New identity checks for company directors might help reduce business fraud, says Philip Winterborne, of insolvency and restructuring trade body R3 in Wales.

A Government consultation into enhancing the role played by Companies House in the UK’s anti-fraud framework, which recently closed, provides a real opportunity to significantly strengthen the UK’s overall corporate governance system.

Companies House acts as the central register of company information in the UK, and is responsible for incorporating and dissolving limited companies.

Philip Winterborne, who is Insolvency and Turnaround partner at Temple Bright solicitors, says:

“R3 has been concerned for some time about the relative laxness of some of the processes central to Companies House’s operations, especially those around verifying that directors are who they say they are, and we’ve long called for director ID verification to be introduced.

“The checks performed when opening a normal bank account are currently more rigorous than those carried out when registering a new company – banks rightly recognise that not ‘knowing their customer’ can lead to misuse of financial systems to facilitate fraud, and it would seem only sensible to extend the same sort of scrutiny to individuals setting up a new business venture.

“The current lack of director ID verification means that individuals who wish to obscure their involvement with other firms can enter a slightly different version of their name onto the Companies House register.

“There is also a risk that directors who have previously been disqualified may continue to operate behind the scenes, and our members often come across disqualified directors contributing to successive business failures or fraudulent activity, breaching the terms of their disqualification by acting as shadow directors and ‘advisors’, or using friends, family or other contacts as a ‘front’ for their involvement. Whilst not necessarily a solution in and of itself, such conduct might be discouraged by a more rigorous ID verification process.

“Entrepreneurs should of course not be discouraged from ‘trying again’ after a business failure, as they often learn lessons from such situations that contribute to their eventual success, but it is equally important that safeguards are put in place to protect everyone from directors who repeatedly act improperly.”

The Business Department’s consultation on enhancing the role of Companies House and on increasing the transparency of UK corporate entities closed in early August, and a response from the Government is expected in coming months.

Philip Winterborne continues:

“Companies House is a key part of the business landscape, and insolvency practitioners often use its register to build up a picture of directors’ track records, and to follow flows of money through annual accounts when investigating potential fraud and other similar issues following the insolvency of a company.

“The implementation of an ID verification system is unlikely to discourage genuine entrepreneurship, but would be a significant deterrent to fraud, and could make a real positive difference to investigations of bad behaviour.

“Making the information held at Companies House as robust and accurate as possible can only help legitimate businesses by making it harder for fraudulent operators to hoodwink good-faith suppliers and customers, and we hope that the Government’s will set out robust new measures and a clear timetable to implement them in order to boost anti-fraud efforts, not least on the part of the insolvency and restructuring profession.”