The Paradise and Panama Papers have given us an unparalleled insight into how fake businesses – often known as ‘shell companies’ – have been used globally to conceal illicit assets, evade sanctions and allow corrupt individuals to enjoy their ill-gotten gains with impunity.
When a luxury London pad or house in the Home Counties is bought with illicit funds, you’re almost certain to encounter a business registered in a secrecy jurisdiction – places where the names of company owners are kept behind closed doors. Many of these can be found in the palm-fringed paradises of the UK’s Overseas Territories and the charming isles of its Crown dependencies. However, recent research by Transparency International UK shows many of these criminal schemes are made possible by those far closer to home.
Through an analysis of 52 major global corruption scandals involving more than £80billion, we identified 766 different UK-registered shell companies playing a key role in transporting illicit funds. Based on what we found, there could be thousands more of these fake businesses being used to move tens of billions in corrupt wealth worldwide. Although this might seem strange at first, the prevalence of UK companies in these schemes is no coincidence. They have been hand-picked by criminals and here’s why.
Scratching the surface
Companies registered in the UK offer instant legitimacy. Its reputation as a respectable international business hub is well known. Because of this, companies registered here are often deemed lower risk by banks and other businesses interacting with them. Without proper due diligence checks, this can allow them to cause some serious damage. In one scheme alone, uncovered by the Organised Crime and Corruption Reporting Project (OCCRP), 17 UK banks handled more than half a billion pounds worth of suspicious wealth emanating from Eastern Europe, which was being channelled by hundreds of UK-registered shell companies.
With the aid of British banks, these companies were able to disperse the money through investments spanning fine furs to private school fees, sometimes to unsuspecting recipients. When talking about the funds it received from the scheme, Millfield School – a prestigious private school in Somerset – said: “The payment was made from a UK bank account and did not appear in any way suspicious at the time.”
Businesses failing to understand their clients and customers allow this mistake to be repeated.
Swift incorporations
Far from being an indicator of respectability, anyone can form a UK company from anywhere in the world. And it’s cheap. While a Panamanian company will set you back around £1,000, you can go online and form a UK company yourself for £12 in a matter of minutes. If you incorporate direct through Companies House there are no due diligence checks on who you are – you’d encounter less ID checks than boarding a flight.
In theory, registering via a regulated agent – otherwise known as Trust and Company Service Providers (TCPSs) – is more secure as they are required by law to undertake money-laundering checks on all customers. However, recent studies have shown that these rules are often ignored or applied sporadically by the sector.
Company factories
We have found a number of formation agents who have been creating secretive corporate structures using UK companies on an industrial scale without even being registered with a money-laundering supervisor – a legal requirement. Indeed, a quarter of the agents listed on Companies House’s website as bulk incorporators were unregistered. Even a handful of these rogue agents can help shift billions of illicit funds in a relatively short period of time.
Lax supervision
Even those TCSPs that are registered with a money-laundering supervisor are not sufficiently incentivised to carry out thorough checks on their clients. The last available information published by HMRC showed its fines for non-compliance in 2014/2015 averaged just over £1,100, peanuts compared to the profits to be made moving illicit money around the globe. This could explain why the sector has been so poor at reporting suspicious activity – which is required by law – to the UK’s National Crime Agency (NCA). According to the latest available data, as a whole the sector submitted just 74 reports over 12 months between 2015 and 2016. Based on the evidence we have, this is likely to be only a small fraction of potential suspicious activity within this industry.
“WE HAVE FOUND A NUMBER OF FORMATION AGENTS WHO HAVE BEEN CREATING SECRETIVE CORPORATE STRUCTURES USING UK COMPANIES ON AN INDUSTRIAL SCALE WITHOUT EVEN BEING REGISTERED WITH A MONEY-LAUNDERING SUPERVISOR — A LEGAL REQUIREMENT”
To make matters worse, money launderers are not confined to choosing a UK-based TCSP. Thanks to the ease of online incorporations, UK companies can be set-up from anywhere in the world. This global activity has not been accounted for in law, with non-UK TCSPs not bound by UK money-laundering regulations, but by those of the jurisdiction in which they operate. Relying on other jurisdictions to enforce money- laundering rules poses significant risks. Whilst the UK’s performance in this area has been poor, other countries’ has been worse.
Less than a quarter of countries assessed by the Financial Action Task Force – an international body that assesses countries’ money-laundering defences – had sufficient systems to prevent the setting up and abuse of shell companies. This means that the UK is relying on weak money-laundering systems to protect the integrity of its own company register.
To compound all of the above is the wholesale trade of companies between agents, which makes it unclear who should have undertaken due diligence checks and at what point in the process. Recent revelations have shown how this trade works, with agents buying ‘off-the-shelf’ packages of companies from each other, depending on their client’s needs. This explains why UK agents were the second most popular intermediaries of choice for Mossack Fonseca – the infamous law firm at the centre of the Panama Papers scandal.
Although the size of this wholesale market is unknown, based on our research we think it could involve thousands – if not tens of thousands – of UK companies. As long as these practices continue, the risks carried by companies formed and sold in this way continue to be significant.
What is being done
From 2017, most legal entities incorporated in the UK have to reveal the names of their ultimate beneficiaries to Companies House. This is published on the persons of significant control (PSC) register. Available via the Companies House website, PSC has added an essential insight into who might be hiding behind the corporate veil.
“WHILE GIVING THE APPEARANCE OF A UK LEGAL ENTITY, TENS OF THOUSANDS OF FIRMS REGISTERED HERE REPRESENT LITTLE MORE THAN SECRETIVE OFFSHORE COMPANIES WITHIN A UK ‘WRAPPER’”
As with all new things, there are some teething problems. Currently, just six people at Companies House are tasked with tackling non-compliance with company law and it does not verify what it is submitted. Despite this, the benefits of a public register mean that the business community and civil society can interrogate the data and provide feedback to Companies House which can then make changes to improve the quality of data. In partnership with investigative journalists, we at Transparency International UK have submitted details of hundreds of companies we think are trying to evade these new transparency rules.
To help navigate and interpret what is currently being published, there are a number of characteristics that can help identify if a UK company might be involved in money laundering. Based on what we have seen from our research, here are some tips and pointers on what to look out for.
Offshore via the UK
While giving the appearance of a UK legal entity, tens of thousands of firms registered here represent little more than secretive offshore companies within a UK ‘wrapper’. In the past, Limited Liability Partnerships (LLP) and Scottish Limited Partnerships (SLPs) have been popular vehicles for money launderers because they can be controlled by two secretive offshore corporate partners – for example, companies based in the British Virgin Islands or Belize (thus hiding the ultimate owner) – and their minimal reporting requirements.
In recent years, both LLPs and SLPs have been brought within the scope of the UK’s PSC register, making it harder for money launderers to hide using UK companies without lying to Companies House and breaking the law. However there are still those who are intent on ignoring these rules by not reporting a PSC or putting the name of some unsuspecting individual as their beneficial owner. So if something doesn’t seem right about a company, there are a number of details to check in order to give you peace of mind.
Location, location, location
Mail forwarding and virtual offices are an essential and legitimate part of many businesses. They are also a constant feature of companies we found to be involved in financial wrongdoing. Providing a superficial layer of legitimacy, as well as distance from the ultimate owner of the company, certain addresses appear repeatedly in Companies House data. Half of the 766 UK companies we identified in our research were registered at just eight addresses, with 105 based at a single rundown office in Potters Bar. The concentration of these shell companies in a relatively small number of places clearly show hotspots of poor due diligence, which allow money laundering activity to go unchecked.
Often these addresses house hundreds, if not thousands, of other companies whose purpose or real owners are not immediately apparent. So, if you aren’t sure about a potential business client, it might be worth checking their registered address and the background of other companies based there. These ‘company factories’ are often semi-permanent fixtures, with batches of entities dissolved en masse, often after a big corruption scandal has been exposed. With this in mind, it’s worth using data from Companies House or third-party tools like OpenCorporates to identify the rate of incorporations and dissolutions at suspicious addresses. Cross-referencing this data with your list of clients might produce some red flags for further investigation.
Nominee directors
Whilst nominee directors don’t technically exist in the UK – with directors legally responsible for the actions of a company – this has not deterred money launderers from using proxy directors to keep their names off the paperwork. Some of these proxies have become synonymous with wrongdoing, such as Ian Taylor, infamous for – among a myriad of money-laundering schemes – directing a company used to help North Korea evade sanctions.
If enforced properly, the UK’s PSC register mitigates the threat of proxy directors, but there is still a long way to go for Companies House to ensure these rules are implemented in practice. A quarter of the firms we identified in our research remain active today and have found a variety of ways to flout company law. If you come across companies with a suspicious director on the UK register, it is worthwhile checking as many sources as possible – from elsewhere on Companies House to the ICIJ’s Offshore Leaks database – to try and identify if the name on the screen you are dealing with is likely to be the real person controlling the company.
Follow the money
Where a company does its banking can tell you as much as anything you find on Companies House, possibly more. Our research found that money launderers based in Eastern Europe have taken advantage of the relationships between some TCSPs and Baltic banks specialising in ‘financial logistics’ (in layman’s terms this means moving money around the world). As a result, lots of UK companies – particularly LLPs and SLPs – have been sold with Baltic Bank accounts as a package. By doing this, those who control these firms gain access to the global financial system without undergoing the same level of due diligence carried out at UK banks.
Becoming a beacon for responsible business
Companies based in the UK might not be as clean as we would like to think. The 766 firms we identified are likely to be just the tip of the iceberg in terms of the widespread abuse of UK legal entities. Thousands of other suspicious firms are still active, which share the same address, proxy directors and corporate partners as those we identified. These companies and the system that allows their creation represent an ongoing threat both to the UK’s international reputation as a clean and safe place to do business, as well as those around the world who suffer from the corruption and other crimes facilitated by these firms.
With Brexit just around the corner, the UK can ill-afford to develop a reputation as a place to do business for money launderers and crooks. To address this threat and become a beacon of responsible business around the world, we need data at Companies House that can be relied on and a well-regulated company service sector that can guard against criminal elements looking to hijack our financial system.
