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Second Economic Crime Bill: new "discrepancy reporting" obligations for all businesses?

Posted on 9 February 2023

The Economic Crime and Corporate Transparency Bill, which is currently making its way through Parliament, proposes a wide range of measures which, if enacted, will equip the Registrar of Companies with powers to enhance the integrity of the register. One of the provisions that has made its way into the Bill (also known as the "Second Economic Crime Bill") during its committee stage is a power for the Government to require all businesses to carry out "discrepancy reporting", an obligation that currently only falls to businesses regulated under the UK's money laundering rules.

Following Russia's invasion of Ukraine last year, the Government moved quickly to crack down on illicit economic activity by Russian criminals in the UK by passing the Economic Crime (Transparency and Enforcement) 2022 Act. However, wider Government concern in relation to the misuse of UK companies and the inaccuracy of the companies register has been building since 2019. The Economic Crime and Corporate Transparency Bill is an important component of the Government's wider Economic Crime Plan 2019-2022. The Government's 2022 White Paper highlights that the Bill's aims are threefold: to directly tackle organised crime such as corruption and money laundering committed by foreign criminals, to protect individuals and businesses from fraud, and to develop a more reliable and usable companies register. 

Introduced in September 2022, the Bill has progressed through the House of Commons and has now had its first reading in the House of Lords. It is expected that the Bill will be on track to receive Royal Assent in Spring 2023.

The existing discrepancy reporting regime

As part of a wider EU Money Laundering Directive, the Money Laundering and Terrorist Finance (Amendment) Regulations 2019 instituted the obligation to report discrepancies in beneficial ownership to Companies House. This requirement applies to any entity that must carry out due diligence checks before establishing a business relationship with a UK company, limited liability partnership or Scottish partnership under the Money Laundering Regulations 2017, a trust required to register under the Trust Registration Services, and from April 2023 an overseas entities required to register in the UK's Register of Overseas Entities. Firms to which this obligation applies include financial institutions, legal and tax advisers, estate agents and insolvency practitioners.

The duty to report kicks in if one of these "obliged entities" identifies a discrepancy between the information they gather about a beneficial owner during the client onboarding process and that which is publicly available on the PSC register at Companies House. Tackling anomalies on the register is intended to ensure its accuracy whilst preventing abuse by criminals. From 1 April 2023, the reporting duty will apply on an ongoing basis, and not just at the outset of a business relationship and the duty will be limited to "material" discrepancies, not just any discrepancy.

The proposed new regime

The Second Economic Crime Bill would give the Government the power to extend the discrepancy reporting regime far beyond just anti-money laundering regulated firms. Under the Bill, any "person who is carrying on business in the United Kingdom" would be required to obtain specified information about their customers and report discrepancies in the information to Companies House. The Government would be able to stipulate the kind of "specified information" to be obtained about either a prospective or existing customer. It remains to be seen whether the requirement will be further refined to certain types of businesses, such as those that already work closely with anti-money laundering regulated firms. Furthermore, it is unclear how such "specified information" will be defined in accompanying regulations, and whether it will extend beyond beneficial ownership to capture other details, such as director information. However, in its current state, the implications of the new regime are significant both in principle and in practice.

On the one hand, it can be argued that increasing the number of businesses that must engage with discrepancy reporting, as well as widening the scope of information to be compared, is ultimately beneficial to enterprise., on the basis that these changes will strengthen the register of companies, ensuring its data is more reliable and thus promoting efficacy when using its services. On the other hand,  businesses that do not have sophisticated due diligence/ KYC processes in place may be fearful that onerous information gathering and reporting requirements could serve to slow down client onboarding and may discourage establishing new business relationships.

Ultimately, the new discrepancy reporting regime is still in Bill form. Its practical impact on businesses in the UK remains to be seen and will depend on how widely the scope of the reporting requirements are defined. Nonetheless, the proposal signals that substantive reforms to bolster the companies register and prevent abuse of the UK economy are on the horizon.

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