Using beneficial ownership information to solve a sticky problem

Sweet shops have become a sticky problem on London’s Oxford Street, one of the city’s leading shopping thoroughfares. As the leader of the local government, Westminster City Council, outlined in a recent article in The Guardian newspaper, his colleagues are investigating some shop operators for tax evasion and selling counterfeit goods. Identifying the real people behind the companies operating these sweet shops is proving a challenge for the council’s investigators. There can be a complex contractual chain between those who own the actual building in which the sweet shop is located, the holder of a lease for the retail space and a company who is a sub-lessor and user of that space. The operator of the sweet shop is very unlikely to be the owner of the building.

These sweet shops could be a scheme to avoid paying business rates or to facilitate money laundering. The physical retail sector in London and across the UK has struggled in recent years as a consequence of the impact of the Covid-19 pandemic as well as the challenge from online retailers. The result is many empty shop units, not just on Oxford Street but on high streets across the country. Where shop units are empty, liability for paying business rates falls on the landowner. So landowners have been anxious to find tenants for these units as the trading company then becomes liable for business rates. This glut of retail space has attracted businesses such as the sweet shops that are easy to set up, have low costs and generate quick cashflow.

The property itself is probably owed by a company, and that company may be overseas. This poses its own challenges and is the subject of the soon to be launched register of overseas owners of UK real estate.

But the issue here is with the owner of the company operating the sweet shop, which is likely to be a UK-registered company.

The tools already exist both to investigate the real people behind these UK companies operating sweet shops or to prevent secretive companies setting up business in the first place. This applies not only to sweet shops but indeed any kind of the business in the UK. Since 2016, all companies registered in the UK must supply details of the real people who ultimately own them (their beneficial owners) to Companies House. These details are available for free on the Companies House website through the Register of Persons of Significant Control (PSC). This includes foreign nationals who are the ultimate owners of UK-registered companies.

Council investigators can use the PSC Register to identify the real owners or at least obtain a lead to follow. If the company has failed to provide these details, then council officials should report the company to Companies House for breach of the regulations. If the officials identify a discrepancy between the information on the register and the results of their investigation, then they should also report this to Companies House, which can demand the company confirm the accuracy of the information held.

To prevent those who are trying to use sweet shops or other businesses as a front for illicit financial activities, there are several actions that council officials can take. When a company applies for a trading licence, officials can check the PSC register for the beneficial ownership details. They could also ask the company to provide beneficial ownership details and make provision of such details a condition of granting a trading licence. If the company applies for a significant change in the licencing conditions, then officials can ask the company to reconfirm the beneficial ownership details. Of course any local council in the UK can take these actions to help prevent businesses in their area becoming a front for illegal financial transactions. Indeed, they should take these actions.

Designing and implementing a central, public beneficial ownership register makes the use of beneficial ownership information more efficient for all users and serves a public good. Based on our experience of delivering beneficial ownership projects across four continents, we have developed the BO6 framework that provides a structure for governments to move from understanding the context for implementing a register through to reaping the benefits from a register with a strong emphasis on communication throughout the process.

Demanding beneficial ownership information from companies seeking to do business in any jurisdiction whether a major city, a region or a country plays an important role in creating an open and competitive business environment and building trust in the economy. There are examples from across the world of governments making the provision of beneficial ownership details a condition of granting a licence e.g. to explore for minerals. Governments gain assurance of the identity of those investing in their jurisdiction and businesses gain a clearer picture of who they are doing business with.

It is possible to use beneficial ownership details as part of a strategy to prevent financial crimes even in countries which do not have freely accessible registers like the one in the UK or any kind of beneficial ownership register. Governments can make the submission of such details a condition of bidding for or obtaining a business licence or project or as part of the public procurement process.

Michael Barron and Tim Law are independent consultants that have advised governments on four continents on implementing effective beneficial ownership reporting systems.