Examination of Witnesses

Economic Crime and Corporate Transparency Bill – in a Public Bill Committee at 2:45 pm on 25 October 2022.

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Dr Susan Hawley, John Cusack and Thom Townsend gave evidence.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch 3:13, 25 October 2022

We now have evidence from Dr Susan Hawley from Spotlight on Corruption, John Cusack—via Zoom—from the Global Coalition to Fight Financial Crime, and Thom Townsend, representing the UK Anti-Corruption Coalition. Can I ask Dr Hawley and Thom Townsend to introduce themselves first?

Dr Hawley:

Hello. I am Dr Susan Hawley, executive director of Spotlight on Corruption. We are a UK anti-corruption charity that monitors how the UK enforces its anti-corruption laws and keeps its international anti-corruption commitments.

Thom Townsend:

Good afternoon, everyone. My name is Thom Townsend. I am the executive director of Open Ownership and the incoming chair of the UK Anti-Corruption Coalition. Open Ownership supports more than 40 Governments around the world to implement exactly these types of reforms.

John Cusack:

Hello everyone. My name is John Cusack. I am the chair of the Global Coalition to Fight Financial Crime, which is an NGO. It is a 20-member organisation, both public and private, with large members such as Interpol and Europol, as well as Open Ownership—Thom’s organisation—and RUSI, which you may well know in the UK too.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q Thank you all for coming to give evidence today. I want to start with a couple of questions. First, in your view, does the Bill provide adequate guarantees against companies that have opaque corporate ownership based in secrecy jurisdictions? Could and should the Bill be further improved to prevent companies’ continued use of offshore and opaque corporate ownerships?

Secondly, does the Bill provide enough mechanisms to help with transparency around the new responsibilities of Companies House, and should there be reporting—to Parliament, or certainly publicly available—on new powers? What would you want to see in order to have confidence that measures are having impact?

Thom Townsend:

I think that there are significant areas of improvement for the piece of legislation that we see before us. Primarily, from our perspective, we focus on reform of company registrars around the world, so my focus is very much on how Companies House can better operate. The key area we would identify is around the verification mechanism, as you would expect, and that splits out into two points.

One is around how we verify someone’s identity versus how we identify and verify the statement of control and ownership that they are giving about their involvement with the company. That second part—their status—is not covered here. We are not putting in place mechanisms to understand whether the disclosure of beneficial ownership is accurate, and that is a significant problem. A colleague talked previously about having a gold standard, but we are far off that. We see company registrars in countries around the world taking meaningful steps to attempt to use their data and powers to begin to understand whether those statements are true. That needs to be significantly beefed up in this legislation.

On the second part—the ID of individuals—there are grave misgivings about that being outsourced to the trust or company supervisor profession. There are other ways of identifying people: in an ideal world, Companies House should be doing that. That is a big change for this piece of legislation, but frankly, that is where most of the world is going.

Thom Townsend:

It is worth saying that countries that are doing very well on this typically have a national identity card system that is the foundation of their ID process. There are other ways of doing it. I think about Estonia, France, Germany—the list could go on, but it is based around their national ID card system. Clearly, we do not have that. The Government have done significant work on their own identity verification programme, which has had mixed results. We know we can do this. It does not necessarily need to be outsourced to that profession, which of course is supervised, but we collectively have severe misgivings about it.

On the second point around the accountability mechanism, we would like to see a very strong mechanism for Companies House to be coming to Parliament on a regular basis to talk about how this is looking and how it is performing. It is a much broader conversation about the kinds of indicators we would like to see reported on. That is a much longer conversation, but I will pass over to colleagues at this point.

John Cusack:

I share Thom’s views, principally, on this. I spent 30 years working in banking as an MLRO—that is the previous history to my current role—and I spent many, many occasions trying to establish beneficial ownership. It is not easy, but it is the key to understanding risk and understanding who owns and controls a bank account, real estate or a company. That is absolutely key. I would like to see an obligation on the companies register that is essentially equivalent to that which a bank has in relation to knowing its customer, to the extent that that is possible. That is where we need to get to. Thom was explaining that some of the better countries are trying to get to that kind of standard.

Secondly, I believe that the registrar of companies needs to have a much stronger obligation than is currently set out in the proposed legislation—it needs, again, to be slightly similar to my old obligations as an MLRO. There needs to be an obligation to operate an AML programme that is worthy of the name, and to have strong and meaningful controls in order to be able to demonstrate that Companies House and the companies register are doing a similar job to what other people do in the private sector.

Dr Hawley:

I would like to strongly back that up. It is essential that the “know your customer” rules that the private sector has to use are used by Companies House as well. There is no point having a registry that SMEs cannot rely on because it is not as accurate as it needs to be. That has been a problem now that the big companies simply do not use the corporate register because it is so inaccurate. There is a long way to go on that.

We also have real concerns, as Thom mentioned, about the authorised corporate service provider provision in the Bill. In essence, it relies on another part of the system—the anti-money laundering supervision system—and the danger is that we are just playing whack-a-mole. We are just pushing the problem down the road. We know that HMRC, in its supervision of TCSPs, has had lots of very serious questions about whether it is up to the job, and it just recently revised its average fine level down from £250,000 to £8,000. There are real questions about whether that is a serious deterrent. In its recent report, it found that nearly 50% of its cases that went up to the governance panel had to be returned to the case officer for serious work to be done again. Either the Bill needs to address the AML supervision regime—I can tell you some of our suggestions, because it would not be that difficult to come up with a transition—or there are real questions over whether that clause should be in it at all.

A final point, which was picked up earlier by colleagues from law enforcement, is about how this will be funded. The registry will be meaningful only if there are proper resources. It can be completely cost-neutral to the Treasury. We are heading into a difficult fiscal time, so it needs to be cost-neutral. As the gentleman from the National Police Chiefs’ Council said earlier, we have almost the lowest registry fee. We are the 6th lowest, in company with Rwanda, Timor-Leste, Ukraine and South Africa. Most other countries charge an average of £150 to £300, compared with £12. That could go an enormous way to getting the right IT infrastructure. We know a lot of this will have to be done with technology and AI. Making sure that the fees for Companies House are set at a realistic level to make this properly verified is essential.

Photo of Jackie Doyle-Price Jackie Doyle-Price The Minister of State, Department for Business, Energy and Industrial Strategy

Q To follow up on that point, we have a principle in this country that the fees should match the operational costs. We are adding to what Companies House will be doing in that active management. That would make a case for an increase in the fee to meet the costs, would it not?

Dr Hawley:

Absolutely. The key thing is what John alluded to—clause 88. What is the requirement in the Bill for how far the registrar has to go? If it is the minimum amount, the fees will be minimal. If we are going for the gold standard, the fees will need to be higher to reflect the greater verification work.

Thom Townsend:

Just a quick thought: what strikes me, reading the Bill, is that it is not quite clear what Government want Companies House to be, when you delve into the detail. Is it around minimising criminal activity, as in the fourth objective? Is it about preventing, which comes up in clause 88? That needs to be resolved to give a very clear idea in primary legislation of what we want Companies House to be. It should be the first line of defence in the UK economy from the perspective of integrity and preventing crime.

Photo of Jackie Doyle-Price Jackie Doyle-Price The Minister of State, Department for Business, Energy and Industrial Strategy

Q I guess it comes back to the discussion that we are having about the twin-track objectives that pull in opposite directions: to enable it to be part of the framework for tackling economic crime, but also to enable business. In your opening comment, you stated that we are a way away from the gold standard. I think we would all agree with that—that is why we have this Bill, frankly, and I certainly have ambitions for it—but I want to probe you on what you said about a national identity card system. Surely you are not suggesting that we cannot improve this kind of scrutiny without a national identity card system. There are other ways to establish that, and other ways of knowing your customer.

Thom Townsend:

Absolutely. My point was just that countries that do have been able to go further and faster as a result of having the underlying infrastructure. But no, absolutely, you can do that. We have brought down the cost of identifying people in this country very rapidly, with KYC for new banking, and taking a video of yourself. We have a lot of technology and lots of ways to achieve that end. It does not have to be done through the trust and corporate service provider industry—it simply does not.

John Cusack:

I will just add to Thom’s point about clause 88. The language concerns me greatly. This will be dependent on the registrar’s diligence and, essentially, on the financing that the registrar has in order to carry out their activities. The language—that the

“registrar must carry out such analysis of information within the registrar’s possession as the registrar considers appropriate”— is extremely timid. If there is no money for it, the registrar will not be doing anything. That is really problematic. We would not apply that in any other circumstance; we would want to set out the obligation—the expectation—and to fund that appropriately, not the other way around.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

Q I have some questions about whether the Bill is sufficient to deter the abuse of shell companies, limited partnerships or Scottish limited partnerships.

Dr Hawley:

We focused more on what is not in the Bill. I do not know whether John or Thom want to address that.

Thom Townsend:

I would hand over to John on this one.

John Cusack:

The Bill is positive. It is one of the contributions that will definitely help, and it is trying to fix a long-standing problem. At the end of the day, however, if we want to deal with financial crime, economic crime, we need convictions—investigations, prosecutions and convictions—and asset recoveries. That comes from resourcing the public sector, as well as demanding high expectations from the private sector. I am worried that in the UK the financing of law enforcement, and of the FIU in particular, is insufficient to assure the objectives that we all want, which are to mitigate, manage and reduce harms from economic crime. This is a long-standing weakness in the UK, as it is in many other countries, and that would definitely help, but let us not kid ourselves that it will make a material difference to the economic crime situation in the UK.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

Q Do you share my concerns that previous Bills to tighten things up—for example, for Scottish limited partnerships—have not been met with enforcement action? Since the changes to the persons with significant control regime came into force, only one fine has been issued, to the value of £210. Would you like to see more enforcements and more follow-up of those who are not applying the current rules?

John Cusack:

Yes, of course. I would support that. However, I would also say, with respect, that the idea is to do prevention with the changes. When we put a lock on the door of an aeroplane, the fact that no one has stormed the cockpit is not how we judge whether a lock on the door is appropriate. We are tightening things up and preventing financial crime, but yes, absolutely, we need to see more enforcement. You would hope that these measures will mean that people will no longer necessarily look to UK companies and Scottish limited partnerships as the vehicle of choice for abuse, and they will look elsewhere.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

Q May I ask about the issues with the register as it exists? There are lots of things on it that are inaccurate, deliberately false or involving the misuse of people’s personal information and addresses. How much do you feel that Companies House has to go back actively into the register to figure out what is wrong with it and to put it right?

Thom Townsend:

When this legislation passes, there will be a lot of remedial work to sort out what is there—there is no doubt about that. Everything that you have just described is true, and it is probably a lot worse even than we are aware of. As you just mentioned, we are clearly starting from such a low bar that any legislation will have some kind of deterrent effect, but it is important to think not just about ensuring that we hit the gold standard with a piece of primary legislation. It is also the resourcing, but ultimately nothing that we can do will create a 100% perfect system.

Essentially, we are trying to remove as much noise as possible from the system to give law enforcement the best possible chance of focusing its resource where it can make the most difference. It is important not to think about this in zero-sum terms of: is it possible to commit crime or not? It is really just about making an environment where it is somewhat more manageable to detect, and then enforce. As it stands it, is the wild west on that register. If you wanted to do enforcement, we would be here until the end of time.

Photo of Alison Thewliss Alison Thewliss Shadow SNP Spokesperson (Treasury)

Q Yes. Finally, can I ask you, John, whether there is any particular recommendation that you would like to make on the register of overseas entities section of the Bill?

John Cusack:

Not necessarily, because what I am most interested in is getting the Bill out in its current form with a financed and adequate registrar with obligations, and resolving that underlying issue. One of the reasons people use UK companies is not so that they can open UK bank accounts, because then you go through the gamut of UK obligations in the regulating sector, even though that happens occasionally when buying real estate and other things. Actually, people buy and acquire UK companies and Scottish limited partnerships so that they can open accounts abroad, because the UK is seen as a first-class jurisdiction. That means that when they open those accounts abroad, not many questions are asked, or not as many as would be if they were acquiring a Nigerian company, for example, which would ring all sorts of alarm bells. The interesting thing about the companies registry is that the abuse by foreigners does not necessarily translate into a UK economic crime issue per se, even though it is something that we also all want to address.

Photo of Margaret Hodge Margaret Hodge Labour, Barking

Q Indeed, it can sometimes lead to terrorism as well as other crimes. May I ask one short question of you all, and then a longer one? We have talked about the importance of looking at persons with significant control. Do you think that we should reduce the threshold of having a 25% shareholding to 5%? Would that help?

John Cusack:

For my high-risk customers, I always had it at 10% in my financial institutions, and 25% for non-high-risk customers, because I really wanted to ensure that I had almost everybody who could possibly be interested in the company or a relationship. I stuck at 10%, but you can always argue it lower or a bit higher.

Thom Townsend:

Yes—whether it should be 5% or not, it needs to be lower. There is an argument to be made between 10% and 5%. My sense is that we have a 25% global standard on this because it is a sort of round number.

Dr Hawley:

It is really interesting to look at what Jersey and Guernsey are doing on financial crime. They have a 10% threshold, and they are introducing a lot of other very interesting economic crime measures that go far further than we have in the UK, including a failure to prevent money laundering offence. They also have a measure to forfeit accounts based on a suspicious activity report, so they are really looking at very radical measures in Jersey and Guernsey that will make the UK look quite behind.

Photo of Margaret Hodge Margaret Hodge Labour, Barking

Q Good. Thank you for that. I recognise that you have all made an incredibly important contribution to the debate, so thank you for that, and for the support that you have given us in developing our thinking. I sincerely mean that. I think we all see the Bill as a start, and we would like to add to it. The pragmatic reality is that we have to prioritise what we add in. For each of you, what are your three top priorities for what could be added to strengthen the effort against economic crime? It is a bit of a tough one. I have a list that is longer than three, but I would be interested in your top three.

Dr Hawley:

I would say that that is the easiest. It is a great question and I will jump in, because I have my three. It would be really fantastic if Parliament signalled that its intention is not to pass a Bill that will just stay on paper; it needs to be properly resourced and make a real difference in terms of economic crime. There are three different cost-neutral ways of doing that, some of which you mentioned in earlier discussions. One is cost protection across civil recovery for law enforcement. The US-style system really works. If we want US-style enforcement, we need US-style rules.

Another way is to increase Companies House fees to match the scale of verification that we need. The other way is to invest far more. In the US, 100% of forfeiture goes into a central fund, and local police get up to 80%. We heard earlier that the NCA gets 50%; some police forces only get 18%. We also desperately need to find ways to match the money that law enforcement brings in. Law enforcement brought in £3.9 billion over the last six years. If that had been reinvested in law enforcement, we would have top capability in this country.

There are two other things. I have mentioned AML supervision already. If we could make the Office for Professional Body Anti-Money Laundering Supervision a body that genuinely raises the consistency of supervision across the board while the Treasury works out the bigger picture on supervision, it would make a really big difference. OPBAS could name and shame supervisors who were not performing, and that needs to apply not just to the legal and accounting sectors, but to HMRC and the FCA.

Finally, there is corporate liability reform, which you also referred to earlier. We have been waiting for it. It was in 2015 that there was the first Conservative party manifesto commitment to have a failure to prevent economic crime offence. The Law Commission has now spoken; we have been waiting a long time for it. Ideally, you would have a failure to prevent fraud offence, a failure to prevent false accounting offence and a failure to prevent money laundering offence, but you also need to bring in a change in the identification doctrine for the schedule 8 offences to make this work.

Thom Townsend:

Unsurprisingly, verification—the first thing would be to think very hard about whether it is the trusts and service providers sector that we want to do that, to think much more broadly about what other mechanisms are available to us, and to cast the net widely around the world; there is a lot happening.

Secondly, the statements of beneficial ownership and significant control should be verified too. That is a far harder task, because the world has not figured out entirely how to do that. There are some really good examples; places such as Austria are doing good work, but it is largely about using data from across Government to make sure that you can red flag those statements.

Thirdly, we probably also need something in the Bill about having a more permissive data-sharing environment, to make sure that Companies House is getting what it wants. If you look at how the Bill is currently drafted, we have data that is “in the registrar’s possession” or “available to the registrar”. It is very unclear what that means, and it needs to be much broader than that.

A supplementary fourth point is to think long and hard about how we are using an identity, once verified, persistently in a lifelong way. Australia, New Zealand and India issue unique identifiers to directors—and, in Australia’s case, to beneficial owners—for life, which makes the investigation process much more straightforward. There is a lot of good practice out there. We need to look very hard at that and think about how we incorporate it into what the UK is doing.

John Cusack:

As far as the Bill goes, I have mentioned one point already, which is the item in relation to beefing up the obligation on the registrar. The second piece is on the information-sharing provision in the Bill—I think it is clause 148. It is a limited information sharing item that essentially requires a SAR to be filed before private information sharing can take place. There is also the exit, pretty much, of the customer, which is potentially problematic. We are going to find that one potential bad actor leaving one bank cannot then open an account somewhere else, but we will also find that innocent people will be involved in that. I would rather have something broader, which allows the detection of unidentified financial crime, whereas, in this particular case, we are going to get identified suspicion being shared, which will potentially lead to some very serious unintended consequences, even though I am very supportive of the provision.

The last thing that I would say outside the Bill is that, ultimately, it is about asset confiscations and asset seizures. The UK is doing okay, but it is not doing anywhere near as well as it should be, and it is certainly underperforming compared with a number of important countries. I will give you one example. Italy not only seizes the amounts that Susan was talking about, but over four or five years it seizes almost £10 billion a year in asset confiscations, because it treats the Italian mafia as a matter of national security and targets its resources accordingly. I would like to see not a change in the law, but the rightsizing of the resources across the piece, whereby they are directed toward the tip of the spear, so that law enforcement FIUs in the UK and asset recovery can be prioritised and targets set, and we get close to the Italians, rather than being where we are today.

Photo of Liam Byrne Liam Byrne Labour, Birmingham, Hodge Hill

Q Susan, can I ask you to spell out what will happen if we do not align the verification procedures in the Bill with the obligations that currently bite on the AML sector?

Dr Hawley:

I alluded to one point earlier, which is that if this is not a registry that companies and people can rely on, it will have been a waste of time and money. I alluded earlier to SMEs particularly not having the resources and having to rely on Companies House in a way that large companies would not; they would do their own intelligence. It will be bad for business and the business community, and it will be bad for the UK’s competitiveness. If you look at our competitiveness rating under the World Economic Forum measures, we are pretty good on quite a lot of things—in the top 10 —but for tackling serious and organised crime we are 70 out of 141. That is a competitiveness rating, so it will dent our competitiveness. Actually going for gold standard practice will be good for the economy, and will make us more competitive.

Photo of Liam Byrne Liam Byrne Labour, Birmingham, Hodge Hill

Q Thom, the registrar’s objectives are set out in clause 1. They are pretty woolly. How would you like to see them improved?

Thom Townsend:

Objective 4 does really need to say “prevent”. It is an objective related to the registrar’s functioning. The registrar should be responsible for taking really active and clear measures to prevent criminal activity under its bailiwick.

Photo of Liam Byrne Liam Byrne Labour, Birmingham, Hodge Hill

Q It currently says “to minimise” the extent to which companies do bad things.

Thom Townsend:

That seems like a ridiculously low bar.

Photo of Liam Byrne Liam Byrne Labour, Birmingham, Hodge Hill

Q My final question is: what is the correct interrelationship with the registries of beneficial ownership that are coming into place?

Thom Townsend:

Sorry, what do you mean?

Photo of Liam Byrne Liam Byrne Labour, Birmingham, Hodge Hill

We have registries of beneficial ownership for assets and property. We have to try to make it possible for law enforcement to connect companies, individuals and assets. Do you think we have the framework for connecting those three dots effectively?

Thom Townsend:

As it stands, no. Some form of this legislation will go a lot further. We need to look at how we are uniquely identifying people. In that case, there is an argument for bringing that ID process in-house so you have clarity around it. You can assign that identifier, which then gets used across the panoply of datasets that law enforcement have in their possession to do that interconnectivity. We run the risk a little bit, as the legislation is currently framed, of creating another island that is a bit better connected but probably will not sit at the heart of the process and be that effective first line of defence that the UK economy should have.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q I want to come back to asset recovery. There is a question about automatic strike-offs by Companies House. Would any reforms to those procedures—for example, for companies that potentially want to be placed in a compulsory liquidation process—be better, and allow for investigation and potentially asset confiscation by insolvency practitioners where those companies may have been guilty of criminal activity and money laundering?

Dr Hawley:

Ensuring that companies cannot just liquidate has been incredibly important to law enforcement in the past. I am very sorry, but we might have to get back to you on that because I have not looked specifically at that clause.

Photo of Seema Malhotra Seema Malhotra Shadow Minister (Business, Energy and Industrial Strategy)

Q I want to come back to some of what we have heard about Companies House. It feels as if quite a lot of the new functions might be outsourced in different ways. Mr Townsend, you made a point about what could and should be done in-house. I would really appreciate hearing your view on whether more can be done in-house. Is there not a danger that that might weaken the safeguards that we bring in?

Thom Townsend:

I think there is a balance between speed and effectiveness. Companies House is fantastic at what it does now—it provides a really good service to register a business quickly, and it is really easy to use—but it has never had to do the kinds of things that we are now proposing it does. It will be a long journey to get from where it is today to the sort of high-functioning all-singing, all-dancing machine that we are proposing.

There is a balance between achieving the objectives of the Bill, and the wider goals of dealing with corruption and countering kleptocracy in the UK. We will probably have to look at some sort of transitional arrangement but, ultimately, we should have a much more aspirational and ambitious vision for what we want Companies House to be in five to 10 years’ time, put the resourcing in place, and ensure oversight and accountability to drive that forward and make it happen.

Photo of Christopher Chope Christopher Chope Conservative, Christchurch

Would anybody else like to answer that question? No? In that case, I thank all three members of the panel for their help in giving evidence.