Economic Crime and Corporate Transparency Bill
UK corporates should be prepared to apply some administrative elbow grease when Economic Crime and Corporate Transparency Bill is implemented.
Forewarned is forearmed
The Economic Crime and Corporate Transparency Bill (the “Bill”) is currently passing through the House of Lords. Subject to successful parliamentary passage, the Bill is anticipated to receive Royal Assent during Spring 2023.
The Bill forms part of a suite of legislative measures designed to prevent abuse of UK corporate structures and combat economic crime. It follows on from the Economic Crime (Transparency and Enforcement) Act 2022, which introduced the requirement for overseas entities owning property in the UK to apply for registration at Companies House.
Once enacted, the Bill will transform the role of Companies House and impact the day-to-day operation of UK corporates. It is anticipated that similar reforms will be made to limited liability partnerships after the implementation of the Bill.
The Bill also includes provisions reforming limited partnerships. For information on the impact of the Bill on limited partnerships, please see our article Changes to Limited Partnerships
Principal aims of the Bill
In summary, the Bill aims (amongst other things) to:
- introduce identity verification measures for all new and existing company directors, persons with significant control (“PSCs”), relevant legal entities (“RLE”) and those delivering documents to Companies House
- increase the powers of Companies House so that it can improve the accuracy and maintain the integrity of the information it holds, thereby enabling Companies House to become an active gatekeeper over company formations and an effective custodian of more reliable corporate data
- enable and broaden the sharing of information between Companies House, law enforcement and others
- enable businesses in a regulated sector (as defined in Part 1 of Schedule 9 to the Proceeds of Crime Act 2002) to share customer information more effectively with each other to prevent, investigate and detect economic crime, and
- prevent the abuse of personal information by increasing the protection of personal information held by companies and provided to Companies House.
Once enacted, the changes introduced pursuant to the Bill will impact UK corporates (including their directors and PSCs), in-house legal advisers and any third parties (including professional advisers) who are instructed to file information at Companies House on their behalf.
The consequences of failing to comply with the new requirements (particularly, those relating to the new verification measures) may not only frustrate a company’s ability to operate, but also attract exposure to civil penalties and criminal liability.
Therefore, it is worth taking a moment now to consider the changes ahead.
Identity verification and the practicalities of non-compliance
All company directors, PSCs, RLEs and those delivering documents to Companies House will need to comply with the new identity verification measures introduced by the Bill.
Although regulations are awaited on the procedural aspects of identity verification, the Bill envisages two ways in which an individual may have their identity verified. In particular, either
- directly through Companies House, or
- indirectly, by way of a verification statement to Companies House from an authorised corporate service provider (“ACSP”) (see below at “Authorised Corporate Service Providers”) confirming that the individual’s identity has been verified in accordance with the regulations.
The Bill has amended the existing false statement criminal office in section 1112 of the Companies Act 2006, changing it to being an offence to deliver a false, deceptive or misleading filing or statement to Companies House without “reasonable excuse”. Notwithstanding the explanatory notes to the Bill (relating to honest mistakes in filing on behalf of a client), ACSPs may feel nervous about the prospect of providing verification statements or indeed making any filings on behalf of their clients following implementation of the Bill.
It is anticipated that existing companies will be afforded a transitional period within which to comply to the new measures. Further information is awaited in this regard.
Implementing a ban on the use of corporate directors has been a reoccurring theme of the reform around corporate transparency. Whilst the Bill is largely quiet on this point, the Government’s Factsheet: identity verification and authorised corporate service providers confirms it is the Government’s intention to use its existing powers to restrict the use of corporate directors in conjunction with the implementation of the Bill and supporting regulations.
It is proposed that such restrictions would include the following requirements:
- only corporate entities with a legal personality will be allowed to act as corporate directors of UK companies
- all directors of corporate directors will need to be natural persons who have had their identity verified prior to the corporate directors’ appointment, and
- companies with corporate directors will be afforded 12 months within which to comply with the above measures or, if they do not or cannot comply, resign their corporate directors.
Authorised Corporate Service Providers
Designed to capture the interactions between Companies House and third party intermediaries such as legal advisers, accountants and company formation agents, the ACSP regime introduced by the Bill will require all individuals and entities wishing to qualify for ACSP status to be registered with Companies House and prove that they are a relevant person (within the meaning of regulation 8(1) of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (SI 2017/692)).
ACSPs filing information at Companies House on behalf of their client will be required to confirm that they have completed all the required identity verification checks.
1. New prohibition on directors acting unless their identity has been verified
Directors (including shadow directors) will be prohibited from acting as a director unless their identity has been verified by Companies House or they are exempt under regulations (yet to be published). The consequence of breach is an offence punishable by fine. However, the director’s appointment and the actions they have undertaken in such capacity would still be valid.
2. New prohibition on directors acting unless directorship is notified
The Bill introduces a new prohibition on a director’s ability to act until notification of their appointment (otherwise than on incorporation) has been received by Companies House within 14 days of their appointment. The consequences for breach are the same as those referred to in paragraph 1
3.Restrictions on who can file documents at Companies House
Individuals filing documents at Companies House must have had their identity verified by Companies House unless exempt under regulations and, when filing such documents, they will be required to include a statement confirming their verified or exempt status (as the case may be).
Individuals (including, without limitation, company directors and company secretaries) will not be able to deliver documents to Companies House on behalf of another person (including legal persons) unless:
- their identity has been verified;
- they are an ACSP;
- they are an employee of an ACSP and acting in the course of their employment, or
- they fall within an exemption that may be specified in regulations.
They will also be required to include a statement confirming their verified/exempt status and that they have the authority of the person, on whose behalf they are filing the document, to deliver the document.
Any individual who makes an unauthorised filing will commit a general false statement offence.
The Bill introduces the following key changes:
- abolishment of the obligation for UK companies to keep and maintain their own PSC register. Going forward, PSC information will be kept centrally on the public register at Companies House. Notification of changes to such information to Companies House will continue to be required
- identity verification requirements for all individual registrable PSCs and for a relevant officer (such as an individual director in the case of a company and a member in the case of an LLP) of a registrable RLE, and
- an obligation to confirm within the statement of initial control that any registrable PSC or registrable RLE on incorporation is not disqualified under the directors’ disqualification legislation or would be disqualified but for the court’s permission to act.
It is worth noting that the Bill requires registrable RLEs not only to identify a relevant officer and comply with the verification requirements applicable throughout the period the RLE is registered at Companies House, but also to ensure that notification is provided to Companies House of any changes to the relevant officer together with the details of the replacement relevant officer (whose identity must also be verified).
The consequence for non-compliance by a registrable PSC/RLE (as the case may be) is a criminal offence punishable by a fine. If the offence is committed by an RLE, every officer of the RLE also commits the offence.
The Bill removes the requirement for companies to maintain their own register of directors, register of directors’ residential addresses, register of secretaries and PSC register. However, information about directors, secretaries and PSCs must still be notified to Companies House which means that companies will need to be increasingly vigilant in the timely filing of accurate information with Companies House.
The Bill also revokes the option for companies to keep their register of members on the central register at Companies House. Companies will need to maintain their own register of members, which must include (in the case of an individual member), such person’s forename and surname.
New requirement for a registered email address
The Bill introduces a requirement for all UK companies to notify Companies House of and maintain a registered appropriate email address with the intention of allowing Companies House to communicate with the company by email. Such e-mail address would not be publicly available.
An email address would be considered appropriate ‘if, in the ordinary course, emails sent to it by Companies House would be expected to come to the attention of a person acting on behalf of the company’. Failure to maintain an appropriate email address ‘without reasonable excuse’ is an offence punishable by fine. Clarification is yet to be provided on what would amount to a reasonable excuse. However, it would be prudent for UK companies to take this opportunity to consider either setting up a new e-mail address specifically for this purpose or have a suitable e-mail address in mind in readiness for when the requirement is implemented.
New changes to the requirement for a registered office address
UK companies are already legally required to have a registered office address. However, the Bill introduces a new requirement for companies to always ensure that such address is an appropriate address. The meaning of appropriate largely follows that which it has in relation to the requirement to maintain a registered e-mail address (mentioned above), with an added requirement that the address must also be one to which the delivery of documents is capable of being recorded by obtaining acknowledgement of delivery.
Going forward, if a UK company notifies Companies House of a change of registered office address, such notice must include a statement confirming that the address is an appropriate address. Similarly, if a company is making a confirmation statement and at the time of making it the registered office is not an appropriate address, the company must also simultaneously notify Companies House accordingly.
Companies House has a new power to nominate a default address if a UK company does not have an appropriate registered address. However, any default address so nominated is not intended to be permanent. UK companies subject to such measure will only be afforded a certain grace period within which to notify Companies House of an appropriate address before they are exposed to fines and potential striking-off action by Companies House.
Obligation to notify Companies House of full list of shareholders
Companies will need to include a full list of shareholders (together with details of the number and class of their respective shareholding) in the first confirmation statement to be filed after the requirement to maintain full names in their register of members comes into force (see Statutory Registers above).
Developing role of Companies House — from passive registrar to active patrol
The Bill confers on Companies House the following new objectives in the performance of its role going forwards to seek to maintain the integrity of the information it holds:
- Objective 1: to ensure that any person required to deliver documents to Companies house does so, and that the requirements relating to proper delivery are complied with
- Objective 2: to ensure that documents delivered to Companies house are complete and contain accurate information
- Objective 3: to minimise the risk of information on the public register creating a false or misleading impression to members of the public
- Objective 4: to minimise the extent to which companies and others carry out unlawful activities or facilitate the carrying out by others of unlawful activities.
The Bill includes a host of new powers provided to Companies House to enable it to meet the Objectives, including, but not limited to those mentioned below:
- the power to reject and query documents for inconsistencies
- the power to require additional information
- the power to require inconsistencies in the information delivered with other information on the register to be resolved
- the power to remove material from the register
- the power to require businesses to report discrepancies about a customer or a prospective customer (further regulations required)
- the power to analyse information for the purposes of crime prevention or detection
- the power to disclose information to any person or a public authority in relation to its, or that authority’s, functions
- the power to make provision for financial penalties for breaches of the Companies Act 2006
- the power to change a company’s name in certain circumstances
- the power to change a company’s registered office address in certain circumstances
- the power to change a director’s service address to such director’s residential address
- the power to require delivery of documents by electronic means.
To pack an extra punch, the Bill also affords latitude to allow Companies House to increase fees charged to those using its services. Such fees are to be confirmed by regulations after the implementation of the Bill.
Call to action and final thoughts
UK corporates should be prepared to apply some administrative elbow grease when the Bill is implemented.
Notwithstanding the anticipation of transitional measures, it would be prudent for UK corporates to take this opportunity to review ownership and statutory management structures to ensure that directors, PSCs/RLEs and any professional service providers are aware of the changes on the horizon, and that they are prepared to deal with them promptly when required. Given the proposed increased powers of Companies House, it would not be wise to leave matters to the last moment.
It will be interesting to see how the procedural aspects of director identity verification evolve, not least because we see the potential difficulties this may have on M&A transaction and restructuring activity.
Further, once the requirement for companies to no longer maintain their own register of directors is implemented, delays by UK corporates notifying Companies House (or indeed delays outside of their control related to the prompt updating of the public register) of changes to director information may also cause unanticipated issues with transaction and finance timetabling.
For further information on the Economic Crime and Corporate Transparency Bill, contact our corporate solicitors.