Small Business, Enterprise and Employment Bill

Written evidence submitted by Jordans Trust Company Ltd (SB 24)

 

Introduction

 

1 This paper has been prepared by Jordans Trust Company Limited.

2 Jordans Trust Company Limited is a regulated trust company, providing UK company formation, administration and management services to non-UK resident clients who wish to do business in the UK or overseas. Our independent professional regulator is the Institute of Chartered Accountants in England and Wales (ICAEW). The ICAEW’s compliance team regularly visit our offices to check randomly selected files to ensure that Jordans Trust Company is identifying and verifying the identities of all persons with ‘significant control’ of the UK companies we form, and that we are conducting appropriate checks on the backgrounds of these individuals (e.g. criminal record checks) to ensure that such persons do not present risks to various stakeholders including the UK, third parties who might deal with the client UK company, and the good name of Jordans Trust Company Limited.

3 Jordans is a large privately owned company with a strong reputation for probity and technical acumen within the UK and international legal and accounting professions.

4 In 2013, we celebrated our 150th anniversary.

The UK’s current position as a major international incorporation centre

 

5 There is no doubt that the UK economy has benefitted from the formation of large numbers of UK companies by non-UK residents for a wide variety of activities including:

i) trading in the UK itself

ii) investing in UK commercial property or other UK assets

iii) trading overseas

6 The uses of UK companies in the context of para 5(iii) is particularly significant. Following the European Court of Justice case in CENTROS (C-212/97) , the use of UK-registered companies for trading in other EU countries , to avoid their more expensive and "un-user-friendly" company formation and administrative requirements , was held not to be an abuse of the European Treaty principle of freedom of establishment if the UK company conducts genuine economic activity in the overseas state. This case led to 1 in 4 companies registered in Germany for German trades being UK companies, until Germany reformed its company formation and administrative laws. This is just one example of the ubiquitous phenomenon of the UK company in international business.

7 The popularity of the UK company stems from our user-friendly incorporation procedures (low-cost; no notarial intervention and no minimum paid up capital requirements) and the reputation the UK rightly has for ‘fair play’ in business. The UK company has an internationally recognized ‘blue-chip reputation’, which it has earned over the last 100 years and more.

8 Quite clearly, the international business communities use of the UK company brings benefits to:

i) UK company registration agents

ii) UK trust companies like Jordans

iii) the Chartered Secretary sector (significant in London)

iv) the legal and accounting sectors throughout the UK

v) other sectors in the UK supplying goods and services to the UK corporate sector

vi) HMRC in the form of UK corporation tax yield

Schedule 3: Register of People with Significant Control

 

There are numerous objections to the proposals in Schedule 3.

9 The duties on UK companies to investigate their PSCs and keep information up to date with criminal penalties for failure to follow the intricate rules correctly (e.g. 790D-F) is a disproportionate burden on business, particularly the small business sector. It is reasonable to conclude that only 1% of UK companies use ‘nominee shareholders’ (the arrangements Schedule 3 is designed to pierce) and that 99% of UK companies already reveal their PSCs unless their company secretarial administration is inadequate. The extra burdens placed on currently transparent arrangements are therefore a gross and unnecessary bureaucratic burden.

10 Duties are also placed on PSCs to supply information to the company (s790G&H) with draconian enforcement rules. This is also a grossly disproportionate burden on the vast majority of UK companies that do not employ nominee shareholders.

11 These onerous administrative burdens will also put at risk the UK companies’ international reputation as a low-cost business-friendly vehicle, with the economic collateral damage likely to be material.

12 The duty to keep and maintain the PSC register (s 790M et seq), apart from producing the unwanted results referred to in 9 and 10 above, produces other very undesirable but predictable effects:

i) Inevitable non-compliance amongst the small business sector through lack of technical competence and financial resource – thus criminalizing a large body of the corporate sector that can ill afford expensive professional advice.

ii) It is a major flaw of this legislation that the particulars of PSCs placed on the PSC register will not be independently unverified. Will criminals self-report? Of course not. Will those who have important commercial reasons for remaining undisclosed self-report? Possibly, or they will seek legal solutions to the problem. One of these will be to transfer their business to a new foreign–registered company and register a branch here. Foreign companies are not within the scope of the new rules. It is worth making the point at this juncture that sensitive PSC information is already provided to regulated trust providers like Jordans Trust Company in the UK. Currently such information has a high level of accuracy and candour because it is supplied in confidence, and is independently checked. Nevertheless the information will be supplied by the regulated service provider to the regulatory authorities (NCIS) where knowledge or suspicion of money laundering is aroused. In this case the regulated trust company must report to NCIS the particulars of the PSC.

13 There will be a disparity in the reliability of information supplied on PSC registers of companies not administered by the regulated sector (i.e. unverified and unchecked information) and the independently verified and checked information received in confidence by the regulated sector.

14 There must be a worry that the currently high level of candour of information supplied in confidence to the regulated sector (and which the regulated sector must supply automatically to NCIS if they know or suspect money laundering) will be degraded if the providers of such information know it will come within the public domain. There may be a flight from the regulated sector in order to avoid candid disclosure on the proposed PSC register.

15 Section 790P arguably puts UK companies in an impossible position. If they receive a request to disclose information on their PSC register and feel the request is not for ‘a proper purpose’, they must apply to court within 5 days to seek an order not to supply the information. This brings a number of unwelcome issues. Section 790P at least recognizes that the information on the PSC register is potentially sensitive, but the costs and uncertainty of a court application created by the legislation for both the UK company and the would-be searcher are surely unacceptable.

16 Section 790R creates criminal offences if the searcher in receipt of the information either makes misleading statements that are reckless to obtain the information, or discloses the information to others. This creates risks, costs and uncertainty for the searcher that are likewise unacceptable. A prudent searcher should take professional advice before making a search. But he may be put off by the knowledge that the information is unlikely to be independently verified if the company is not administered by a regulated corporate service provider.

17 At least ss790P and R recognize the potential sensitivity of the information. Yet the alternative procedure is that the information is available to all, unconditionally, if the register is kept at Companies House (the Central register). See s 790V. One would again question the reliability of information placed on such a central register by companies masterminded by criminals who will studiously avoid the regulated sector.

18 Section 790ZF includes provision for protecting PSCs from disclosure if they are at risk from serious harm. The costs, conditions and delays of such applications will be likely to deter legitimate PSCs. Criminals, unchecked and unadministered by the regulated sector, will just provide false information to Companies House.

Summary

 

19 We recommend that this part of the Bill (i.e. ss70 & 71 and Schedule 3) is taken out of the Bill for further consideration. See in particular paras 22, 23 and 24 below.

20 The UK company’s excellent business reputation has been built up without a PSC register.

21 The result of implementation of the Bill’s transparency provisions will be:

i) significant non-compliance by ‘honest’ companies that do not have the financial or technical resources to comply with the complex and onerous rules.

ii) criminals will put false information on the PSC or central register.

iii) the international reputation of the UK company as a business – friendly international business vehicle will be destroyed.

iv) international clients may well move their UK investments into non-UK corporate structures, e.g. Irish, Cyprus, Malta, US, Hong Kong or Singapore structures. Non-UK companies are outside the scope of the Bill.

v) UK traders requiring confidentiality may even form low-cost offshore companies (e.g. in Ireland) and register as branches to trade here. There will be no UK tax saving, but if they wish to keep ownership confidential by using a non-UK registered company, they avoid disclosure under the Bill.

22 A final point should be made. Only a tiny proportion of UK companies are incorporated through the regulated sector represented by Jordans Trust Company Limited.

23 The significant majority of UK companies (c 70%) are incorporated via the Government’s incorporation website. A company incorporated through this website provides no due diligence whatsoever. It is a gateway for criminals who wish to avoid the searching due diligence regulated service providers like Jordans routinely undertake.

24 The Government should address this anomaly first before imposing these frankly horrendous burdens on the UK corporate sector, apparently for the sake of a tiny minority of criminal users of UK companies (who will willfully disrespect the rules anyway). It seems to us that this Bill’s transparency regime has no upside and puts the UK’s deserved reputation as an international incorporation centre at grave risk with much collateral economic damage to the UK.

October 2014

Prepared 15th October 2014