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Why financial institutions should welcome Companies House reform

For decades, Companies House has provided frictionless company formation to support the British economy. A job it’s done admirably well; in 2021 the agency saw the highest number of incorporations on record. However, the register has also suffered from data-quality issues and companies being set up to front fraudulent or illicit activities. Recent data showed the scale of the problem by finding hundreds of directors listed were dead before their companies were even formed.

The Economic Crime and Corporate Transparency Bill, which is currently passing through the House of Lords, potentially provides the means and opportunity for Companies House to better protect the UK system from being used to facilitate criminal activity. If the bill is passed, Companies House will be able to strengthen the integrity of the register. It will have the ability to proactively prevent fraudulent companies being incorporated and to challenge those seeking to exploit the system to commit fraud or launder money.

 

Strengthening the integrity of the Register

Previously, Companies House have not had the legal mechanism or mandate to safeguard the UK economy in this way. Instead, significant responsibility has been placed upon Financial institutions to detect and report suspicious transactions or behaviours under existing Know Your Customer regulations. However, because it is currently relatively easy for a fraudster to set up a seemingly legitimate company without using their own identity, the Financial Institutions are at a disadvantage.

These reforms will give Companies House the opportunity to be more proactive in preventing fraudsters from getting their foot in the door with the act of incorporation and to protect against common issues such as identity theft and the formation of fake companies.

The rules propose arming the Registrar with the ability to amend, remove or add correct records. This will mean it can take a more active role in disrupting company infrastructure that conceals criminal activity. It will also provide the mandate to proactively verify individuals when they register – making it harder for bad actors to get into the system at all.

 

Nowhere to run and nowhere to hide

The reforms will also expand asset seizures to cover crypto assets. Crypto is increasingly being used by criminals to hide assets from banks and authorities. Expanding criminal confiscation powers will help fight back by making it faster and easier for law enforcement to capture this type of asset.

The legislation will also help foster cross-industry collaboration and information sharing to prevent economic crime. This will be transformational and enable more transparency. Where there is reason to suspect criminal activity, public and private sector organisations will be able to share information between themselves more freely. This will help them validate, investigate and where appropriate act to better protect the UK economy from dirty money which is clearly no longer welcome in the system.

 

The bill itself won’t bring about change – action is required

While the Economic Crime and Corporate Transparency Bill is the biggest upgrade to the rules governing UK company creation in 170 years, it needs the resources, tools and technologies to reach its full potential.

Companies House is in a unique position as it holds the keys, and therefore the data, to incorporation for all UK companies. It knows which credit cards are used to pay the administration fees, it knows which laptops are used to submit the incorporation information and it privately holds all the data about the Directors including the contact details such as email addresses, home addresses and telephone numbers.

Activating all that historic intelligence whilst incorporating current data from outside sources is not a trivial task. Until advances in artificial intelligence improved traditional data-matching, this would have been exceptionally challenging. However, entity resolution technology can now enable the integration of large volumes of disparate data turning it into actionable and valuable intelligence and a solid foundation for analysis.

Network analytics offer even further opportunity to protect the system as Companies House shift into the new active gatekeeper role. Organised criminals rarely create one shell company in isolation to hide assets. Instead, they create multiple companies, that on the surface have no links. Network analysis could support investigators to move from assessing single-registry filings in isolation to rapidly detecting and connecting networks of bad actors by identifying subtle patterns that cannot be found without scalable, AI-driven detection techniques.

These reforms have the potential to give Companies House a paradigm shift in how it operates. The potential benefits in protecting the UK economy and general public from criminal activity are clear, but realising these benefits will only come from operational change and by fully taking advantage of the opportunity arising from the new legislation.

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