The 2018 FATF mutual evaluation report of UK anti money laundering (AML) practices highlights a problem that to many is still surprising – when you set up a business in the UK, very little is done to establish the identity of the owners of that business, whether those are individuals or other businesses. This lax approach to understanding beneficial ownership originates from a political need to encourage innovation and allow entrepreneurship to flourish.
Setting up a business in the UK can be done online, costs £12 and takes less than 24 hours and you can do it from anywhere in the world. That might sound like a good thing but when it comes to money laundering it really isn’t. This Guardian article from June lays out in frightening detail just how easy it is and how widely it is used by money launderers.
If you want to set up a business there are agencies (often referred to as formation agents) that can help you do so. They may provide a range of services beyond simply registering a company and many are legitimate businesses. Formation agents such as Formations House can also be used, with or without their knowledge, by criminals who wish to industrialize the process of setting up businesses and use a third party to keep their involvement even more in the shadows. This was the subject of a recent investigation, reported this week in The Times.
Companies set up to launder money or facilitate other criminal behaviour will still need financial services, including bank accounts. It is the responsibility of the banks that provide those services to carry out due diligence, to meet their legal obligations under AML regulation. They must understand the ultimate beneficial ownership of their customers.
Evidently it is hard to argue that carrying out a check at Companies House meets the necessary level of assurance of ultimate beneficial ownership. This has not gone unnoticed, and following a consultation period earlier this year Companies House are looking to reform, but to date those measures are not in place and certainly haven’t been tested.
How to Improve the Process
Those providing financial services, such as banks, must go further to establish if a business they provide a service to is suspicious, but this can leave them trawling Google and engaged in other highly manual and unreliable processes, or even reliant on self-reporting by their customers.
The availability of leaked documents such as the Paradise and Panama Papers provides an alternative source of data that can help identify suspicious organizations. At FICO we have integrated the Offshore Leaks Database by the International Consortium of Investigative Journalists (ICIJ) to screen customers against and explore any existing offshore connections to better assign appropriate levels of risk for ongoing customer due diligence requirements. The ICIJ database contains information on almost 500,000 offshore entities, and is continuously updated.
Technology and analytics can help streamline processes, increase transparency and reduce risk. End-to-end KYC solutions, like Siron® KYC, support the risk classification process of new and existing customers, and use third-party databases to match customer information with sanction and watch lists, and identify beneficial owners and politically exposed persons. Use of such systems is a best practice.