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Ex-cons game UK corporate registration system, enabling fraud, money laundering

Criminals are slipping through the cracks of the U.K. Companies House commercial register at an alarming rate, undermining the ability of financial institutions to weed out money launderers and fraudsters, according to new research from British financial technology company, HooYu.

Of some 6,700 directors currently excluded from the commercial register for fraud and other criminal activity, over 800 — or 1 in every 8 — still have active directorships. The analysis also uncovered about 500 of what HooYu described as "chameleon fraudsters" — excluded directors who had re-entered the register with a "clean" listing by changing their date of birth or switching around a few letters in their name, according to HooYu, which sells its know-your-customer, or KYC, technology to banks and other companies.

Companies House is the U.K.'s registrar of companies and deals with the incorporation and dissolution of limited liability partnerships (LLPs). Information on Companies House, a division of the U.K. government's Department for Business, Innovation and Skills is freely accessible to members of the public as well as businesses.

Financial institutions rely heavily on the register as part of their KYC checks, HooYu's marketing director, David Pope, said in an interview.

"Along with the electoral register and credit checks, Companies House is a pillar of KYC for most financial institutions," Pope told S&P Global Market Intelligence.

Worrying loophole

Under the Money Laundering, Terrorist Financing and Transfer of Funds Regulations of 2017, all regulated entities are obliged to carry out due diligence on any new clients to ensure that they are not involved in money laundering or terrorism.

Companies House does not currently have a mandate to do its own verification of information being supplied by individuals or companies coming onto the commercial register, Pope said.

"Until Companies House information is properly screened at the point of submission, and ongoing due diligence is undertaken to remove disqualified directors, it leaves a worrying loophole open to fraudsters, criminals and terrorists for them to exploit," he said in a statement.

Ben Cowdock, senior researcher at Transparency International U.K., a global nonprofit that tracks and campaigns against corruption and associated financial crime, said it had worked for years to show how inaccurate data held on the Companies Register acts as a barrier to transparency and allows criminals to launder money through U.K.-based corporate vehicles.

"This abuse of UK companies to launder stolen wealth has been evident in major global money laundering scandals, and well documented in our own research. It is vital that the Government act quickly to introduce legislation to empower Companies House to carry out checks both on those forming companies and the information they submit," Cowdock said.

"Addressing these concerns is an important move against ‘dirty money’ in the UK, which also complements the government’s widely supported plans for a new register of who ultimately owns the overseas entities that own property here."

A government consultation was launched earlier in May to address ways that Company's House can become more watertight. This could result in Companies House being given more powers to check the identities and information of people setting up U.K. companies.

Much of the money that flowed from nonresident clients through the Estonian branch of Danish lender in Danske, in what has become one of Europe's biggest money laundering scandals, went through accounts held by companies registered in the U.K. at Companies House.

Active directorships

One example of a Companies House "chameleon" is Shaid Luqman, a dual British-Pakistani national who fled the U.K. in 2011 following the collapse of his Manchester-based real estate lending business, Lexi Holdings. Luqman set up the company, originally named Pearl Holdings (Europe) in 2000, with capital from Barclays PLC. The company functioned for a number of years as a successful and well-regarded bridging loans provider, according to the U.K. Serious Fraud Office.

But Shaid and his brother Waheed Luqman, who was also a director, painted a misleading picture of the company's finances and tampered with accounts in order to gain further bank financing, including a syndicated loan from a number of banks with Barclays as the lead partner. Lexi Holdings eventually went into administration in 2006 with debts of over £100 million.

Waheed Luqman was handed custodial sentences for conspiracy to defraud and conspiracy to falsely account, but fled the country. Shaid Luqman also absconded before he could be sentenced. Despite this, the same Shaid Luqman still has an active directorship on Companies House, according to HooYu's analysis. A simple search by S&P Global Market Intelligence brought up the active entry to Luqman, listing him as a former director of Lexi.

Commenting on HooYu's research, a spokesperson for Companies House said in an emailed statement:

"Companies House operates one of the world’s most open company registers, accessed over five billion times last year. This means company information is under constant scrutiny by law enforcement agencies and the public and is a powerful tool for identifying inaccurate or fraudulent information. Where economic crime and other offenses are suspected, we work closely with law enforcement partners to assist their investigations.

"Although we don't currently have the statutory power or capability to verify the accuracy of the information that companies provide, the government has recently announced a consultation on a series of reforms which seek to address these matters."