Economic Crime and Corporate Transparency Bill (Eighth sitting)

Margaret Hodge Excerpts

Committee stage
Thursday 3rd November 2022 Public Bill Committees

[Dame Margaret Hodge (Barking) (Lab)]

What happens if it is a false statement? Who will uncover that?

[Kevin Hollinrake]

Who will uncover—

[Dame Margaret Hodge]

If a false statement is put in. I mean, I was just—

[The Chair]

Order. Is this an intervention?

[Dame Margaret Hodge]

I ask the question for a reason. I did not intervene during the previous debate, but the Minister might know—I certainly do—that thousands and thousands of microbusinesses are supposed to put their annual accounts in to HMRC, but do not do so, and nobody ever goes after them. There therefore may be thousands and thousands of businesses that put in false statements. Given the anti-regulatory stance that the Minister has displayed today, I am just interested in knowing who will actually check the statements and what will happen then.

[Kevin Hollinrake]

I am very disappointed that the right hon. Lady regards me as anti-regulatory. I want a system that allows good, bona fide businesses to go about their daily business without unnecessary checks and balances. We cannot control everything that goes on in our society but, in the main, businesses are lawful, and undertake lawful and legitimate commercial activity.

If the right hon. Lady expects a world in which we check every single filing, nobody will be doing any commercial work in our society. The only people we will have will then be box-checkers, and where would the tax revenue come from to pay for all the things that both she and I want in our society?

We must have a proportionate balance between regulation, the cost of resourcing regulators and the needs of law enforcement agencies. That is why our belief, which I know is not entirely hers, is that we need to take an intelligence-based approach to regulation. That is the most effective way to do it.

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[Alison Thewliss]

I wholeheartedly support Labour’s new clause. There is an awful lot more that needs to be done to tighten up the measure on verification. Nick Van Benschoten, in his evidence, said:

“On the verification measures, one of the key points is that they fall short of minimum industry standards. Verification of identity is necessary but not sufficient. A key thing we have noted is that the Bill does not provide for order-making powers to allow Companies House to verify the status of directors or beneficial owners, and for that sort of requirement on company information agents and so on. That seems an odd gap.”––[Official Report, Economic Crime and Corporate Transparency Public Bill Committee, 25 October 2022; c. 7, Q3.]

I wholeheartedly agree with that. It is the key part of the Bill. If we are not going to verify people on the register, there is almost no point in having the legislation. It is the verification that is crucial.

Hand in hand with that are the fines for not complying with the verification. I draw the Minister’s attention, again, to the people with significant control over Scottish limited partnerships. There has been one fine of £210 since the rules came into place. That is no kind of deterrent whatsoever. The rules need to be here, the verification needs to be right, and the sanctions for not complying must be enforced. I would say that even the sanctions are far too low.

Leaving trust and company service providers to verify identity leaves the door wide open to abuse. There is already abuse, and the Government’s position in the Bill is to continue to allow that to happen. As the hon. Member for Aberavon said, trust and company service providers have been identified in numerous Government documents as being the gap that allows money laundering and international crime. That cannot be allowed to continue in the Bill. If the Government leave the door open for the trust and company service providers, they will continue to abuse the system and the register will continue to be full of absolute guff.

I raised the issue of verification in the House, albeit, I appreciate, with a different Minister, the hon. Member for Torbay (Kevin Foster). He suggested that a decision had not yet been made on how the verification system would work. My suggestion was that it go through the UK Government’s existing verification scheme, which is used for passports, driving licences and tax returns, because that system is already up and running. The response suggested that that had not yet been decided.

However, it was drawn to my attention today that Companies House has already put out a tender for a verification system. A tender went out on 10 October and closed on 24 October for an “authentication digital delivery partner”, looking for people to come and work on this system. I am curious to know why, when we have not yet got this legislation in place, the Government have tendered the contract and closed the application process for the company to build the system.

I would be grateful for some clarification from the Minister on exactly what the status is of that £3.7 million contract, which Companies House has already put out to tender. Why has it gone out before the Bill has concluded if Companies House does not know what it is building yet, and when amendments are still being tabled? I appreciate that the Government want to move at speed, but putting the cart before the horse in this way seems quite wrong.

We would like the verification to be strengthened, but if the Government have already instructed a contractor on what it will build, why are we even here this afternoon?

[Dame Margaret Hodge]

I seek your guidance, Mr Robertson: we are talking about clause 60, are we not?

[The Chair]

We are talking about clause 61, but we can also discuss new clause 27.

[Dame Margaret Hodge]

Yes; the others come later.

After the excellent speech by my hon. Friend the Member for Aberavon, I will speak briefly. I have two things to say. We will come back to the issue of shareholders, data and the threshold, which is really important, and I will certainly come back to the issue of trust or company service providers, because Labour Members all think that it is key to get that right if we are to have any credibility about the integrity of the list.

I want to talk about new clause 27. The Minister has said a number of times that he does not want to impede business. I do not think any Opposition Member wants to impede business either. We want to have smart regulation, not too much regulation. The purpose of this debate is to ensure that the regulation is indeed smart. At the moment, there are too many flaws.

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[Kevin Hollinrake]

As an overriding point, we all know how important the integrity of the ID verification system is. I completely agree with that and we need there to be confidence in it.

On the point raised by the hon. Member for Glasgow Central, it is not right that a tender has gone out already. A request for information has been put out to determine some of the characteristics of the suppliers to learn what services they provide, but a tender has not gone out. Once determined, the ID verification system will be brought to the House to be approved by affirmative resolution. There will be opportunities for debate at that time to make sure it is fit for purpose, both in the framework and how it will be operated.

On the comments the hon. Member for Aberavon made about persons of significant control, first, I think he makes the exact case that we would make. A 25% threshold is pretty much the global standard, but even if it were lowered, people could find ways around it—even if there were a 0% threshold, as was suggested by Professor Elspeth Berry. That is why the definition of a person of significant control is not solely about the percentage of the shareholding of a company. There are five definitions, including one I that believe will interest the hon. Gentleman, which is somebody who, other than by shareholding,

“has the right to exercise or actually exercises significant influence or control”

over a company. Therefore, there could be zero shareholding and they would still be a person of significant control. How is that enforced? If directors allow that to happen and do not declare that they have a person of significant control, they are liable for a fine and a custodial sentence of up to two years. We do deal with that in a reasonable way.

Some valid concerns have been expressed about company formation agents. I am happy to write to the National Crime Agency to ask what it has done about them. However, not all company service providers are company formation agents; there is a distinction. A company service provider may well be a large accountancy practice, such as Deloitte, PwC or KPMG. The hon. Member for Aberavon stated that such organisations know very little about their clients and offer a blanket service, but I do not think that is fair. My accountants can verify my ID and they know a great deal about me, I can promise the hon. Gentleman.

Of course we must make sure that the system is robust, and I acknowledge that there are some concerns about the supervision of those registered as supervised for money-laundering purposes. Of course we must be sure that the system is right. As hon. Members are aware, I think, the Treasury is looking at means of improving the regime to ensure that the supervision is much better, and it needs to be. The difficulty is—we will have more debate about the issue in forthcoming sittings—whether we want to get everything perfect in the system before we start ID verification, or whether we start ID verification. In my view, it is essential that we get that ID verification done as quickly as possible. Waiting until the AML supervision regime is absolutely perfect would be a mistake, in my view. The two things should happen concurrently.

I understand the reasoning behind new clause 27. I completely agree with the idea of giving confidence to Parliament that the matters are being taken forward. I am happy to commit to return to Parliament to communicate by whatever means is preferable—written ministerial statement or oral statement—what progress has been made to ensure that Parliament has the information that it needs to hold Companies House and other agencies to account.

[Dame Margaret Hodge]

rose—

[The Chair]

The Minister is finished. If someone else wishes to speak, they can stand in the normal way and indicate.

[Dame Margaret Hodge]

I am grateful to the Minister for saying that he will return to Parliament, but new clause 27 is designed to ensure that there is an annual report to Parliament. That means that our successors—certainly mine—will be able to hold Companies House to account over time. He knows that accountability is absolutely vital to ensuring the integrity of the system.

Question put and agreed to.

Clause 61 accordingly ordered to stand part of the Bill.

Clause 62

Procedure etc for verifying identity

[Stephen Kinnock]

I beg to move amendment 108, in clause 62, page 47, leave out lines 14 and 15.

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[Stephen Kinnock]

I have spoken at some length about the Opposition’s concerns about the provisions in clauses 62 and 63 to authorise third-party trust or corporate service providers—or authorised corporate service providers, as they are described in the Bill—to carry out ID checks on the Government’s behalf. Amendments 108, 109 and 110 to 112 would simply remove those provisions from the Bill in the hope of prompting a rethink by the Government.

I should like to explain the thinking behind the amendments tabled by me and my hon. Friend the Member for Feltham and Heston. The purpose of amendment 107 goes back to what I have said about the surprising lack of specific details on the proposed verification process. As I have said, it is not as though the Government have not had enough time to think through what procedures might be necessary; four consultations have already taken place on the topic. Amendment 107 would incorporate into the Bill requirements for some form of official identification, including photo ID, to be submitted to the registrar. That should not be controversial. In fact, the amendment would merely reflect international best practice guidelines, including those published by the Financial Action Task Force, the IMF and the World Bank, among others, and the commitments made in the Government’s own White Paper.

[Dame Margaret Hodge]

It is a pleasure to rise to speak under your chairmanship, Mr Robertson, and I do so to speak to amendment 78. The amendment is part of a batch of amendments that we will get to later. I hope that hon. Members will bear with me if I speak longer on amendment 78, so that amendments 79, 82 and 83 will not require a long explanation.

This is one of the most important series of amendments that we have placed before the Committee. The purpose is to ensure that we close any loopholes, so that we do not find ourselves back in debate in a couple of years’ time, bemoaning the fact that we failed to create watertight legislation and that we do not have the information and data that we need to hold businesses to account.

I stress that our aim is not to be bureaucratic. The last thing anybody wants is bureaucratic regulation. However, if we do not have effective, smart regulation, we will not achieve the objective, which is shared across the House, of bearing down on illicit finance and on the abuse of our corporate structure system by ne’er-do-wells. Today, we are paying the price of those who came before us, from both political parties, who thought that by simply deregulating the whole of the financial services sector, they would encourage growth in the economy. They did encourage growth, but they also made us a destination of choice for too much illicit finance. That has come into focus with the war in Ukraine and the role of Russians in bringing their financing here. That money is used to fund Putin and his allies in the attack on Ukraine.

The Government have decided to outsource responsibility for checking the unique identification of beneficial owners. I can see why they have done so. It is quicker to do it that way than to build up the necessary resources in Companies House. Like my hon. Friend the Member for Aberavon, I would have had more confidence if we had done it in house, but that was the Government’s decision. The purpose of my amendment is not to challenge that decision. However, we need to trust the corporate service providers. We need to trust both the professionals and the others involved, whether they are lawyers or accountants, to do the job properly and honestly. At present, confidence and trust are not there.

I thought that the Government were on the same page on this issue. From all the leaks, and from all the information and intelligence about how illicit wealth from all the kleptocracies has reached our shores, I thought that they understood the role played by the TCSPs. I thought they understood the role that the TCSPs play, and therefore shared our concern that we need to get that regulatory framework right before we unleash a new system that, if it is not right, could lead to us peopling the new Companies House register with dud information that we do not want.

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[James Daly (Bury North) (Con)]

I refer to my entry in the Register of Members’ Financial Interests as a practising solicitor and a partner in a firm of solicitors. The right hon. Lady has essentially said that everybody involved in the legal sector and financial advisers are potentially dishonest. They absolutely are not. The vast amount of people involved in the sector are honest, decent people who have a lot of regulation and try their damnedest to abide by all of it. The picture that the right hon. Lady paints is not correct.

[Dame Margaret Hodge]

That is not what I said. The hon. Gentleman may have chosen to interpret it that way—

[James Daly]

You said we cannot trust people in the sector.

[Dame Margaret Hodge]

No, I did not. I said that none of the professions has sufficient supervisory or regulatory capabilities, policies or practices in place to pull out the bad apples. I have nowhere ever stated that that applies to everyone, but I hope the hon. Gentleman agrees that the extent of people setting up shell companies —we are talking largely about shell companies—as vehicles to move illicit finance, whether through drugs, kleptocrats or people trafficking, is shocking.

Let me tell the hon. Gentleman my most egregious story, which has been mentioned—the Savaro story. We had this terrible explosion in Lebanon, with hundreds of people killed and lots of property destroyed. We were told that it was fertiliser held in the warehouse that was going to Mozambique. A couple of months after the explosion, I was rung up by a Reuters journalist with whom I have worked down the years, who said, “Did you know it was a UK limited company—Savaro Ltd?” He went on to say that not only was it a UK limited company, but, interestingly enough, it had told HMRC it was dormant, so it had not filled in its tax returns. It was registered in the name of a company service provider, a woman who lived in Cyprus. There were two lies in the system: a lie about the company service provider, and lying to HMRC.

I gave the usual quote and was then overwhelmed by people from Lebanon contacting me, including the Bar Association, all of whom were trying to find out the origins of what had happened. It then emerged that three Ukrainian Syrians—this was before the Ukrainian war—were the real owners. There was no way the fertiliser was going to be used in Mozambique; it was going to Assad to drop as barrel bombs on the civilian population of Syria. That is the sort of shocking outcome that comes from lack of proper regulatory control.

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[Stephen Kinnock]

No. I have made clear to the Minister that we are deeply unhappy, particularly with the failure to take on board the recommendations under amendment 107 and the very important points my right hon. Friend the Member for Barking made.

[Dame Margaret Hodge]

Similarly, I will take the matter up elsewhere during the course of the Bill.

[Stephen Kinnock]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 62 ordered to stand part of the Bill.

Clause 63

Authorisation of corporate service providers

[Dame Margaret Hodge]

I beg to move amendment 81, in clause 63, page 49, line 38, at end insert—

“(3A) When an application is made under this section, the registrar may request evidence from HMRC that a fit and proper person test has been carried out on the applicant.”

This amendment allows the registrar to request evidence from HMRC that a fit and proper person test has been carried out on a person applying to be an authorised corporate service provider.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 82, in clause 63, page 49, line 45, at end insert—

“(ba) the registrar is satisfied—

(i) that HMRC has carried out a fit and proper person test on the applicant, and

(ii) that the applicant has met the requirement of the fit and proper person test, and”.

This amendment would mean that the registrar could only grant an application to become an authorised corporate service provider if satisfied that an applicant had passed HMRC’s fit and proper person test.

Government amendment 8.

Amendment 79, in clause 63, page 52, leave out from line 42 to line 28 on page 53, and insert—

“1098G Duty to provide information

(1) The registrar must carry out a risk assessment in relation to any authorised corporate service provider to establish whether the verification of identity by the authorised corporate service provider is likely to give rise to a risk of economic crime.

(2) If the risk assessment identifies a real risk of economic crime, the registrar may—

(a) require an authorised corporate service provider to provide information to the registrar; or

(b) require a person who ceases to be an authorised corporate service provider by virtue of section 1098F—

(i) to notify the registrar;

(ii) to provide the registrar with such information relating to the circumstances by virtue of which the person so ceased as may be requested by the registrar.

(3) The registrar may require information to be provided on request, on the occurrence of an event or at regular intervals.

(4) The circumstances that may be specified under section 1098F(2) or 1098G(1) (ceasing to be an authorised corporate service provider and suspension) include failure to comply with a requirement under subsection (1)(a).

(5) A person who fails to comply with a requirement to provide information under this section commits an offence.

(6) An offence under this section is punishable on summary conviction by—

(a) in England and Wales a fine;

(b) in Scotland and Northern Ireland a fine not exceeding level 5 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 5 on the standard scale.”

This amendment would give the registrar the power to require information from an authorised corporate service provider. This would replace the current provision in the Bill giving the Secretary of State a power to make regulations requiring the provision of such information.

[Dame Margaret Hodge]

I will speak very briefly. It would be nice if the Minister could agree to the amendments, which are simply there to tighten up the oversight of the bodies. Amendments 81 and 82 are connected, and would force HMRC to do what it is not currently doing and carry out proper checks on the TCSPs and monitor them properly. Amendment 79 gives the registrar the power to require information. At the moment, as I read the Bill, there is no power for the registrar to challenge any of the information provided to her by any corporate service provider.

[Kevin Hollinrake]

I thank the right hon. Lady for her contribution. Clause 63 introduces a requirement for third party agents who wish to provide corporate services to clients, such as incorporating companies and filing documents on their behalf, to be registered with Companies House as authorised corporate service providers. ACSPs will be required to be supervised for the purposes of the money laundering requirements at all times and to notify the registrar of any changes to supervision.

I understand and am sympathetic to the intention behind amendments 81 and 82. They are driven by concern that the UK’s AML supervisory regime is not as robust as it could be. The Government recognise that, as do I. It is being addressed by my colleagues at the Treasury, who are responsible for the supervisory regime. I am afraid, however, that the amendments would duplicate some of the regulatory obligations of HMRC, the default supervisor for corporate service providers, by adding to the role of the registrar of companies. Their effect would be to make an agency of my Department responsible for overseeing activities of another Department. Not only is that duplicative, but it is wrong for one branch of Government to mark the homework of another branch. The most efficient means to address any issues with the quality of supervision is to tackle them at source, which is work that HM Treasury is undertaking on supervisory reform. I hope I have provided clarity on why the amendments are not needed.

On amendment 79, I understand the right hon. Lady’s concerns, but I consider the amendment to be unnecessary. As I have set out, under the measures in the Bill corporate service providers will need to confirm they are supervised for the purposes of the money laundering regulations, register with the registrar and, in the case of an individual, have their identity verified before they are allowed to form companies or registerable partnerships or to file on their behalf. The ID verification checks undertaken by those providers will achieve the same level of assurance of the claimed identity as those undertaken through the direct verification route.

[Dame Margaret Hodge]

I am grateful to the Minister for giving way. Yes or no: will Companies House be able to challenge at any point information given to it by a TCSP—an authorised provider?

[Kevin Hollinrake]

As I understand it, yes, Companies House will have the rights and powers to do that, though we do not at this point know to what extent it will do so. The right hon. Lady spoke in a previous debate about spot checks. It would seem sensible to take that kind of risk-based approach. Certainly, an AML supervisor would have that ability as well.

Providers will be required to declare that they have completed all the necessary identification checks when they interact with the registrar. Under money laundering regulations, all agents are required to retain records, and the registrar can request further information and ID verification checks if necessary, which I think answers the question that the right hon. Lady just asked. The agent will be committing an offence if they fail to carry out the ID checks to the required standards, or at all.

Under the Bill, proposed new sections 1098F and 1098G of the Companies Act 2006, as introduced by clause 63, will enable the registrar to suspended and deauthorise an authorised corporate service provider. The Bill will allow the registrar to maintain an audit trail of agent activity and to share it with supervisors. That will serve as a prompt to supervisors to up their game. I hope that that explanation has further clarified why the amendments are not needed.

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[Dame Margaret Hodge]

I will look in detail later to ensure that what I asked for is there, but I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Amendment made: 8, in clause 63, page 50, line 23, leave out “registered or”.—(Kevin Hollinrake.)

This amendment would mean that a firm applying to become an authorised corporate service provider would always have to state its principal office, rather than having the option of stating its registered office.

[Stephen Kinnock]

I beg to move amendment 98, in clause 63, page 53, leave out from line 29 to line 5 on page 54.

This amendment removes the provision enabling the authorisation of foreign corporate service providers.