad apple’ of the company formation industry, Formations House and its years of lax anti-money laundering (AML) controls exposed by this investigation are symptomatic of the UK’s failure to get to grips with dirty money and illicit finance.

It is no coincidence that Formations House thrived in the UK, selling and maintaining British companies as one of its main activities. Companies here are cheap and easy to form, and carry a veneer of legitimacy due to our country’s respected reputation for good governance. This is attractive to legitimate businesses and criminals alike. Our continuing analysis of this problem has so far identified 929 UK shell companies used in 89 corruption and money laundering cases, amounting to around £137 billion globally in potential economic damage.

There are two routes to forming companies in the UK, both of which can be done in a matter of minutes.

Firstly, there’s ‘direct incorporation’ through Companies House’s online service, which costs as little as £12 and can provide you with a company ready to trade in just 24 hours. Currently, Companies House have no statutory powers to carry out money laundering checks, and are unable to verify the accuracy of information submitted to them. This makes it an ‘honesty box’ and too easy a way to lie for anyone looking to avoid scrutiny.

Secondly, there are trust and company service providers (TCSPs), which can be anyone from lawyers and accountants to dedicated company formation agents. Corrupt individuals and those seeking to launder money often favour these because of the additional services they offer. As shown by the investigation and our previous research, it’s easy to see why: prestigious mailbox addresses give the impression of respectability and success; nominee services obscure the true owners from scrutiny; ‘vintage’ companies with trading accounts give the false impression of established businesses; and introductions to unscrupulous banks provide an entry point to the global financial system for illicit funds.

These services are offered by a range of businesses both within the UK and abroad. For our most recent report, without even looking too hard we found 23 active agents offering these kinds of products. We also found over 6,000 identikit shell companies registered at just 10 addresses, seemingly by a handful of agents. Given all of this is hiding in plain sight, it may be baffling to the outsider why more isn’t being done about this kind of high risk activity.

Unfortunately, this behaviour is allowed to persist in large part due to poor oversight of these business service providers both here and abroad. In the UK, those offering company formation and maintenance services could be supervised by one of 19 different bodies who oversee the legal, accountancy and dedicated TCSPs. This patchwork approach to enforcement has offered inconsistent levels of oversight and enforcement against breaches to our defences against dirty money laundering.

Shockingly, many of those given the responsibility for overseeing compliance with the law are also the lobbyists for their regulated community – a clear conflict of interest – and this is not a theoretical risk. The Office for Professional Body Anti-Money Laundering Supervisors (OPBAS) – established to raise standards in AML supervisors – found many of these self-regulatory bodies expressed concerns that issuing robust fines would “damage their ability to attract or retain members.”

Unfortunately, certain public sector counterparts do not fare much better. The average fine issued by HMRC – the default supervisor for formation agents when they’re not overseen by another AML body – is just a few thousand pounds. This hardly represents a credible deterrent to those hell-bent on breaking the law and keen to make a quick buck from unsavoury clients.

These factors combine to create conditions in which firms like Formations House continue to operate freely and unchecked. Whilst there are signs of improvement, with an Economic Crime Plan launched earlier this year and a Government consultation on reforming Companies House, these must be followed up with concrete action.

Firstly, Parliament should empower Companies House to increase the accuracy and reliability of the UK corporate register. So many companies incorporated here are abused for financial crime because it is far too easy for criminals to lie on the paperwork and avoid scrutiny. This needs to change and fast.

Secondly, there needs to be a radical overhaul of the UK’s AML supervisory regime. The current arrangement, held together by a patchwork of 25 different oversight bodies with varying powers and responsibilities, is simply not working. There should be fewer supervisory bodies overseeing firms’ compliance with the rules, with sufficient resourcing to carry out their duties, free from conflicts of interest, and a more targeted approach to how they work.

And thirdly, there needs to be a more credible deterrent against those tempted to break the rules. Currently, egregious behaviour appears to go unpunished, proving little incentive for rogue agents to stay within the law. More proportionate and transparent sanctions for AML breaches are needed, with criminal convictions sought for the most egregious behaviour.

At a time when the UK is seeking to renegotiate its relationship with the world, these leaks act as a timely reminder that not all business is good business. Mossack Fonseca, the now infamous agents at the heart of the Panama Papers, found this out much to their detriment. It is worth remembering that the second most popular destination for their agents was the UK. Whoever gets the keys to Downing Street after December 12th, it is incumbent upon them to ensure much closer scrutiny of those, like Formations House, at the heart of the UK’s £100 billion a year dirty money problem.

 

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Read 77 times Last modified on Wednesday, 04 December 2019 17:36
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Ben Cowdock

Ben is the Senior Research Office here at Transparency International UK, responsible for leading research into corrupt money entering the UK. He holds an MA in Governance and Corruption from the University of Sussex.

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