The reforms aim to tackle fraud and money laundering. Companies House has long faced criticism for its lack of identity checks meaning that false information can be submitted without verification taking place. It is reported that billions of pounds of illicit profits are laundered through the lax Companies House system every year.
The recent FinCEN leak, which brought to light thousands of documents sent from banks to the US authorities between 2000 and 2017, is a timely reminder that the UK needs to clean up its act. The files reveal that the UK is considered a "higher risk jurisdiction" by FinCEN and that over 3,000 UK companies are named in the documents – more than any other country.
The reforms announced by the government will introduce compulsory identity verification for both directors and people with significant control ("PSCs") of UK companies. The government has said that there will be a 24/7 digital verification process and that Companies House plans to use an 'identity provider' from the public or private sector to perform verifications on its behalf. It is also intended that identity data will be cross-checked with other government data sets to confirm its veracity. The changes will also give Companies House greater powers to query and reject information.
Although the reforms are to be welcomed and are much needed to protect business in the UK, there are a number of issues that the government has failed to address in its consultation leading to question marks over the effectiveness of the intended reforms.
Firstly, there is no meaningful timeframe by when the reforms will be implemented. The legal changes will need to be passed in Parliament when parliamentary time allows; it is unlikely that this will happen before 2022 at the earliest.
There are also issues over the effectiveness of the checks to be implemented. The government indicates that data will be cross-checked but there are questions over how the digital process will be able to accurately identify false or forged identity documents. Given Companies House's limited resources to date (with a team of only six people policing the compliance of four million firms on the system, according to a 2017 Transparency International report), drastic changes will need to take place if Companies House is going to be able to fulfil its new function. It remains to be seen if the government will be prepared to dig deep into its pockets to fund the necessary transformation. If a third party will conduct verifications, who will that third party be and how will it be overseen?
Another issue for consideration is what will happen to existing companies on the register? The government has said that the identity checks will be extended to existing directors and PSCs and that they will be afforded a transitional period within which to comply with sanctions for those who fail to do so by the end of this period. However, the government has not put forward any meaningful suggestion as to how it proposes to check the existing circa. 10 million directors and PSCs currently registered (a mammoth undertaking). It has also not identified what the sanctions for non-compliance will be. Presumably, if the sanctions are to include a director's and company's removal from the register we can expect a sudden exodus with potentially wide reaching ramifications.
Many questions need to be addressed if the Companies House reforms are going to have a significant impact any time soon. The FinCEN leak confirms that the UK needs to do what it can quickly to protect the business community from fraud and improve its global reputation as a higher risk jurisdiction.
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