Quite an eye-catching headline, isn’t it? It’s an interesting piece on the state of the company formation industry. Although the main section of the article is heavily focused on a ‘loophole’ relating to formations directly through Companies House, the attention grabbing headline is surely misleading and possibly disingenuous.
The extraordinarily large number in that headline is, as the ST journalist Danny Fortson put it, “quite a feat” – or it would be if the person in question was either an entrepreneurial machine or a rogue. She is neither. She simply worked in the company formation industry.
Ready-made companies, also known as off-the-shelf companies, are simply companies formed and maintained by Formation Agents as their “stock”. They are kept as ready-made dormant companies available to their clients – mainly Chartered Accountants – who need a company for their clients immediately .
The analogy would be the difference between buying an off-the-peg suit from a shop as against having a made-to-measure tailored suit.
Clearly Formation Agents need to keep a number of such companies as their “stock”.
When incorporating any company, there must be a ‘human’ (not corporate) director and a shareholder. When forming their “stock” of shelf companies, Formation Agents will nominate an employee within their company to be the initial director and shareholder. This person will resign as soon as the company is sold.
In addition to shelf companies, Company Formation Agents also often offer their regulated professional intermediary clients, such as accountants and solicitors, the option for an expedited formation by acting as the initial director, resigning immediately after formation.
The following quote was again disingenuous. “[forming] businesses of every stripe – from rubbish clearers, to online pornographers, financial scammers to perfectly legitimate retailers and restauranteurs.”
All formations agents – and Companies House – form a complete range of companies and it is not their responsibility, nor should it be, to moralise about the legal activities of such companies, only to assess them from a risk perspective. Is the implication that rubbish clearers and online pornographers are in some way less legitimate than retailers or restauranteurs?
A1 Company Services has indeed formed businesses of every stripe including Charities, Nurseries, Dental practices and Nursing Homes.
Often, higher risk activities only get caught through ongoing monitoring, which would provide some insight as to why the company highlighted in the ST article ceased using A1’s address nearly a year ago.
The legal obligation of Formation agents, who are regulated by HMRC, is to carry out due diligence on customers with whom they have an ongoing relationship or in higher risk situations. Specialised accountants or customers with a registered office are an example of an ongoing business relationship.
Money laundering and terrorist financing
The government want to walk the tightrope between cracking down on money laundering and smoothing the path to incorporation and opening a business.
Ironically, as highlighted by this article, Companies House , a governmental body, is exempt from proposed new legislation designed to increase due diligence.
Currently, Formation agents are only obliged to carry out due diligence checks on individuals with whom they have an ongoing relationship – i.e. where they provide other services or form companies repeatedly. The new legislation may require agents to carry out such checks in the course of all company formations. Danny Fortson has finally cast light onto the meticulous procedures that professionals undertake which do not apply to Companies House:
“The loophole […] will funnel nefarious characters away from the professionals, who are obliged to carry out checks when red flags are raised, to the automated Companies House website, where human review is scant.”
Unfortunately, any increase in due diligence through monitored company formations agents will push those who, for whatever reason, cannot or do not want to provide suitable due diligence directly to Companies House.
As Stephen Curtis, head of ACRA stated, it would be like “locking the front door but leaving the back gate wide open”. It has been suggested that subjecting Companies House to the same due diligence rules would be too onerous for a “not for profit” organisation . If so, in order to ensure that all individuals comply with anti-money laundering procedures, perhaps the government should withdraw the ability for Companies House to offer company formation services directly to the general public. This would force all those wishing to form a company to go through authorised, regulated agents that have regular inspections from the likes of HMRC and abide by the law.
This industry is under a lot of scrutiny currently. The move to obstruct money laundering and terrorist financing is admirable, but it can only be effective if they apply to everyone. Company Formation agents should be placed at the forefront of getting new businesses in the UK and should be open to inspections to make sure that all agents are carrying out their compliancy checks dutifully.
A1 Company Services is an associated brand of Quick, servicing the professional and intermediary market