Insolvency Oracle

Developments in UK insolvency by Michelle Butler

Tag Archives: PSC


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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?


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MLR19: as if we didn’t have enough to do already!

It took less than one month for the draft new Money Laundering Regs to come into force, but I struggle to see how many of the additional burdens loaded onto our shoulders have anything to do with minimising the risks of money laundering.

I realise that I can be guilty of seeing insolvency work as somehow special.  However, the inability or refusal of legislation drafters to recognise that insolvency office holders do not have client relationships with the entities/individuals over which they are appointed means that the ever-increasing AML burdens feel so pointless and nonsensical when it comes to IPs.

I wrote as much when I responded to HM Treasury’s consultation back in June 2019 and I was pleased to see that the ICAEW had responded with many of the same concerns, including that MLR-regulated people should not be burdened with a new requirement to report discrepancies to the Registrar of Companies (see below).  But of course, HM Treasury has been required to make these changes largely to stay in line with the EU’s Fifth Money Laundering Directive (“5MLD”), so inevitably there would be no special treatment for IPs.

The new Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (“MLR19”) can be found at http://www.legislation.gov.uk/uksi/2019/1511/contents/made and I think the Law Society’s summary at https://www.lawsociety.org.uk/policy-campaigns/articles/anti-money-laundering-guidance/ (scroll down for the 5MLD bit) is a particularly good one.

How Accurate are PSC Registers?

I have yet to meet anyone working in insolvency who thinks that the adoption of the new People with Significant Control (“PSC”) register was a good idea.  In the good old days, more often than not companies’ annual returns could be relied upon as a true record of shareholdings.  Now that the annual return has been replaced with the confirmation statement, we often don’t know where we are as regards shareholdings!  In addition, from what I’ve seen, many PSCs are incorrect – it seems that many directors or their agents have trouble with percentages (how difficult can it be to determine whether someone has a shareholding of “more than 50% but less than 75%”?!).

People with Significant Control include, not only 25%+ shareholders, but also anyone who otherwise exercises significant influence or control over the company.  Thus, the traditional formulaic approach to registering PSCs, which only ever seem to focus on 25%+ shareholders, does not take into consideration other signs of control, such as those exerted by shadow directors or those relinquished to the significant others of nominal shareholders.

With the abundance of PSC errors in mind, it seems to me that a new MLR19 requirement could add to IPs’ to-do list in a great deal of cases.

New Obligation to Inform the Registrar of Companies of Discrepancies

The MLR19 introduces to the MLR17 a new Regulation 30A, which requires relevant persons (i.e. IPs etc.) to:

“report to the registrar any discrepancy the relevant person finds between information relating to the beneficial ownership of the customer and… [that which] becomes available to the relevant person in the course of carrying out its duties under these Regulations.”

When might an IP discover a discrepancy?

One could argue that, as AML CDD should be completed right at the start of the engagement, we might not be certain that the register contains any discrepancy until we investigate the shareholdings, say, to draft a Statement of Affairs… and therefore knowledge of any such discrepancy does not become available “in the course of carrying out” AML duties, but rather it emerges after this point.  However, as the MLR17 require “ongoing monitoring”, such an argument is probably a little weak.  (UPDATE 12/08/21: The Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020 revised this requirement in October 2020 so that the duty to report PSC discrepancies only arises when the discrepancy is identified “when establishing a business relationship with the customer”.  BUT HMT has just issued a consultation (https://www.gov.uk/government/consultations/amendments-to-the-money-laundering-terrorist-financing-and-transfer-of-funds-information-on-the-payer-regulations-2017-statutory-instrument-2022) that proposes to turn this back into an ongoing obligation!)

Companies House has provided guidance on reporting discrepancies on the register: https://www.gov.uk/guidance/report-a-discrepancy-about-a-beneficial-owner-on-the-psc-register-by-an-obliged-entity.

They have also provided an online form (https://www.smartsurvey.co.uk/s/report-a-discrepancy/), but, although they provide twelve categories of people who might use the form, insolvency practitioners are not listed *sigh*

What will RoC do with the information?

The MLR19 state that:

“the registrar must take such action as the registrar considers appropriate to investigate and, if necessary, resolve the discrepancy in a timely manner.”

So… an IP informs RoC that the PSC register is incorrect on a company in CVL, because someone is recorded as a between-50%-and-75%-shareholder when in fact they are the 100% shareholder.  Is it “necessary” for RoC to resolve this discrepancy?  In an insolvency, it will not make a darned bit of difference, will it?

 

So do IPs really need to inform RoC of the discrepancy?

If you want to comply with the MLR19/17, then yes you do.

Typical, isn’t it?  The Regs require IPs to go to the trouble of notifying RoC of pointless pieces of information, but the Regs give RoC a nice little get-out to avoid having to do anything about it.  What a waste of our time!

Widening the MLR-Regulated Net

The MLR19 captures some new businesses into the MLR-regulated net.  Most will only be relevant to IPs when they are appointed over entities/individuals who are trading in these areas – letting agents, art dealers, cryptoasset exchange and custodian wallet providers – but I wonder if the widened definition of “tax adviser” may capture more non-formal insolvency work carried out by IPs themselves.

“Tax adviser” has been newly defined as:

“a firm or sole practitioner who by way of business provides material aid, or assistance, or advice, in connection with the tax affairs of other persons”.

So… you help a company or an individual to agree a TTP with HMRC in order to avoid a formal insolvency process – does this now make you a “tax adviser”?

I appreciate that some firms already put all prospective new engagements through their AML CDD process whether or not they strictly fall as MLR-regulated engagements, but I suspect that just as many other firms do not.  Now they may have to think twice.

Training for “Agents”

The MLR19 widens the scope of those for whom a MLR-regulated firm is responsible for training.  As well as the MLR17’s “relevant employees”, now firms must train (and keep records of training) for:

“any agents it uses for the purposes of its business whose work is of a kind mentioned in paragraph (2)”, which covers any work relevant to the firm’s compliance with the MLR17 or which is otherwise capable of contributing to the identification or mitigation of the firm’s ML/TF risks or the prevention or detection of ML/TF to which the firm is exposed.

So… an IP instructs agents to sell an insolvent’s assets and to receive the proceeds of sale to pass on to the IP in due course.  It seems to me that, whether or not the sale transaction is caught by the MLR17*, the agents’ work could contribute to the IP’s ML/TF risks or exposure.  And… what about if you use ERA agents, who might come across ghost employees or illegal workers, surely those ERA agents also can affect your ML/TF risks and exposure?  Do the MLR19 capture these agents??

(* If you have not already read the CCAB’s draft insolvency guidance, I would recommend it – at http://ccab.org.uk/documents/20190830CCAB%20InsolvencyAppendixFDraft_18forHMT.pdf.  In brief, the draft guidance explains that only a Trustee in Bankruptcy sells their own assets – all other insolvency office holders act as agents – so, while a TiB must ensure that relevant asset purchasers are subject to AML CDD, no other office holders need “routinely” do so.  Personally, while I see the technical argument, I do wonder whether it reflects the spirit behind the Regs to allow an Administrator to sell a business for £1m without AML CDD, but to require a TiB to do AML checks on someone who wants to buy a bankruptcy asset for >€15,000.)

Jo and I have debated whether chattel agents etc. are truly agents: do they act under the IP’s delegated authority to enter into legal relations on the IPs behalf?  Even if this is a legal definition of “agent”, does this hold true for the application of the word in the MLR19?

The problem I have is that HM Treasury’s consultation was clearly not interested in agents in general.  The consultation document referred to networks of agents used in a Money Service Business, those involving “multi-layer arrangements with sub-agents who deal with frontline customers”.  But the MLR19 make no such distinction.

Prescriptive EDD for Transactions/Parties in High Risk Countries

The MLR17 already highlighted the need for EDD and enhanced ongoing monitoring where a business relationship or transaction involves someone in a “high-risk third country”.  The MLR19 have added (new Reg 33(3A)) six elements of EDD that “must” be included in these circumstances.

In the main, these new statutory requirements are not unusual.  They include: obtaining more information on the customer, their beneficial owner, the nature of the relationship or reason for the transaction, the source of funds/wealth, and getting senior management to approve the establishing or continuing of the business relationship.

The final requirement puzzled me, though:

“conducting enhanced monitoring of the business relationship by increasing the number and timing of controls applied, and selecting patterns of transactions that need further examination”

Unless an office holder is trading (or is monitoring the trading of) the insolvent’s business, it is difficult to see how this works in an insolvency context.

Nevertheless, IPs’ systems may need to be changed in order to cover the newly-prescribed EDD and ongoing monitoring where someone established in a high risk third country is encountered.  For a more thorough explanation of this area, you may want to look at the Law Society’s guidance mentioned above.

Other Clarifications

The MLR19 include several other tweaks, which to be fair are valuable clarifications of the MLR17 and which may affect the finer points of some firms’ processes and templates.  Again, I’d recommend the Law Society’s guidance for a detailed summary.

Should IPs wait until the RPBs issue/endorse new guidance before we make changes?

The ICAEW has posted a summary of the changes primarily for accountants and has noted that the CCAB’s Guidance will be updated in due course (https://www.icaew.com/technical/legal-and-regulatory/anti-money-laundering/fifth-anti-money-laundering-directive-5mld).  The IPA doesn’t appear to have posted anything specific on the MLR19, but I expect that they too will look to the updated CCAB Guidance.  However, in light of the fact that the CCAB insolvency-specific guidance was not issued even in draft for over 2 years after the MLR17 came into force, I won’t be holding my breath.