The bogus companies exploiting Britain’s registration rules

Britain appears to be enjoying a surge of entrepreneurialism, with more than 200,000 start-ups registered at Companies House between April and June this year alone. However, while many of these are genuine cases of people taking the plunge and embarking on their dream of opening a tea shop, launching a webinar app or whatever, an awful lot are not going to be contributing any cherries to our national pie – and some might well be pilfering a few.

Among those unlikely to be contributing are the 36 companies registered last year to a single address in Bristol – not a business park but a small semi-detached house. Or the 95 registered, apparently by Romanian nationals, at 65 different houses in the same Herefordshire street since January last year. Then there is the bizarre case of 100 businesses registered by Chinese nationals at a semi in Orpington, all in the course of 14 days. When approached, the bewildered occupant of the house denied any knowledge of them whatsoever.

What on earth is going on? In short, mass abuse of Britain’s companies-registration process. Of course, in some ways it is good that the barriers to setting up a company are low, but perhaps not so good that anyone, anywhere in the world, can set up a UK-registered firm for the small fee of £12. They do not need to provide proof of identity, still less that they are making a serious attempt to set up a viable business. All they need is some sort of British address to put on the form: an address which can easily be lifted from the internet. Nor is there much to stop people registering companies with bogus directors, even including people unaware of how their names are being used.

‘It is easier than getting a library card,’ says Graham Barrow, whose blog the Dark Money Files has been tracking UK company formations for seven years. ‘At least with a library card you have to produce a utility bill.’ While attention this year has been focused on dirty Russian money, the mass company registrations are coming from other quarters. Over the past 12 months Barrow has counted around 50,000 new UK registrations of Chinese-based firms. There have been another 20,000 by Pakistani nationals – helped, he says, by websites in Pakistan which will complete the process for you. Over the past five years, 70,000 Philippines-based companies have registered here too.

The obvious question is why register a company in Britain if you are not operating a business here and have very likely never set foot in the country? The answer in many cases appears to be money laundering. A UK registration document can help you open a bank account or PayPal account. The accounts used for laundering are not necessarily handled by UK banks, but a UK company registration document, like a UK passport, can open doors. And once you have an account, you can whisk money around the world. The proceeds of your romance scam or other criminal activity can be passed off as revenue from what appears to be a legitimate company.

The company doesn’t need to last very long in order to perform its function. Many of the bogus businesses are so-called ‘burner companies’, set up to perform only one purpose, after which they are allowed to fall dormant. A vast number never get round to filing their first annual return and end up being struck off.

One clue as to what’s happening was the huge surge in Chinese firms registering in Britain in September last year, when China banned its own citizens trading in cryptocurrencies. ‘Almost overnight there was a 40 per cent increase,’ says Barrow.

The companies being enabled by our lax registration process are not necessarily all involved in organised crime as we would know it. China has very strict rules on international money transfer, with citizens limited to transferring a maximum of around $50,000 a year out of the country, and then only through official government channels. If you are a genuine Chinese entrepreneur wanting to leave Xi Jinping’s dictatorship and set up in the West, you might very well need to turn to underground banking, involving the creation of a UK-based front company. Some of the fraudulent ones are believed to be involved in a petty criminal activity in China known as ‘Daigou’ – buying small amounts of western goods and selling them to Chinese customers, circumventing the country’s import rules and tariffs.

But there is a darker side. The UN Security Council reported last year how a ship, the Ji Yuan, made multiple voyages from Hong Kong to North Korea, breaking sanctions by delivering, among other things, a Mercedes Benz and electronic goods. The Ji Yuan, it turned out, was registered to a company, Jiyuan Shipping, which in turn is registered at a flat in Cambridge. However, Jixiang Zhuang, the company’s director when it was founded, is recorded as living in Fujian, China.

The UN report names two other UK-registered companies as owners of vessels that have violated North Korean sanctions. Always Smooth Ltd, which had one Chinese and one Burmese director, was incorporated in 2017 and dissolved last March, without engaging in any business activity: the accounts filed between 2018 and 2020 show it as lying dormant. Good Siblings Ltd, incorporated in 2018, had one Chinese and one Bangladeshi director. It has never filed accounts showing any business activity either, claiming exemption as  a dormant company. An application to have it struck off has been delayed owing to Companies House having received an objection. Both firms are registered at an address in Silvertown, east London.

The mass registration of foreign-owned firms certainly seems to have fooled some. The printing company Vistaprint’s ‘Global Micro-Business Impact Report’ declared Britain the fourth most entrepreneurial country in the world – a claim based on the number of businesses per 1,000 residents. ‘The results… truly show the entrepreneurial spirit Britain embodies,’ a press release asserted.

An alternative interpretation is that it shows how naive British institutions are in tackling financial crime. While the Department for Business says that in 2020/21 Companies House removed 4,194 fake addresses from the register, this is a power it can only exercise while an application to set up a firm is being made, not afterwards. The Economic Crime and Corporate Transparency Bill should, when it passes into law, have some impact. All directors wanting to register a company in the UK will be obliged to verify their identity, while the bill also allows Companies House to share data with other government bodies such as HMRC. But that won’t necessarily stop someone setting up a UK-registered firm without any intention of doing business in Britain in order to, say, open a bank account in a third country.

Why has our registration process been allowed to be abused for so long? The commitments made by Companies House might have seemed adequate when it was founded in 1844, but it ought to have been obvious that they were hardly going to be enough to weed out criminal activity in the internet age.

Company registration is symptomatic of a far bigger problem: police and other UK agencies have failed utterly to get to grips with the hugely increased criminal possibilities offered by the internet. We have a national body, Action Fraud, which is supposed to handle financial crime on behalf of all police forces but which appears to be interested in little more than collecting fraud statistics. In 2020/21, it records, there were 875,622 reports of fraud involving £2.35 billion worth of losses, but only 35,209 cases were pursued. Only 2 per cent of reported cybercrime cases resulted in a conviction.

There is a lesson here for governments trying to encourage enterprise. Keeping regulations as light as possible is a noble aim, but not to the extent that you can effectively buy a ticket to enable international money laundering for £12, no questions asked.

Nobody wants to discourage enterprise. But nor should we want to encourage international money launderers.