It would be an understatement to say the last 4 years have been a game-changer when it comes to anti-financial crime regulation and the know your customer (KYC) and customer due diligence (CDD) requirements.  

We’ve seen several important initiatives here in Europe, first with the 4th Anti-Money Laundering Directive (4AMLD), followed by further amendments encompassed in the amendments made to it in 2018 (5AMLD). Add to this the authentication requirements under the PSD2 and the new FATF Guidance on KYC/CDD for crypto currencies and it’s fair to say that it’s been a very busy time for those who work with and oversee KYC/CDD activities.

Company Registries

One of the significant amendments made by the 5AMLD was the requirement that European Member States create company registers and record on them information about their beneficial ownership (See: Articles 30/31). For some Member States, this has meant the creation of an altogether new agency, while for others this has entailed significant reform of existing regulations related to companies and their formation.

Here in the UK, the situation is slightly different. The UK has had a register of companies, currently known as Companies House, in one form or another since 1844.[1] Today, the number of corporate entities recorded is substantial - there were 672,890 new company incorporations in 2018/19. This is the highest number of incorporations since 2009/10.[2]  Apparently, one of the earliest companies still on the register from that era, according to Gary Townsley, the Communications Manager at Companies House, is company number 118 (I’ll leave it to you to look it up!).[3]

Criticism has been levelled at Companies House over the past few years about register’s data quality. You are sure to have heard the stories about misspelt addresses, use of Disney character names and so forth. But this is soon to change. The Companies House 2018/2019 Business Plan outlines a three-year transformation programme designed to bring the register into the digital age. The changes proposed include improvement of the quality and accessibility of data held on the register.

Added to this is the public consultation announced in May 2019, “Corporate transparency and register reform”, about some of these changes. They might not only improve the register’s data, but also its utility and reliability in relation to KYC and CDD.

Importance of Registry Data to KYC and CDD

When first created, Companies House primary purpose was to help fulfil the requirements in the Companies Act. But over time, the register has become a “go to” information source to help better understand the financial crime risk profile of a company and the individuals who direct or control it.  The register’s data is also useful to formulate a picture about the nature and purpose of a company – why was it formed? How is being used? It has also helped to flag anomalies that have triggered KYC reviews by financial institutions in relation to an existing customer.

The Panama Papers and the Russian Laundromat cases have shown that information about a company and its key individuals is essential to identifying those who may be seeking to conceal their identity or the illicit activities they engage in.

International efforts to clamp down on tax evasion and avoidance have resulted in governments globally introducing regulations that increase tax transparency in order to combat abuse facilitated through the use of opaque corporate structures and offshore investment products and services. Many jurisdictions rely on the AML regulatory framework requiring KYC and CDD of customers to identify beneficial owners for tax compliance purposes.

For example, the Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standard (CRS) require financial institutions to collect, validate and report tax residency information for new and existing customers (individuals and entities) whose accounts fall within the scope of these regulatory requirements. An important determinant is the nature of the activities undertaken by a customer who is a legal entity, such as a company. If the entity falls within the definition of a “Passive Non-Financial Entity”, the tax residency information must be collected for that entity and its controlling persons. The information recorded on the Companies House register can be an important source of data to determine the reliability of the tax residency information provided for these parties.

Financial institutions must ensure there is no reason to doubt the accuracy and reliability of the tax residency information collected about a customer and its controllers. The KYC and CDD collected by financial institutions is critical for:

• Identifying existing customers who must be reported to the relevant tax authority;
• Determining whether the tax residency information collected is reliable; and
• Monitoring for any change in the customer’s circumstances that might impact upon tax residency information, including changes in beneficial ownership.

Improvements made to both the data held on the registry and how it can be searched will prove to be an improvement welcome by both financial institutions and regulators alike, in bolstering the accuracy and reliability of information recorded on it.

Current Companies House Consultation

The consultation proposes several changes that aim to increase the transparency of UK corporate entities and help combat economic crime. Some of the proposals are relevant for those financial institutions who refer to the register’s data as part of their KYC and CDD activities:

• Verifying the identification for individuals (i.e. KYC) named on the register
• Whether individuals can be validly appointed as a director before their KYC has been completed
• Evidence from 3rd party agents that CDD has been undertaken on the individuals they proposed to enter onto the register, and
• Collection by companies of more detailed information about their shareholders.

From my discussions with people working in the KYC and CDD space, there are even more ideas being generated in response to the consultation on how the register’s data can be even further improved.

Concluding Thoughts

The proposals in both the Companies House 2018/19 Business Plan and the consultation really show that we are in a very exciting time of transformation. If implemented, these changes could feed into the rapidly emerging approach I am seeing across organisations of working “smarter not harder”.

One of the recommendations we’ll be submitting from EFI is to reformat the registry’s entry system to allow for the subclassification of directors into executive and non-executive directors. Currently, it’s not possible to tell from the registry entries whether a director play a role in the day-to-day operations of the company. This information can be essential to understanding which directors have control over the day to day activities of a company.  It can also help to detect whether “shadow” directors are being held out as being in control of a company, but with little or no relevant experience. 

Making Companies House data more reliable would reduce the time and effort needed collect and verify, or even revalidate information found on the register. And that would mean more time to analyse and assess unusual customer activity. Can’t wait to see what other innovative ideas are generated from the consultation.

[1] Townley. G. “What is Companies House” (published 3 July 2018) [Online] [Accessed 22 July 2019 at: https://companieshouse.blog.gov.uk/2018/07/03/what-is-companies-house/ ]

[2] Official Statistics Companies register activities: 2018 to 2019 (published 27 June 2019) [Online] [Accessed 22 July 2019 at: https://www.gov.uk/government/publications/companies-register-activities-statistical-release-2018-to-2019/companies-register-activities-2018-to-2019 ]

[3] For more general and humorous information about Companies House, check out Gary Townley’s blog page at: https://companieshouse.blog.gov.uk/author/gary-townley/