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Sanctions and Anti-Money Laundering Bill [HL] - Committee (3rd Day) (Continued)

Part of the debate – in the House of Lords at 8:45 pm on 6th December 2017.

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Photo of Lord Bates Lord Bates The Minister of State, Department for International Development 8:45 pm, 6th December 2017

My Lords, I thank the noble Baroness, Lady Kramer, for leading a short but interesting debate on these matters. I shall put some remarks on the record to see whether they satisfy her and my noble friend.

Amendments 69H and 69J would prohibit trust or company service providers, known as TCSPs, that do not carry on business in the UK from incorporating UK companies, unless overseen by a UK anti-money laundering supervisor. The amendments would also require UK companies to establish a UK bank account and evidence this to Companies House. The money laundering regulations 2017 require TCSPs carrying on business in the UK to be fit and proper. We will also shortly formally establish the office for professional body anti-money laundering supervision, or OPBAS, which will work to ensure consistently high standards of anti-money laundering supervision by professional bodies, including TCSPs.

If there are factors that make it unclear whether a trust or company service provider could be regarded as acting by way of business in the UK—in which case it would fall within the jurisdiction of a UK anti-money laundering supervisor—HMRC considers on a case-by-case basis whether registration for supervision is necessary in order to combat attempted evasion of supervisory requirements. I therefore agree with the intention behind the amendment. However, given the pending establishment of the office for professional body anti-money laundering supervision, it is right that we establish this body first and then take proper account of its conclusions around TCSP supervision before taking further action in this space.

Additionally, the problem that the noble Baroness, Lady Kramer, and my noble friend Lord Naseby correctly identified ultimately results from trust or company service providers exploiting the comparative weakness of anti-money laundering supervision in certain overseas jurisdictions. In order to comprehensively address this, our emphasis should not be solely on expanding the scope of our anti-money laundering regime, particularly given the practical difficulties that would arise from UK supervisors seeking to exercise effective oversight over trust or company service providers established outside the UK and with no physical presence within the UK.

Such circumstances would present significant challenges for effective supervision, which typically includes measures such as on-site visits to firms that present higher risks of money laundering. The most effective way of addressing the problem which the proposers of the amendment have highlighted is through effective international co-ordination to drive up standards of supervision in jurisdictions with weaker anti-money laundering regimes than we have here in the UK. This is the agenda which we promote with international partners through the Financial Action Task Force, and it is this agenda which will offer a durable, long-term solution to the problem of weak overseas supervision of trust or company service providers.

Amendment 69J would amend the Companies Act 2006 to require UK companies to establish a UK bank account and evidence this to Companies House on an annual basis, or otherwise pay a fee or financial penalty. The wider purpose behind this part of the Companies Act is to provide a simple mechanism for companies to confirm that corporate information registered with Companies House as required under other obligations is accurate and up to date. The amendment would significantly change the purpose of the annual confirmation statement. As drafted, it would additionally require all UK companies to demonstrate annually that they hold a UK bank account; otherwise, they would have to pay a financial penalty. This would mark a significant increase in the reporting burden on the 3.9 million entities registered with Companies House, the majority of which are small, local businesses which would have to provide evidence of a UK bank account every year.

Amendment 69K would require company formation agents—defined for these purposes as including the UK registrar of companies at Companies House—to conduct customer due diligence. I appreciate my noble friend’s remarks about the consultation which has taken place, led by my noble friend Lord Ahmad, with colleagues and officials. I understand and sympathise with my noble friend’s intention; it is quite correct that we should take steps to avoid corporate vehicles being used for money laundering. However, I hope I can convince him that his amendment is not the best way to do that—although he prefaced his remarks by saying that it was a probing amendment. He will probably want to reflect on my remarks in response to it.

The amendment would represent a fundamental change in the principles under which the UK’s company law system has long operated. The UK registrar of companies has a statutory duty to incorporate and dissolve limited companies. This is carried out by Companies House, which registers company information and makes it available to the public. Companies House is not—unlike trust or company service providers, which are already supervised for anti-money laundering purposes under the money laundering regulations—a private-sector profit-making business. The registrar has no discretion in law to refuse or decline a request to incorporate a company. Companies House therefore cannot decline to establish a business relationship in the way that firms regulated for anti-money laundering purposes must when they cannot discharge their customer due diligence obligations. Because of the registrar’s statutory obligations, Companies House is not considered to be a company formation agent. If approved, the amendment would require further substantial revision to UK company law to allow Companies House to operate in the same fashion as company formation agents.

Approximately 600,000 new companies are registered each year at Companies House. The customer due diligence measures required under the money laundering regulations are significant, and are required to be applied by regulated firms on an ongoing, risk-sensitive basis to prevent illicit actors making use of the financial system. They are not intended—either by international standards, EU law or UK law—to be applied by a public body to all companies that are incorporated within the UK. Were these measures to be adopted, they would be a significant, unfunded burden upon Companies House and would fundamentally alter its relationship with the company formation process. They would also unnecessarily delay the process of company formation. The overwhelming majority of UK companies are set up for legitimate commercial purposes. Applying this amendment as drafted would not address or identify higher risks of money laundering or terrorist financing, but would instead impose an across-the-board administrative burden on Companies House and individual companies.

As drafted, the amendment would also require that due diligence be carried out in accordance with any of the customer due diligence measures specified in the money laundering regulations, the fourth EU money laundering directive or regulations made under Clause 41 of the Bill. This approach would unfortunately create uncertainty for firms and for Companies House as to which set of due diligence obligations they should comply with, and how they should do so.

Amendment 69L raises similar issues, so I will be brief. It seeks to amend the Companies Act 2006 to require the Secretary of State to impose a duty on Companies House to carry out customer due diligence measures in accordance with the money laundering regulations on persons wishing to register a company in the UK. The international standards set by the Financial Action Task Force, EU and UK law all envisage that customer due diligence measures should be applied by a limited number of regulated firms. These entities are the gatekeepers to the financial system and are therefore the proper entities to carry out due diligence for anti-money laundering purposes. Given the scale of Companies House’s activities, it would only be possible to require it to conduct such due diligence at disproportionate cost. This would further penalise legitimate businesses while not adding significant new obstacles to money laundering and terrorist financing.

The amendment tabled by the noble Baroness, Lady Bowles, would effectively establish an additional levy on legitimate businesses: to duplicate due diligence checks that are already being conducted by regulated firms such as banks and lawyers, which such businesses already have commercial relationships with. Were these measures to be adopted, they would unnecessarily delay the process of company formation from the same day—in its most accelerated form—to an average of weeks, not days. This would additionally result in a significant increase in the cost of incorporation at Companies House. Also, any such obligations would only duplicate those already carried out by financial institutions and other firms that are already regulated in the UK. Any entity with a UK bank account is already required to go through customer due diligence. It would be neither effective nor proportionate to compel Companies House to duplicate these requirements.

For these reasons, I therefore ask the noble Baronesses, Lady Bowles and Lady Kramer, and my noble friend Lord Naseby, to withdraw their amendments.