Before the 1844 Joint Stock Companies Act, companies could only form by Royal Charter or Act of Parliament. However, the 1844 act provided for firms to be incorporated so long as they were recorded on a public register, Companies House, where the public could understand the entities they were dealing with.

Of course, being on a public register is one thing, having recorded information fact checked is quite another and it surprises many that Companies House is merely a repository for what is lodged with it. It only checks that returns are made on time and appropriate fees are paid. Other than that, to an extent, directors and companies can post whatever they like. And some do.

But there’s a move to improve this situation and a consultation has just been completed, the details of which can be found if you search for Corporate Transparency and Register Reform on gov.uk.

Government consults

Jason Piper, policy lead, Tax and Business Law at the ACCA, an accounting professional body, says that there is widespread concern about abuse of corporate structures, “whether through the kinds of wrongdoing highlighted by the Panama Papers, or in large-scale money laundering operations”. He says that the flexibility and variety of UK corporate entities is attractive to criminals as well as legitimate businesses and that reform is necessary. 

Accountancy is one side of the corporate story, insolvency is the other and Duncan Swift, president of insolvency and restructuring trade body R3, is pleased that progress is being made. He says that pressure has been building for this for some time. He’s especially bothered by the “difficulty of tracking beneficial ownership and money flows through opaque corporates. This [consultation] is the government playing catch-up”.

There is also pressure from Europe for change in the form of proposals in the EU Company Law Package of 25 April 2018 with measures around digital tools for company law, including online registers. As Piper points out, “in other EU countries the registries only include checked and verified information, which can be relied upon as a matter of law; this hasn’t been the case in the UK”. 

For the UK to align with or be a part of any wider framework across Europe, reform is essential.

It also helps that Companies House has embarked on a large programme of change to processing systems; it makes sense to change things now.

But there is one more benefit, says Peter Windatt, an accountant and licensed insolvency practitioner at BRI Business Recovery and Insolvency: “The government will get the ability to cross check information across its departments giving regulators [even] more opportunity to ensure that data is accurate and true.”

Systemic abuse

Companies House estimates that the accuracy of its records is generally between 90% and 99% accurate. However, a variance of that magnitude allows for large numbers of incorrect records, whether those inaccuracies are deliberate or just errors. Law enforcement and journalists have shown that certain structures are very attractive to criminals and are easy to abuse. Consider the example of John Vincent Cable Services Ltd, incorporated in 2013. It listed the then business secretary Vince Cable, former Liberal Democrat leader, as a director and shareholder – without his knowledge.

But there are plenty of other areas ripe for abuse says Swift and he points out a number. One is directors using multiple versions of their name and/or different dates of birth to prevent a full picture of their activities being captured. “This,” he says, “makes it easier for bad actors and fraudsters to avoid scrutiny, and to hoodwink other businesses entering into contracts with them in good faith.” 

Other examples he notes are UK companies with only overseas registered corporates registered as directors, beneficial owners ‘parking’ unlawfully obtained personal assets into UK companies with friends or underage children named as directors, and the widespread use of individuals ‘fronting’ for owners or controlling directors.

Windatt, from experience, has seen the same. He knows that “there are no ‘fuzzy logic’ matching techniques currently in use which means that Jon, John, Jonathan, Jonathon, JG and J. G. Smith, all the same people in reality, are treated as unique individuals.” And he’s not convinced that the majority of such incidences are accidental.

For Richard Naish, a partner in the Corporate Department at law firm Walker Morris, any system that was developed nearly 200 years ago will be open to abuse and reform is probably due: “You could say it has not kept up with the changes in the way businesses are run and the complex ownership structures that are in place.”

The main area to address is the reliability of the information. Historically, Companies House simply collates submitted forms and makes available certain details as required by the Companies Acts. But, as Naish explains, the Companies Register is totally dependent on directors providing accurate information in the first place. He says that “there is no way of checking the accuracy of the register. If a company files incorrect information at Companies House, that is reflected in the entry on the register”.

Piper agrees. He notes that there has been comparatively little proactive checking of information, and “crucially no legal obligation to check it, and very little in the way of powers to challenge or change records which are known to be wrong”. 

It’s too easy to get false information onto the system, and far too difficult to get it off.

It’s for this reason that he and the ACCA are behind the 80-page consultation: “It is encouraging to see the breadth and depth of thinking that’s gone into the proposals, and also to have a properly structured multi- stage consultation that’s taking place at the beginning of the reform process rather than halfway through.”

Of the proposals, the biggest relates to identification and verification of directors and Persons of Significant Control (PSC) and of those filing information on their behalf. Naish thinks that the proposal to extend the powers of Companies House to query and seek corroboration of information before it is entered on the register “is good and should give people looking at the information available greater comfort that it can be substantiated.”

Veracity of information is important also to Swift who offers a blunt view: “Anyone who wants to benefit from limited liability as a company director should be required to prove they are who they say they are, and all their corporate affiliations and roles should be collected in one place”. It bothers him that an individual who wants to set up a simple bank account faces more stringent scrutiny than someone who wants to set up a business, with all the privileges and responsibilities that that entails.

One big problem is one that Piper points out: while there should be a zero tolerance for ‘mistakes’, there is a huge volume of historic data, much of which is accurate. Further, there is also the resource issue at Companies House itself to consider – even with automation – in updating systems.

But to prevent breaches occurring, Naish wants to see Companies House given sufficient powers to maintain standards. He says that “if the new proposals are really going to catch economic criminals, Companies House is going to have to be given the resources and manpower to catch those corporate entities attempting to abuse the system”. Like Piper he sees staffing and resourcing issues and expects “that Companies House will adopt some form of risk-based enforcement”.

Ultimately, should Companies House be empowered to get tough with rule-breakers? Swift thinks so: “Any actual or attempted abuse of limited liability should be treated very seriously. To protect the integrity of the Companies House database, strong discouragements for bad behaviour are desirable.”

Effect on businesses

As to what effect the proposals will have on directors and businesses, Piper knows that there will always be those who game the system. However, he says that “the suite of measures in the consultation go a long way towards making it much harder for the criminals without in most cases imposing a significant burden on directors, business or their agents”. 

Naish has a similar outlook. He reckons that “any new requirements will quickly become the norm just like the introduction of the confirmation statement and PSC register”. In the meantime, his advice to users of Companies House wanting to check the accuracy of a filing – “contact the company itself to corroborate the information.”

Windatt suggests the same, adding that if he were making background checks on a company, he’d look at other material available “and check that the same names, postcodes, company numbers, etc were consistent.” From his standpoint, he would like Companies House to use a unique director ID number so that “a director with many fingers in many pies can more easily be identified with a higher degree of confidence along with a list of their many and various interests”. As he puts it, directors have the benefit of limited liability (in most cases), their ready identification is a modest price to pay for such protection. 

To finish

But there is a balance to be struck, for the biggest challenge Companies House faces is not that it needs to make the system better than it currently is now, it also needs to make it more attractive than the alternatives. If the proposals make incorporation too difficult then legitimate businesses as well as criminals will simply bypass the company structure and use unregulated platforms.