Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: money laundering


by Leave a comment

Checking PSCs: is it Pretty Silly Compliance?

A lot later than I’d hoped, here’s an article on some of the changes in the Money Laundering Regs that took effect on 1 April 2023.  I’ve also covered some anomalies in the PSC regime when compared with AML Beneficial Owners that could trip up the unwary.

In brief, this article explores:

  • At what points are we now required to check the PSC register?
  • What records are we now required to keep?
  • Does the change to reporting only “material” PSC discrepancies now give us a reason for not reporting in many instances?
  • Do PSC discrepancy reports need to be repeated if the discrepancy has not been fixed?
  • Does an insolvency office holder become a PSC?
  • When a PSC is not the same as an AML beneficial owner: (i) when the shareholder is a UK-registered company
  • When a PSC is not the same as an AML beneficial owner: (ii) when the shareholder has died
  • When a PSC is not the same as an AML beneficial owner: (iii) when the person exercises “significant”, but not “ultimate”, control

The Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 can be found at https://www.legislation.gov.uk/uksi/2022/860/contents/made

In this article, I refer to three useful pieces of Companies House guidance:

Reviewing PSCs as part of “ongoing monitoring”

When the MLR19 came out, several professional bodies queried the wording that appeared to suggest that a client’s PSCs were to be reviewed (and, if necessary, a PSC discrepancy report submitted) during the life of a business relationship.   It was felt that this put an unnecessary burden on AML-regulated businesses.  As a consequence and because it appeared that the MLR19 had gone further than had been originally planned, in 2020 the MLR17 were changed making it clear that a PSC review was required only when establishing the relationship at the start.

However, in 2021, HM Treasury consulted on the question: wouldn’t it be a good idea to review clients’ PSCs whenever ongoing monitoring is carried out during a relationship?

At that point of course, the fate was sealed.  So it came to pass: the Money Laundering and Terrorist Financing (Amendment) (No. 2) Regulations 2022 reintroduced the need to review PSCs as part of ongoing monitoring.

How frequently should these reviews be carried out?

The MLR17 indicate that the primary purposes of “ongoing monitoring” are to examine whether a client’s activity is consistent with what the AML-regulated business expects it to be based on its knowledge and risk assessment and to ensure that the AML CDD measures remain up to date.

Neither the MLR17 nor the CCAB Guidance specify how frequently “ongoing monitoring” should be conducted.  As with most things AML, the MLR17 state that it needs to be done according to the assessed risk.  In a fairly recent ICAEW webinar directed at ICAEW members in general (c.1 hour into “Money Laundering Risks”, March 23), it was suggested that periodic routine ongoing monitoring might be done every year for high risk clients and every two or three years for low risk clients.

Of course, the mood music from the RPBs has been that insolvency is generally a high risk service, so IPs are unlikely to have any truly low risk clients when compared with accountants.  Therefore, in insolvencies, it seems to me sensible to tick the “ongoing monitoring” boxes at the time of each case review, but of course firms are free to establish policies setting out other timescales.

Do these reviews realistically achieve anything in insolvencies?

In almost all cases, I think not.  For example, you would not expect PSCs to change in a CVL.  The only cases where I can imagine a PSC ever changing are rescue Administrations or CVAs, but even then it would be very rare.  I guess potentially it could also happen in an MVL, although most shareholder-shifting occurs pre-liquidation.

I understand that part of the authorities’ concerns generally is that some fraudsters file director-appointment or PSC-registration documents on Companies House in order to build a false identity.  Although one would hope that directors would police their own company’s file at Companies House, AML-regulated businesses are also tasked with keeping the registers clean by means of these statutory PSC reviews and discrepancy reporting requirements.

But how likely is it that a fraudster is going to pick an insolvent company in order to build a false identity? 

Hopefully, the long-awaited Companies House reform measures via the Economic Crime and Corporate Transparency Bill, which is currently being considered by the House of Lords, will block the ability for fraudsters to abuse company files in this way in future.  But I suspect that this will not mean that the PSC requirements on professionals are lifted (sigh!).

HM Treasury micro-management: requirements on record-keeping

If the issue were just that we needed to check the PSC register at every ongoing monitoring point, I could just about live with that.  However, the amendments go further than this.  In a seemingly unprecedented demonstration of micro-management, we are now required to take a copy of the PSC register every time ongoing monitoring is carried out!

This is set out in new Regulation 30A(2A):

“When taking measures to fulfil the duties to carry out customer due diligence and ongoing monitoring of a business relationship.., a relevant person must also collect an excerpt of the register which contains full details of any information specified in paragraph (1A) which is held on the register at that time, or must establish from its inspection of the register that there is no such information held on the register at that time.”

But now we only need to report “material discrepancies”, right?

True, the regulators have highlighted this particular change as lessening the burden on us all.  But the small print suggests to me that little has changed in practice.

While the Regs have been changed so that only material discrepancies need to be reported, new Schedule 3AZA defines these as occurring where:

“… the discrepancy, by its nature, and having regard to all the circumstances, may reasonably be considered—

(a) to be linked to money laundering or terrorist financing; or

(b) to conceal details of the business of the customer.”

Companies House guidance on Reporting a Discrepancy points out that it is irrelevant whether there was an intention to conceal.

The Regs’ Schedule continues:

“Discrepancies listed in this paragraph are in the form of—

(a) a difference in name;

(b) an incorrect entry for nature of control;

(c) an incorrect entry for date of birth;

(d) an incorrect entry for nationality;

(e) an incorrect entry for correspondence address;

(f) a missing entry for a person of significant control or a registrable beneficial owner;

(g) an incorrect entry for the date the individual became a registrable person.”

In my experience, incorrect natures of control or entirely missing entries are the most obvious discrepancies, so these will continue to need to be reported. 

The Companies House guidance on Reporting a Discrepancy provides examples of discrepancies that would be considered “material” and it seems to me that only insignificant typos might not hit this threshold.  I guess, however, that we might also avoid reporting a discrepancy if someone is registered as a PSC when they are not one… although I wonder how the RPBs will view this.

What a faff!

What happens after a PSC discrepancy report is submitted?

Well, the Regs require Companies House to “take such action as [Companies House] considers appropriate to investigate and, if necessary, resolve the discrepancy in a timely manner” (MLR17 Reg 30A(5)).  In practice this appears to mean that they will email the insolvency office holder and ask them to amend the company’s register.  Personally, I cannot see that there is a positive duty on an insolvency office holder to fix the register and, in any event, the PSC discrepancy report is only submitted on the basis of the IP’s knowledge; in many cases, the true facts of the situation may be less than certain.

If the IP chooses not to amend the register, then the chances are that the discrepancy will remain.  I have seen that, in such cases, Companies House generally takes the view that they have taken the appropriate steps and so no more action is required.  Oh, the things we all do to comply with poorly thought-out legislation!

A welcome bit of pragmatism in the Companies House guidance

Of course, things tend to be different with a live client, such as those with accountants.  In those cases, when an accountant identifies a PSC discrepancy, it would be usual for them to get in touch with the client and encourage them to correct the discrepancy on the file.  Although this sometimes also happens pre-insolvency, in cases where the PSC discrepancy remains after the insolvency has begun, this gives rise to another issue when “ongoing monitoring” is carried out later.

Technically, the amended Regs don’t accommodate an uncorrected PSC discrepancy.  They would require you to submit a new PSC discrepancy report every time.

However, the Companies House guidance on Reporting a Discrepancy thankfully explains that they are not expecting a second discrepancy report if it has been reported previously.

Should the insolvency office holder be recorded as a PSC?

Interesting question, don’t you think?  Clearly, insolvency office holders exercise “significant influence or control”, so does this make them a PSC?  As their appointment doesn’t immediately affect the PSC register at Companies House, does this give rise to a material discrepancy to be reported during ongoing monitoring or a need to be registered as a PSC on appointment?

I strongly recommend the Companies House guidance on “Significant Influence or Control”.  It contains many nuggets helping to determine who might be a PSC.

It includes, at para 4.4, that anyone exercising a function under an enactment, e.g. “a Liquidator or receiver”, is not a PSC (provided that they only act in accordance with their statutory functions).

That’s one issue sorted, then.

When PSCs and Beneficial Owners differ

But there are other scenarios that can be confusing.  In most cases, identifying the PSCs is no different from identifying the beneficial owners for AML CDD purposes and this makes it relatively straightforward to spot any PSC discrepancies. 

But there are several situations in which the PSCs are not the same as the AML beneficial owners, so when staff are checking for PSC discrepancies it is valuable that they understand these anomalies.

When there is a UK-registered corporate shareholder

Sometimes, we come across the following scenario:

We’re probably all comfortable with the concept that the beneficial owners for AML CDD purposes are the two 50% shareholders at the top of the tree.  However, if the holding company is a UK-registered company, then the holding company is the one that should be registered as the operating company’s PSC.

There are other scenarios (i.e. not only UK-registered companies) where a 25%+ shareholder who is a legal entity should itself be registered as a PSC – see section 2.2. of the Companies House PSC guidance for companies.  But in other cases, the legal entity shareholder should not be registered as the PSC, but instead the individuals or entities up the shareholding tree need to be registered.

Where the shareholder has died

For AML CDD purposes, the MLR17 state (Reg 6(6)):

“In these Regulations, ‘beneficial owner’, in relation to an estate of a deceased person in the course of administration, means—

(a) in England and Wales and Northern Ireland, the executor, original or by representation, or administrator for the time being of a deceased person;

(b) in Scotland, the executor for the purposes of the Executors (Scotland) Act 1900”

However, the Companies House PSC guidance for companies states (para 7.7.1):

“In the unfortunate event that a PSC of your company is deceased, the PSC should remain on the PSC register until such time as their interest is formally transferred to its new owner. While an executor has fiduciary duties to the intended beneficiaries of the assets, the executor is are responsible for administering the estate according the wishes of the deceased. The deceased will therefore continue to be registrable until such time as the control passes to another person, such as an heir, who will exercise their influence and control over your company for themselves.”

In other words, for AML CDD purposes, the executor or administrator of a deceased person’s estate will be a beneficial owner, but for PSC purposes it will remain the deceased person.

The difference between “significant” and “ultimate” control

While we usually focus on the shareholders and directors when identifying the beneficial owners for AML CDD purposes, there is an additional woolly category (MLR17 Reg 5(1)(a)): those who “exercise ultimate control over the management” of the entity.

The PSC regime has a different measure.  As the name suggests, it is concerned with those who exercise significant, not ultimate, control.  I think that both the AML and PSC regimes require us to consider shadow directors, but other people may be a PSC but not a beneficial owner.

The Companies House guidance on “Significant Influence or Control” includes an interesting – and insolvency-relevant – example (para 4.10):

“Extra-ordinary functions of a person could result in them being considered to have significant influence or control:

A director who also owns important assets or has key relationships that are important to the running of the business (e.g. intellectual property rights), and uses this additional power to influence the outcome of decisions related to the running of the business of the company. This individual would not be able to rely on the excepted role of director to avoid being considered to exercise significant influence or control.”

This scenario – and indeed the existence of shadow directors – could make an IP’s life frustrating, I think.  Before appointment, you could identify someone exercising significant control in this way but who is not registered as a PSC at Companies House… so you submit a PSC discrepancy report.  Then, Companies House gets in touch with you after your appointment asking you to amend the register.  But at that point, the person no longer exercises significant control – ta daa!

Ok, I know, I would hope that the RPB would not take you to task for not submitting a PSC discrepancy report pre-appointment, but who knows?

The costs of compliance

IPs are well accustomed to investing time and effort in complying with what appear to be pointless requirements, so I’m sure that most will read this with a tired eye-rolling. 

Of course, all these additional duties need to be resourced and this costs firms – and therefore insolvent estates – more money.  However, it seems that the RPB/IS perceptions that some IPs charge excessive fees never change, regardless of the fact that year after year compliance duties increase.  This may only be another 10-minute task, but it all adds up, doesn’t it?


by Leave a comment

The Economic Crime Levy – a disaster averted

Regulations introduced last year appeared to make insolvency office holders personally liable for the new economic crime levy due from insolvent businesses, whether incurred pre- or post-appointment.  Was this another example of HMRC looking to jump the queue over ordinary unsecured creditors?

Fortunately, R3 took up the baton and, eventually, amendment regulations were created to curtail these effects.  Phew!

The original regulations, the Economic Crime (Anti-Money Laundering) Levy Regulations 2022 (“the Regs”), can be found at: https://www.legislation.gov.uk/uksi/2022/269/contents/made

The Economic Crime (Anti-Money Laundering) Levy (Amendment) Regulations 2023 (“the Amendment Regs”), are at: https://www.legislation.gov.uk/uksi/2023/369/contents/made

How does the levy work in general?

Don’t panic!  The charge is not levied on all businesses.  It is attracted only by businesses that carry out AML-regulated businesses… so banks, solicitors, accountants, art dealers, estate agents, casinos, insolvency practitioners…

IPs?! 

Honestly, there’s no need to panic… at least not this year.

Relating to the 2022/23 year, the levies are:

  • For small businesses (under £10.2m UK revenue): nil
  • For medium businesses (£10.2m – £36m): £10,000
  • For large businesses (£36m – £1bn): £36,000
  • For very large businesses (over £1bn): £250,000

The levy for the 2022/23 financial year becomes due on 30 September 2023.  The levy rates have been fixed by the Finance Act 2022, so it will be interesting to see if/when this changes in future and whether small businesses will be made to contribute.

What if the trader goes insolvent?

Regulation 15 of the Regs states:

  • (1) This regulation applies where a person liable to pay the levy—
  • (a) who is an individual—
  • (i) has died or become incapacitated; or
  • (ii) has become bankrupt; or
  • (b) is subject to winding-up, receivership, administration or an equivalent procedure.
  • (2) The person (“P”) who—
  • (a) in the case of an individual, carries on the regulated business on behalf of an individual who has died or become incapacitated; or
  • (b) acts as the liquidator, receiver or administrator in relation to the business of the person liable to pay the levy or acts in an equivalent capacity,
  • may be treated by the appropriate collection authority as the person liable to pay the levy and must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy.

And that was it!  There was nothing limiting the scope or slipping the levy into any insolvency order of priority: if the insolvent business couldn’t pay, then the levy could be charged to the office holder.

Disaster averted!

After I had realised the effect of this regulation (with the help of the R3 GTC chair), I raised it at an R3 General Technical Committee meeting and fortunately R3 – as well as, I think, the Insolvency Service (after all, Official Receivers could be liable too) – took up the issue with HMRC, as they are the “appropriate collection authority” in the majority of cases.

The Amendment Regs were made on 27 March 2023 and they insert the following:

  • (3) Any amount of levy which relates to UK revenue attributable to a period before the date when the winding-up, receivership, administration or other equivalent procedure takes effect is payable by the person subject to the winding-up, receivership, administration or an equivalent procedure, and not by the person treated as the person liable to pay the levy under paragraph (2).
  • (4) Any amount of levy which relates to UK revenue attributable to a period on or after the date when the winding-up, receivership, administration or other equivalent procedure takes effect is to be regarded as an expense of that winding-up, receivership, administration or equivalent procedure.

The effect of this amendment

In other words, if the levy relates to pre-appointment revenue, it will remain due and payable by the insolvent entity, i.e. it will be a normal unsecured claim.  It is only if the levy relates to post-appointment revenue that we will need to worry, because then it will be an expense.

The thought of trading-on an AML-regulated business probably sends shivers down most of our spines already.  Now, the attraction of an additional expense just adds another nail in the trading-on in insolvency coffin.

“Equivalent procedures”?

As you can see, the Regs specifically reach to liquidators, receivers, administrators and trustees in bankruptcy.  What about VA Nominees and Supervisors?  Personally, I can think of many arguments as to why a VA is not an equivalent procedure and moratorium monitors are even less likely to be caught, I think.  However, it may well be up to the courts to decide on those.

It’s not all good news: more work for office holders

Regulation 15 imposes more than a direct financial cost on insolvency office holders.  They also “must satisfy the requirements of Part 3 of the Act and the requirements of these Regulations as if they were the person liable to pay the levy”.

This means that insolvency office holders will need to submit returns to HMRC (or the FCA or the Gambling Commission, depending on the type of business) for pre-appointment periods and probably also for the first post-appointment period to the end of the tax year unless the collection authorities introduce an end-of-trading return process.  I very much doubt that HMRC etc. will be able to accommodate office holders who want to submit returns offline – that will be interesting.

If there is no post-appointment trading and no prospect of an unsecured dividend, will office holders still be required to submit missing returns?  Let’s hope the collection authority doesn’t get all jobsworth over this requirement.

A new regime and a new registration process

Of course, we’ve only just got to the end of the first levy year and, although the Regs came into force on 1 April 2022, HMRC is not yet receiving registrations (see https://www.gov.uk/government/publications/prepare-for-the-economic-crime-levy/get-ready-for-the-economic-crime-levy#registering-for-the-ecl).  Therefore, office holders taking appointments of AML-regulated entities over the next few months may also need to do the work of registering the entity in the first place.

Is it all a conspiracy?

Actually, no, I don’t think HMRC tried to jump the queue by getting this levy some kind of super priority.  I think it was just poor drafting.  But, goodness, what poor drafting!

It goes to show that we all need to stay alert to new legislation: the more eyes on these things, the better.


by Leave a comment

What will “Transparency & Trust” mean for IPs?

0222 Cairns skyrail

My thanks to Mr Cable for re-appearing in the headlines and making this two month old consultation suddenly seem current again. The proposal in his “Transparency & Trust” paper that got everyone talking was the attempt to curb future excesses of the banks and demand by legislation that their directors take care to be socially responsible, but is there anything in the paper for IPs..?

The consultation can be found at https://www.gov.uk/government/consultations/company-ownership-transparency-and-trust-discussion-paper, although regrettably it closed to responses yesterday. Well, it’s been a busy summer!

Identifying Beneficial Owners

I’ve been doing a bit of work recently on compliance with the Money Laundering Regs and it has reminded me of the rigmarole around identifying, and verifying the identities of, an insolvent company’s beneficial owners. Identifying the >25% shareholders is the easy bit (although, of course, it gets a bit more complicated where the shareholders are corporate entities), but how, on day minus-one of an insolvency appointment, are you supposed to identify other beneficial owners, those who “otherwise exercise control over the management of the company”? People don’t often stand up and introduce themselves as shadow directors. The consultation describes other complications to identifying the beneficial owners, such as where a number of shareholders have agreed to act in concert.

BIS’ suggested solution: let’s make it a requirement for companies to disclose their beneficial owners. The consultation considers the details of such a system: when companies would be required to make such disclosure; to which companies it would apply; what about trusts; what powers would need to be granted and to whom to ensure compliance; whether such a registry would be publicly available or restricted only to law enforcement and tax authorities… but what I cannot help asking myself is: if a company is being misused for illegal purposes by some hidden beneficial owner, would the company really have complied with the legislation and disclosed him/her? Or is it more likely that such requirements would just put more burden on law-abiding companies in ensuring that their registers of beneficial owners, in which no one is really interested (the information only really has any value if money laundering has taken place, doesn’t it?), are kept up-to-date?

Although, personally, I cannot see such a system doing anything much to help prevent illegal activity, at least if IPs are able to see information on companies’ beneficial owners, it might help in their Anti-Money Laundering checks, and I think that anything that helps with that chore would be a bonus. So how likely is it that the information would be made public? It seems from the consultation that it is the Government’s preference and, even if that doesn’t happen, the second option is that it might be accessible to “regulated entities”, i.e. anyone who is required to make MLR checks.

There’s a sting in the tail, however. Slipped into the consultation is: “If they were given access to the registry, regulated entities would incur additional costs if they were required to check and report any inconsistencies between their own data and that held on the register” (paragraph 2.74). Can you imagine? Would they seriously require office holders to inform whoever that a defunct company’s register of beneficial owners was not up to date? My perception is that IPs do not really feature as a separate group in the minds of those who oversee the MLR, so I doubt that they would see the pointlessness of such a task.

Changing Directors’ Duties

Okay, this proposal won’t directly affect IPs, but I couldn’t help passing a quick comment. As no doubt you’ve heard, the proposal is to amend the directors’ duties in the CA06 “to create a primary duty to promote financial stability over the interests of shareholders” (page 61). It is noticeable that more consultation space is taken up listing the potential drawbacks of the proposal than its advantages. In addition to the described issues of how to enforce such a duty, how shareholders would react, how UK corporate banks would fare competing against banks not caught by the CA06, I was wondering how you could measure promoting financial stability: it seems to me that it would depend on whether you were to ask Vince Cable or George Osborne.

The consultation includes many other proposals, which would affect the disqualification regime – some of these are:

• whether the regime should be tougher on directors where vulnerable people have suffered loss (is the absence of a jubilant Christmas for a Farepak customer a more worthy cause than that for a redundant employee who’d worked hard up to the end of an insolvent company’s life?)
• whether the courts should take greater account of previous failures, even if no action has been taken on them (surely the just and socially-responsible solution would be to fund the Service adequately to tackle any misconduct of the first failure?)
• whether to extend the time limit for disqualification proceedings from two to five years (what about the Service’s method of prioritising cases? I appreciate that this is a gross simplification, but don’t they hold a big pile of potentials and progress those that they feel are in the public’s greatest interest, leaving the rest in the pile until it gets to the critical time when they have to make a decision one way or the other? Won’t the extension to five years simply mean that their potential pile holds four years’ worth of cases, rather than one year’s? Again, unless the Service is granted more resources, I cannot see that this measure would really help. I also object to the consultation’s comment that “it can quite easily be several months before the relevant insolvency practitioner reports to the Secretary of State detailing the areas of misconduct that may require investigation. In such cases, the limitation period might mean that misconduct is not addressed” (paragraph 12.2))
• whether “sectoral regulators”, such as the Pensions Regulator, FCA and PRA, should be granted the ability to ban people from acting as a director in any sector.
• whether directors who had been convicted/restricted/disqualified overseas should be prevented from being a director in the UK.

“Improving Financial Redress for Creditors”

The Government anticipates that, if liquidators and administrators (as the Red Tape Challenge outcome proposes to extend the power to take S213/4 actions to administrators) were entitled to sell or assign fraudulent and wrongful trading actions, a market for them would develop. Do you think so..?

BIS has thought about the possibility that directors (or someone connected to them) might bid for the action and, although they suggest an, albeit not water-tight, safeguard, they also point out that, if the director did buy the right of action, at least the estate would benefit from the sale consideration. Although, personally, I’d feel uncomfortable with that – and I’m not sure what the creditors would say (but, of course, the office holder could ask them, and maybe that would be a better safeguard?) – I guess it makes commercial sense.

The consultation also proposes to give the court the power to make a compensatory award against a director at the time it makes a disqualification order. The consultation states: “This measure could potentially affect the timeliness of obtaining disqualifications if it deterred directors from offering a disqualification undertaking and therefore resulted in more disqualification cases needing to be taken to court” (paragraph 11.16), but personally, I would have thought that this measure would increase exponentially the number of director undertakings, as there seems to be no suggestion that an undertaking would expose a director to the risk of an award.

It is envisaged that the award would not be used to cover the general expenses of the liquidation and “there is a question as to who should benefit from any compensatory award. This could be creditors generally or it could be left to the court to determine based on the facts of the case” (paragraph 11.14), although I assume that, if it were for the general body of creditors, the office holder would be expected to pay the dividend. I wonder how the office holder’s fees and costs would be viewed, if he had to keep the case open purely for the purposes of seeing through the outcome of any such action.

The consultation also states that “Liquidators would still be expected to consider whether there are any actions they could bring themselves, as they ought to now” (paragraph 11.15). Could liquidators be criticised for taking actions, the proceeds of which would settle first their costs, when, if it were left to the court on the back of a disqualification order, the creditors would see the full amount? It is a liquidator’s function to get in and realise the assets, so probably not, but administrators..?

The same paragraph states: “If by the time the disqualification action comes before the court, liquidators have successfully recovered monies from the directors, that is something the court would be expected to take into account when deciding whether or not to make a compensatory award (or in setting the amount of it)” – it could get fun if the actions were running in parallel.

.
Despite my quibbles, generally I think the proposals are a step in the right direction. However, I wonder how those in the Service’s Intelligence and Enforcement Directorate feel about the proposals, which would lead to so much more work and high expectations laid upon them. Let’s hope that these proposals give them a sound case for increasing their access to funds and people.