The company registration process at Companies House in the UK is a troubled one. There are five ways in which the venerable public institution can close the compliance gap.

Thanks to a concerted effort by HM Government and private business, the UK has made great strides in the fight against money laundering in recent years. Shell companies are not permitted, nor are bearer shares, so there are now fewer avenues and vehicles for financial criminals to use.

Nevertheless, we are still not doing all we can. Recent studies and media reports have drawn attention to the way in which Companies House monitors the registration of new businesses. As highlighted in Transparency International’s report, Hiding in Plain Sight, and in a recent programme on BBC Radio 4, File on 4, a lacuna in the law exempts Companies House from having to check, or insist on others checking, the identities of people who want to form companies.

Due to this lacuna, an individual who wants to register a new company in the UK has to apply to Companies House but only has to give it an address and name its owners. Companies House does have a register of “persons of significant control” – individuals who own 25% or more of a company – but requires no verification of identity for such people. Nor does it require anyone to cross-reference the address(es) it has been given with the electoral roll or other databases. Moreover, it lacks the powers it would need if it wanted to check the information that people were giving it.

A lack of due diligence

The result of these failings? Transparency International has found that some 766 companies registered in the UK have been directly involved in laundering money that came from at least 13 countries. Flaws in the UK's registration system are obviouly making the country an attractive destination for money launderers who want to money across national borders.

Processes at Companies House are designed to make company registration in the UK as smooth and frictionless as possible and to promote entrepreneurship, with all its attendant economic benefits. This must not, however, come at the expense of AML due diligence – banks use Companies House data in their own customer onboarding checks on the assumption that it is accurate. False data of any kind might undermine their AML efforts, with serious ramifications for their businesses. Companies House has a moral duty to ensure that this does not happen.

So how can Companies House step lively and do somethig to thwart financial crime in the 21st Century? Here are some ways in which it can close the compliance gap. If it were to take just one – or a combination – of these steps, we might see dividends.
 
1. Require every company to have a British bank account

HM Government could make it compulsory for companies that register with Companies House to have bank accounts in the UK. Banks are already legally obliged to carry out comprehensive 'know your customer' or KYC checks on new customers, searching for adverse information about them and verifying their identities. A simple requirement such as this would result in 'due diligence' as stringent as any.

To reduce the amount of bother in the registration process, the Government could require companies to open bank accounts within six months of formation, instead of as a condition of registration.

2. Perform KYC checks

According to Transparency International, some 400 companies listed with Companies House are registered to two-year-olds, or to people who died 300 years ago.

To tackle this – if regulations cannot be changed to make British bank accounts compulsory – Companies House could perform KYC checks on all business registrations to ascertain whether the beneficial owners are genuine and/or not linked with financial crime.

This is a legal requirement for companies in the financial services, accountancy, legal and real estate sectors – Companies House could achieve the same standard quite voluntarily.

3. Cross-reference addresses

Companies House could check the address at which each new business claims to be based. Transparency International found that half of the 766 suspect companies listed at Companies House are registered to just eight addresses in the UK.

It also could verify the addresses that applicants give it and cross-reference them with addresses that various government agenices know to be linked with money laundering. By doing this, it might help those agencies target the founders of shell companies for investigation even before registation takes place. In doing so, it might close down new channels through which criminals might move money through the UK.

4. Search for adverse information

In addition to verifying addresses and identities, Companies House should also search 'criminal databases' for adverse information on the people who wish to become the beneficial owners of the businesses it registers. This is a key part of AML compliance for businesses already. Backgroundchecks.com, a US online search firm, states that national criminal databases, which are also referred to as multi-jurisdictional databases, compile information from many different jurisdictional sources, including courthouses, court support agencies, prisons and custodial institutions, other government agencies and official security agencies. Both governments and companies run them.

It is not enough to search, however. It is necessary to scan the adverse media for other adverse reports about prospective beneficial owners for the best results. This includes searching traditional and digital news channels, as well as weblogs. Regulatory websites, databases of sanctioned entities and individuals and watchlists should be trawled, as well as databases of high-risk businesses. If Companies House looked at all these sources, it would find much of the information it needed to spot the 'money-laundering risk' (a term used often in the British Money Laundering Regulations 2017 and the Joint Money Laundering Steering Group's guidelines, but never actually defined in either) that a registering business poses and, if the National Crime Agency is interested, keep an eye on any subsequent documents it sends in.

5. Harness the power of modern technology

Companies House is woefully under-resourced – it reportedly has a team of just six handling more than two million companies. To burden these people with AML duties would be folly.

The agency could, however, buy some software to help it in this area. Advanced regulatory information technology (RegTech) can support human compliance managers by helping them carry out the necessary searches – ID/address verification and searches for adverse media - quickly and accurately. This could help the institution register many companies simultaneously, perhaps allowing it to handle many more applications per day than it can do now, at relatively little cost.

Time to act!

Historically, the UK has provided a fantastic environment for entrepreneurs who want to set up new businesses, with a smooth and frictionless registration process. The continuation of this culture is vital to our nation's future.

The UK has been making efforts to tackle money laundering over the years, but it ought to do more. Its business gatekeeper, Companies House, should be involved to a greater degree than it is now.

By performing AML tasks that are on a par with those done by banks, Companies House can play its part in tackling the money-laundering problem and identifying criminal activity, the better to help prosecutors. The regulation of company formation services is also an essential step towards this highly desirable goal.

Companies House may lack resources, but it has options. By introducing new protocols and striking up the right alliances, it can keep a closer eye on its charges, protecting the wider economy from the threat of money laundering and setting an example for other countries to envy.