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LONDON (Reuters) - British government efforts to crack down on money laundering and fraud through UK businesses are failing to tackle a key area - the role of company formation agents - a Reuters study of the sector shows.
Some formation agents, who typically offer to create new businesses for fees of about 200 pounds ($288) or less, fail to perform significant due diligence on who their customers are or why they are buying new companies, according to lawyers. The agents offer to set up companies within a day or even a few hours, allowing time for only minimal checks.
The weaknesses of the system make it vulnerable to abuse. A Reuters analysis of bank transaction data gives a unique insight into how newly-formed UK businesses were used to conceal huge flows of money that originated in Russia and eastern Europe. The bank transaction data spanned 2006 to 2008; such data is rarely available and Reuters was unable to obtain more up-to-date information.
Frances Coulson, head of insolvency and litigation at Moon Beever solicitors, said the data showed how illicit money passes through Britain. She said such flows still continue because no regulatory or investigatory changes have had any significant effect in clamping down on the practice.
"This is going on now and all the time," said Coulson, who is a trustee director of the Fraud Advisory Panel, a body set up by the Institute for Chartered Accountants in England and Wales. "All the indicators are that it's getting worse."
Coulson said better due diligence - such as checking identification documents - by company formation agents and the UK corporate register, Companies House, would help combat fraud.
Formation agents, also known as company service providers, are regulated by Her Majesty's Revenue and Customs (HMRC), the UK tax collector, which maintains a list of approved agents. However, HMRC does not publish the list, thus preventing potential customers from easily checking the status of an agent.
New rules coming into effect later this year are intended to improve corporate transparency. From June, British authorities will begin compiling and publishing details of "people with significant control" of businesses.
The aim is to prevent fraudsters from setting up companies whose directors and shareholders are nominees - people who are directors in name only and are acting on behalf of someone else – or opaque corporations. However, critics say there are no new funds to help police the system.
An indication of the scale of fraud through UK companies can be found in data detailing 1.3m transactions that originated in Russia and Eastern Europe and passed through two U.S. banks between April 2006 and November 2008. A Reuters analysis of the data shows that nearly $2 billion was paid into the bank accounts of newly-created UK companies and limited liability partnerships (LLPs) that went on to claim in corporate filings that they were not trading and were dormant.
Receiving large sums of money while claiming to be dormant is a breach of UK company and tax laws.
A further $230 million flowed through the bank accounts of 15 businesses which simply did not file accounts.
One of the businesses appearing in the bank data was Starion Overseas LLP, a partnership set up in 2006. Starion Overseas was one of 20 LLPs created on a single day - June 29, 2006 - by a formation agent called @UKPLC, filings show. @UKPLC formed the LLPs on behalf of a Panamanian-Russian company called Midland Group.
At least 12 of the LLPs formed that day received millions of dollars between 2006 and 2008 while filing regulatory statements saying they were dormant, according to corporate records and the bank data reviewed by Reuters. It was not possible to identify who made the payments.
More than $112 million was paid into a Latvian bank account in the name of Starion Overseas between March 2007 and June 2008, with most of the money coming from a bank account in Moscow.
Such a large sum would normally require an LLP to file full accounts with Companies House, which maintains and publishes corporate filings in the UK. However, Starion Overseas submitted statements saying it was dormant during this entire period. Starion Overseas was dissolved in 2010 and could not be contacted for comment.
The statements were submitted on behalf of Starion Overseas by the formation agent @UKPLC. In total, @UKPLC submitted accounts to Companies House for 12 of the partnerships it set up for Midland Group. Those accounts said the partnerships were all dormant – even though millions of pounds were flowing through the LLPs' bank accounts, according to the bank data reviewed by Reuters.
The co-founder of Midland Group is Oscar Cedeno, a lawyer based in Panama. He said in an email that he could not comment on companies he was involved with because of "attorney-client privilege."
@UKPLC, which is based near Reading, west of London, is now known as Cloudbuy, a company listed on the London Stock Exchange. In an emailed statement the company said it was not responsible for the accuracy of filings it submitted to Companies House on behalf of clients. It said it went to great lengths, including using fraud prevention software, to weed out bad clients or suspicious transactions.
The company said there may be "a few bad companies" in the more than 300,000 it had formed, but that it worked with UK government bodies "to vigorously support law enforcement in prosecuting any criminal organizations that use its services."
Businesses which provide services such as company formation, registered addresses, nominee directors and account filing are required to register with HMRC. As well as being Britain's tax collector, HMRC is responsible for monitoring whether company formation agents have proper systems in place to ensure they don't supply services to fraudsters.
However, it is unclear whether all such companies meant to register with HMRC do so, since HMRC does not publish a list of those registered. The tax authority declined requests to supply a copy of the list to Reuters.
HMRC does not specify exactly what due diligence agents should conduct on their clients. A spokesman for HMRC declined to give details of what monitoring it conducts on business formation agents.
HMRC told Reuters it had refused to register some agents and had withdrawn the registration of other agents it felt did not meet the regulatory requirements. "HMRC makes sure businesses are fit to be operating in the supervised sector by challenging them on their anti-money laundering strategies, moving quickly against those businesses which don't have effective anti-money laundering plans in place," said the spokesman.
Successive UK governments have criticized the practice of individuals acting as "front" or nominee directors for hidden owners. In 2013, David Gauke, a deputy finance minister, told the UK parliament that the existence of such directors was "inconsistent with our desire to know who really owns and controls UK companies."
However, Reuters found that some formation agents still advertise such nominee services – including some of agents listed on a government website giving advice on how to set up in business.
A further weakness in the regulatory system is Companies House, which collects and publishes corporate filings by the over 3 million companies registered in the UK. Companies House told Reuters that it checks whether forms submitted to it have been properly completed, but that it does not have the capacity to verify whether the information on the forms is accurate.
A spokesman for Companies House said it was the responsibility of the Department of Business Innovation and Skills to enforce rules that businesses submit accurate and truthful corporate filings. Submitting false documents is a criminal offense under the Companies Act 2006.
The department said it had never prosecuted anyone for such an offense.
Additional reporting by Himanshu Ojha and Craig Shaw; Editing By Richard Woods