• Gary Smith
• November 10, 2020
• 5 min read

Companies House fraud crackdown: what it means for directors

Setting up a UK company is quick, cheap and easy to do. In fact, law enforcers would have us believe that it’s a little too easy at present, amid claims that the UK incorporation process is attracting more than its fair share of international money launderers.

In response, the government has just come up with a range of proposals designed to improve transparency. These include a stronger ID verification procedure for directors and Persons with Significant Control (PSCs), along with beefed-up powers for Companies House to query and investigate potentially false information.

So will these changes result in more admin for existing directors? Will there be extra hoops to jump through when setting up a company? Here’s a closer look at what’s proposed…

UK company registration: cheap, easy, but also too lax…

According to Statista, in 2018, the average cost to start a company in the EU was 300 euros. Italy is at the expensive end of the scale, where start-up fees are a whopping €2,000. In the UK by contrast, £12 covers your online registration fee, and your new online company is usually registered within 24 hours.

On the whole, a cheap, streamlined incorporation process is a good thing. It encourages entrepreneurship (including foreign investment). It also makes it easier for small business owners to shift over to tap into the benefits of having their own company.

But what checks do directors have to undergo before a company can be set up? Critics say that the UK verification process is too lax, making it vulnerable to abuse for financial crime.

At present, when you register, you just need to provide 3 pieces of personal information about yourself and each of your shareholders or guarantors. Examples include:

• Town of birth
• Mother’s maiden name
• Father’s first name
• Telephone number
• National insurance number
• Passport number

However, Companies House essentially has to take the information presented to it on trust, as it has no real legal power to query it.

The first ever conviction for supplying false information to Companies House (and the only one to date) involved a formation agent named Kevin Brewer. He incorporated a company ‘John Vincent Cable Services’ in 2013, making the then Business Secretary, Vince Cable a director without his knowledge. Brewer’s stated aim was to highlight just how easy it was to set up companies with other people’s details. He told Companies House what he had done. For his efforts, Brewer was hit with a fine and legal costs of more than £20,000.

Why it’s seen as a problem

Weaknesses in the verification process give rise to the following issues:

Shell companies – Criminals use fictitious or stolen identities to set up shell companies, which can then be used to launder money. Transparency International UK research uncovered 929 such UK companies. These were involved in 89 laundering scams, amounting to £137bn in potential global economic damage.

Trust in the database – According to Companies House, Company Register data was accessed 9.4 billion times in the last year. It’s a vital source of reference. As just one example, let’s say your small business is deciding whether to grant deferred payment terms to a company. You’ll want to find out more about the company before agreeing to anything, such as who’s behind it and their credit-worthiness. The Register is a vital source of information. If you can’t trust the information that’s on there, it increases the credit risk your business faces.

What’s changing?

Following consultation, the Department for Business, Energy & Industrial Strategy issued its response in the report, Corporate Transparency and Register Reform. So far as company owners are concerned, the key proposal involves an overhauled ID verification process.

Here’s what we know so far…

What is it?

A compulsory identification procedure for all directors and Persons with Significant Control (PSC) of UK registered companies. (Broadly, a PSC is someone who owns more than 25% of a company).

It seems that in the first stage of implementation, the enhanced verification process will apply to new company registrations and the appointment of new directors/PSCs. Gradually, it will also be rolled out retrospectively. So presumably, at some point, all existing directors/PSCs will be prompted to undergo the process.

What will it involve?

At present, directors only have to provide three pieces of very basic information (see above). In place of this, the government will proceed with developing a “digital verification service that uses leading technology”. Companies House will be using an Identity Provider from the public or private sector for this.

It’s all rather vague at present, but reference is made to what’s happening with the new breed of open banking service providers. So it’s likely to consist of a combination of digital document scanning (e.g. passport, bank statements, correspondence showing proof of address) and information matching.

Agents (e.g. law firms and company formation specialists) may also have an important role to play here. If a formation agent has already carried out identity checks as part of the customer due diligence process, the government says that there should not be a need for these checks to be duplicated by Companies House.

Will it mean a longer verification process?

Again, it’s difficult to judge until the specifics are announced. But the government optimistically states that “most people will be able to verify their identity through digital processes in a matter of minutes”.

How will it impact non-UK residents?

The government states that there may be some individuals who “will find it more difficult to verify their identity with Companies House and for whom the process will take longer”. It’s not difficult to see how non-UK directors and major shareholders might fall into this category. A lot will depend on the partner of choice for the digital checking system. The government is careful to stress its continued commitment to encouraging investment from legitimate overseas parties. To facilitate this, and to avoid delays in verification for such parties, we would hope and expect they will choose a partner with a global reach. This should enable the quick matching of ID data to trusted data sources in most jurisdictions.

When will the changes be made?

Not for a while. Companies House is currently weighing up the market options and will start procuring the services and infrastructure needed for verification in 2021. The changes also have to be approved by Parliament via primary legislation.

What it all means for company directors

The government says it intends to strengthen the ability of Companies House to check the information provided by directors and to cross-reference this information against other government databases (e.g. the DWP and Passport Office). All of this makes sense, and the additional checks proposed seem to be no more thorough in scope than the type of information you would be asked for when opening a bank account.

So the fundamentals are unchanged by these proposals. In other words, the UK remains one of the most attractive environments to set up a limited company quickly and easily.

For advice on restructuring your business and help with all aspects of company tax planning, we’re here to help. Contact MJH Accountancy today to discuss your needs.