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Companies House consultation: Good news in the fight against fraud

Companies House consultation: Good news in the fight against fraud

01 October 2020

The Government’s long-awaited response to the “Corporate transparency and register reform" consultation, which looked at "options to enhance the role of Companies House and increase the transparency of UK corporate entities", was published on 18 September.

Overall, the approach the Government has decided to take should help tighten the procedures around company formation and oversight, which is great news for everyone involved in the fight against fraud. However, there are a few areas where we believe more action would further enhance the role Companies House plays in tackling economic crime - and enable the insolvency and restructuring profession to make an even greater contribution to these efforts than it does at present.

The consultation was one of great interest to R3 and our members, due to the key role the UK insolvency and restructuring profession plays in tackling financial fraud. Insolvency practitioners are required to investigate a company's affairs and director conduct, in part by referring to the entity's books and records, in order to discharge their duties when appointed as office holders. Being able to access corporate records and information about directors, or rapidly to identify where this information is missing or inaccurate, is an important component of the profession's ability to carry out statutory duties, and to pursue wrongdoers.

Welcome developments

There are a number of elements of the Government's response that should be celebrated. We are happy to see that:

  • Company directors and People with Significant Control (PSC) of a company will be required to have their ID verified by Companies House, in order to be listed on the site. Previously, no documents proving identity were required, leaving obvious loopholes for fraudsters to exploit. Director ID verification is something that R3 has supported for some time, as our members had expressed frustration over directors deliberately using different spellings of their name, adding or omitting middle names, or using different dates of birth in order to make it harder to pin down a pattern of involvement in a string of companies. Our consultation response made the point that registering as a director should require at least as much verification as needed to open a UK bank account in order to deter fraudsters.
  • Company formation agents will also be required to have their ID verified before they are allowed to open an account with Companies House. Only agents who are registered for anti money-laundering purposes will be allowed to have an account with Companies House, thus providing an extra layer of security to the process of company formation.
  • Shareholders will not be required verify their identification: We are in favour of keeping the status quo, as shareholders do not usually have a material say in the running of a company - if they do, they are required to register as a PSC. This strikes a sensible balance between safeguarding against fraud, and not deterring investment in legitimate enterprises.
  • Dissolved company records will continue to be retained by Companies House for 20 years, which is very good news for the insolvency and restructuring profession. In the course of investigations, insolvency practitioners acting as office holders often need to look up a director's involvement in other companies, in order to establish patterns of behaviour and chase the flow of funds. There had been some concern that Companies House records would be held for a shorter period, which could have hampered or prevented full investigations, to the detriment of honest investors and creditors.
  • The Government will look into ways to do more with the information contained within company accounts, which could be very useful for analysing the performance of SMEs, and for the early spotting of potential issues within sectors. The Government will also investigate the possibility of cross-referencing the information held by Companies House with that held by bodies such as HMRC and other agencies, which could further improve transparency and reduce the ability of fraudsters to operate.

More clarity – and action – needed

Although there are many positive aspects to the Government's response, there are also a couple of areas where we wish it had gone further. For instance, we were somewhat concerned that the Government will introduce a statutory discretion for the Registrar of Companies to query and check information. There is a strong case to be made that the 'discretion' should be an obligation, in order to make the information contained in the register as robust as possible. We will seek clarity from the Government on what this new discretion will mean in practice.

It was also disappointing that the Government's response did not refer to our suggestion that office holders should be allowed access to what will become the 'back end' of Companies House data, in order to facilitate investigations into potential wrongdoing and misfeasance. This access will be granted to certain public sector bodies; we would argue (and will make the point to the Government) that the profession's duty to investigate director behaviour provides a strong public-interest reason for access to be extended to insolvency practitioners acting as office holders as well.

Campaigning continues

The Government’s plan for strengthening the powers of Companies House will help to bolster the UK’s anti-fraud measures. The new checks on identity for directors and PSC will provide another layer of protection for investors and suppliers, allowing clear director track records to be established, without being onerous to the point of deterring genuine entrepreneurs.

However, we will continue to call for the insolvency and restructuring profession's fraud-fighting role to be considered fully in the Government's reforms plans,  so that the profession is able to play an even greater part in combatting economic crime at a critical time for UK plc.

Read R3's response to the 2019 consultation here.

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James JeffreysJames Jeffreys
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