UK businesses being set up at record rate, register says


Businesses are being set up in the UK at a record rate, according to the government’s register of national corporate activity, as criminals attempting Covid-related fraud establish companies alongside entrepreneurs creating new ventures.

Senior bankers have raised concerns that criminals have formed companies to take out lightly checked government-backed loans. The National Audit Office this month warned that tens of billions could be lost through fraud and defaults.

“Since the start of the Covid pandemic, we initially saw a drop but we are now running at a record level of new incorporations for the last two months,” said Louise Smyth, chief executive of Companies House, the register of businesses.

In the second quarter of 2020, the last for which there is Companies House data, there were 176,115 new incorporations, an increase of 3.6 per cent on the same period last year.

Meanwhile, a pause until the autumn in striking companies off the register and a relaxation of insolvency rules because of the pandemic mean that fewer companies have gone bust. 

The number of dissolutions in the second quarter of 2020 fell by 90 per cent compared with 2019 to 14,606.

In the second quarter of 2020 there were 176,115 new incorporations at Companies House, an increase of 3.6% on the same period last year © Charlie Bibby/FT
Louise Smyth: ‘We have had companies that have been set up to take advantage of what’s going on with Covid’ © Charlie Bibby/FT

More than 4.5m companies are now on the register, compared with 2.7m in 2010.

Ms Smyth said a number of factors were behind the increase in company formation, including people losing their jobs and setting up businesses instead. 

But the rise also reflected “people trying to game the system”, she acknowledged, and Companies House is working with law enforcement bodies to tackle the criminal activity.

“We have had companies that have been set up to take advantage of what’s going on with Covid,” she said. “Not just the loans, but companies doing scams. We did hear of someone who was selling their company on ebay.” 

Tackling criminal behaviour, which transparency campaigners say has long been a weakness of Companies House, is a focus of reforms agreed last month. When passed into law, these will see the most important changes to how companies are overseen in the UK for almost two centuries.

The agency will strengthen the accuracy and transparency of company ownership through more robust identification processes, use new powers to investigate suspect filings and develop better anti-fraud technology. 

“We are putting in a system to identify that people are who they say they are,” said Ms Smyth, pointing to digital products such as those used by the UK’s car licensing authority to query information before it is entered on the register.

A relaxation of insolvency rules because of the coronavirus pandemic mean that fewer companies have gone bust © Charlie Bibby/FT
The agency is constrained by most of its records being stuck in a pre-digital age. Some of the oldest accounts are saturated in arsenic © Charlie Bibby/FT

The reforms are partly driven by a government desire to crack down on dirty money flowing into the UK. The National Crime Agency has estimated that as much as £90bn is laundered through the UK’s financial system each year, including by using shell entities registered at Companies House.

Transparency International UK, a campaigning group, claims to have found 929 UK companies involved in 89 cases of corruption and money laundering between 2009 and 2019. Its analysis suggested that Britain had been home to tens of thousands of shell companies over the past decade.

“People are rightly saying that we could do more,” said Ms Smyth, adding that one of her first tasks after the reforms have passed into law will include the creation of a “risk engine” to identify suspicious activity.

Under current laws, Companies House can check records to make sure the right boxes have been filled in, but little else. No checks are made on whether information provided is correct.

A common fraud is for criminals to use false addresses as their registered office. The agency can check records to make sure the right boxes have been filled in, but little else © Charlie Bibby/FT
Before the pandemic, hundreds of employees were needed to manually sort the 84 tonnes of paper records that arrived at Companies House each year © Charlie Bibby/FT

“My current powers don’t allow me to take action [even when] I can see that obviously something’s wrong,” Ms Smyth said.

Rachel Davies, head of advocacy at Transparency International UK, said the reforms “if implemented promptly and backed up with sufficient resourcing, will represent a significant step forward in tackling the UK’s role as a global hub for dirty money”.

Companies House received about 200 requests a month for help from law enforcement agencies before the pandemic, a number that has risen steeply in recent years. 

A common fraud is for criminals to use false addresses as their registered office. Ms Smyth highlighted one example involving a newly widowed woman whose address was used to register a bridal company. “And so this poor woman had all these brides outraged because they weren’t getting their dresses. It was really difficult. And there wasn’t really very much I could do to help her.”

Another involved 800 false companies registered at a single address — the reforms make it easier for Ms Smyth to remove such inaccurate information from the register.

Companies House will also work more closely with other government departments, such as the tax authority, to try and identify suspicious behaviour.

Companies House is already testing machine learning technology to help carry out initial examination of documents © Charlie Bibby/FT
New ways to upload files digitally have been brought in and also systems for office staff to scan documents more quickly © Charlie Bibby/FT

The agency is also constrained by most of its records being stuck in a pre-digital age. Some of the oldest accounts are saturated in arsenic — an old means of document preservation but now dangerous enough that handling the books requires gloves.

Before the pandemic, as many as half of the 1,000 employees were needed to manually sort the 84 tonnes of paper records that came through the post every year.

“We’ve got a lot of legacy, we’ve got a lot of manual workarounds [to problems], we’ve got multiple data entry and information, and obviously there’s potential for things to go awry. We’re at the beginning of a five-year transformation programme,” said Ms Smyth.

She has brought in new ways to upload files digitally and also systems for office staff to scan documents more quickly.

Ms Smyth said Companies House would need different skills in the future to meet the government’s ambitions with “more forensic, more investigative, more analytical” roles likely to replace some of the basic processing work. It is already testing machine learning technology to help carry out initial examination of documents.



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