If you haven’t had a chance to catch up on our recent webinar on corporate client due diligence red flags, with our guest speaker Ray Blake, director of the Dark Money Files Limited, then I recommend that you do! 

Either way, here are the key takeaways from the webinar.

Companies House abuse

If you don’t already know, it is pretty easy to set up a company in the UK. It’s cheap (was £12 not £50) and there is a lack of verification of the information being submitted by Companies House. This is why incorporating a company in the UK is very attractive to criminals.

The Economic Crime and Corporate Transparency Act 2023 (ECCTA)

The UK Government was/is aware of this bad name it has made for itself when it comes to Companies House, so decided that it would make some changes to the way in which companies are dealt with at Companies House within the Economic Crime and Corporate Transparency Act 2023. This Act came into force on 4th March 2024.

The Economic Crime and Corporate Transparency Act 2023 is aimed at combating economic crime and improving corporate transparency, providing Companies House with new and enhanced powers to improve the quality and reliability of its data and tackle misuse of the companies register, which includes:

• The ability to query and challenge inconsistent information
• The ability to remove information more quickly, if that information is inaccurate, incomplete, false or fraudulent
• Stronger checks on company names which may give a false or misleading impression
• Powers to fine a company, add an annotation on the company’s record (i.e. a note to say the company has been naughty) and prosecute a company
  

Companies House will also be taking steps to clean up the register to remove inaccurate information and at a later date directors, shareholders and persons with significant control will be required to provide identity documentation  in order for the company to be registered.

Challenges faced by Companies House. 

• There are 4000 new companies being set up every day
• At least 10% of those companies are no good
• Existing backlog of 5.5 million companies yet to be ‘cleaned up’
• New powers are in force, but not yet fully implemented, due to lack of resources and funding to fully implement new powers  and some of the powers granted under the ECCTA require secondary legislation which has not yet been approved

‍You need to think like a criminal...

‍In order to spot these dodgy companies, you’ll need to think like a criminal… how would I exploit my firm's services if I were up to no good?

Criminals are very persistent and even if they struggle to be onboarded by a law firm, they will keep trying. And whilst they are doing this they are essentially gathering intelligence as to what questions they will be asked, what evidence will be requested, and it will only be a matter of time before they know what a firm will want from them. So they will have their background story and they will have the required documents ready. 

Once they’re in, they will tell all of their criminal friends about the law firm they’ve managed to infiltrate and pass over their intelligence on what they are likely to be asked to get through the onboarding process.

‍Identifying red flags‍

‍Company name‍

Criminals use algorithms to create company names for them - they don’t have time to be creating new company names. If the company name is just a collection of random syllables and they can’t provide a good reason for why it is named that way, then this would be a potential red flag. A great question to ask is, “why is your company named as it is?”

‍Context of company formation‍

Consider when the company was formed. If it was recently incorporated, it's worth thinking to yourself, what else was incorporated that day or during that week? Is this genuinely a 1-off corporate formation for a company that has a legitimate purpose or is it one of a network?

‍Age of director and shareholders‍

It's worth looking at the age of the shareholders and directors. Is it sensible that these people are involved in this company? Often criminals will steal identities. The names you provide when you are registering a company doesn't have to be your own identity.

‍Company address ‍

Look at the company address as well. Does the address provided look like the premises that would be suitable for that type of industrial activity? Criminals will use residential addresses without the owner's permission and the owner will know nothing about it until they start receiving post for a company they know nothing about and have no connection with.

‍Statement of capital ‍

This is something that generally in an onboarding context is ignored. Excessive amounts of stated capital may potentially be used for improper or misleading reasons, such as inflating the perceived value of the company or facilitating fraudulent activities. Companies House has seen 10 trillion pound startups being registered!

‍Strange nature of business - SIC code‍

Every business must quote at least one SIC code, a Standard Industry Classification. The SIC code should match the industry that the company provides services in. The SIC code needs to match everything you understand about the company. If the company name and services indicated that it was a technology company then you would expect the SIC code to match. ‍

Non trading (dormant) entities 

One of the other SIC codes you can see, describes the company as dormant. This is important to check because if the company purports to be active, however you are seeing live accounts and commercial activity, then it’s unlikely that the company is dormant, because you wouldn’t see this with a dormant company. There is a large proportion of companies registered as ‘dormant’, however they really aren’t and these are likely to be criminal ones.

Also don't rely on the account filings at Companies House. They are not linked in any way to HM Revenue and Customs. Company’s can give one set of official accounts to the revenue authorities and a completely different set to Company House. 

What could you be missing?

So when you obtain a utility bill for proof of address, what are you looking at? The usual answer to the question is name, address and date. But what about the actual bill, how much have they paid for say their electricity? If it’s a big property and the bill for a quarter in the winter months is just £50, they’re probably not residing at that property.

If reviewed properly documents such as utility bills are a good way to spot potential money laundering. Back in 2018 a solicitor was fined £12,500 for failing to comply with the Money Laundering Regulations. One of the issues documented was the fact that the solicitor had failed to raise questions with a client about a £2,000 overpayment on a £60 utility bill .

‍Complex corporate structures 

We know it's not an easy job, because the regulations require that you understand who owns and controls any entity which is not a natural person client. Essentially what you need to establish is both the legal ownership and the beneficial ownership of any entity. 

Ultimate beneficial owners have to be natural persons. If your answer to the question “who owns this company?” is another company, that's not good enough. You have to keep working your way through the corporate structure until you find an individual or individuals who ultimately own the company.

You need to understand the ownership and control structure. Who is the ultimate beneficial owner (UBO)?

In traditional ownership structures, ownership is often defined by the percentage of shares held in an entity, which the law states is someone who directly or indirectly owns more than 25% of the shares. 

However this also includes voting rights and ownership and control can diverge when considering voting rights. For instance, Y may only possess 5% of the shares in a company, yet if those shares carry 100% of the voting rights, Y effectively holds control over the company despite being a minority owner.

You also need to consider influence.Think about who's calling the shots! Imagine the company founder, now retired and sharing their shares with family. They might not seem involved on paper, but guess what? They're still the puppet masters, showing up at every meeting and getting their hands in every deal!

And remember, listed companies (on the London Stock Exchange or equivalent in another jurisdiction) are exempt from the UBO requirement.

The regulations state that you must take reasonable measures to understand the ownership and control of the company, therefore it’s important to see the whole structure of the company. Consider:

• Relationships between the parties - for example a couple who own 20% each in a company would not be classified as an ultimate beneficial owner on their own, but the two of them together could give them control and significant influence
• Owning exactly 25% would not make a person a UBO but they could still have significant influence, depending on the nature of the company and their role within it
• Doing the maths won’t always help you out. Having a majority control in a number of companies within a corporate structure could make someone a UBO even if the maths shows they are not, because they would have significant control

This is why it is important to see the whole structure of the company so you have the full picture in respect of who owns the company.

Concealing a UBO

There are 4 really easy ways criminals will try to conceal themselves from the record if they don't want to be identified as an owner of the company as a UBO.

Voting rights

Someone could wield more power in a company than their actual ownership suggests with the magic of voting rights! They could tweak the company's share structure to give themselves a bigger say in the company, even if their actual shareholding isn't that big. It will be clear from the foundational documents of the corporation if this is the case. 

Nominees

A nominee shareholder is someone who holds shares on behalf of another person or entity. Essentially, they act as a representative or trustee for the true owner of the shares. Nominee shareholders are often used to maintain privacy or confidentiality in ownership arrangements, especially in cases where the true owner prefers to remain anonymous. They are legally registered as the shareholder in company records but hold the shares for the benefit of the beneficial owner, whose identity may not be disclosed publicly.

There are legitimate reasons for setting up shareholders in this way, particularly if it's a new company that's being set up or if there are merger activities being undertaken because this is easier than registering a power of attorney. However this makes it even trickier for you to meet your requirements under the MLRs. 

If the same names keep popping up across multiple companies that seem unrelated, just stop and think, could these folks be professional nominee directors? A quick search might just unveil their secret connections, shedding light on the behind-the-scenes players pulling the strings.

Family blocks 

We have discussed this one above, instead of holding a 50% share in a company, someone may scatter those shares among family members they trust to act according to their wishes. Sneaky, right? But if you've done your homework and unravelled the family ties, you won't be fooled by this.

Shell Companies

The other thing that's become increasingly popular in recent years is to own assets through an offshore shell company. To the outside world, it's like hitting a dead end in a maze.

Whilst it is completely legitimate for clients to want their ownership kept hush-hush, you've got a legal duty to uncover the ownership and control structure, even if they're not shouting it from the rooftops. 

To verify a director or not to verify a director... that is the question.

So the last thing I wanted to touch on was this confusion I often see about directors. Whilst the law mandates obtaining a list of directors, your verification efforts can vary based on your risk assessment. The requirement to verify their identities isn't a legal requirement, however, taking a proactive approach by verifying one or more of them is a smart move, even if it's not legally mandated.

Sometimes there might be some kind of overlap between the director and owner of the company. If the director is also the owner then they would be subject to the UBO requirements and you would need to identify and verify them.

‍