The Economic Crime and Corporate Transparency Act has received Royal Assent. The Act will significantly reform the way UK companies are incorporated, tackle misuse of limited partnerships and redefine the role of Companies House from that of a registry to a proactive regulator.
The legislation introduces a new offence of failure to prevent fraud (see our separate briefing here) and other measures to tackle economic crime, but in this briefing we highlight the key reforms relating to UK company creation and corporate transparency.
Reasons for the reforms
The legislation's three stated objectives are to:
- prevent organised criminals, fraudsters, kleptocrats and terrorists from using companies and other corporate entities to abuse the UK’s open economy;
- strengthen the UK’s broader response to economic crime; and
- support enterprise by enabling Companies House to deliver a better service and improving the reliability of its data to inform business transactions and lending decisions across the economy.
The Government's February 2022 White Paper describes how the use of anonymous or fraudulent "shell" companies and partnerships provides criminals with a "veneer of legitimacy" to commit a range of crimes, from corruption and money laundering to identity theft. The aim is that verifying the identities of those that own and control companies, along with a raft of other corporate transparency measures, will help to make it harder for criminals to use and abuse UK businesses.
Identity verification for directors and PSCs
One of the central reforms confirmed by the Government in its response to its consultation on the role of Companies House and corporate transparency was the introduction of compulsory identity verification for all directors and People with Significant Control (PSCs) of UK corporate entities. Identity verification requirements will apply to all new and existing registered company directors, PSCs and anyone else filing documents with the Registrar. For new directors, identity verification will need to take place before the company is formed, while PSCs will be required to be verified within a short time after incorporation.
While more detail on the process is awaited, there will be two types of identity verification: direct verification via Companies House or verification through an "authorised corporate service provider" (i.e. a person subject to the UK's money laundering regulations and who has registered at Companies House).
Consequences for directors and others of failure to verify their identity
There will be a transition period for existing companies to comply with the requirements, but after that, anyone who was required to verify their identity but has failed to do so could be subject to criminal or civil proceedings. They could also face incorporation of a new company being rejected and, for directors, prohibition from acting as a director.
New powers for the Registrar
Historically, Companies House's role has been one of record keeper rather than regulator. The White Paper confirmed that Companies House would no longer be a "passive administrator of company information", but a "much more active gatekeeper over company creation and [a] custodian of more reliable information on the register." The legislation will introduce new objectives for the Registrar to promote and maintain the integrity of the register and to minimise the extent to which companies facilitate the carrying out of unlawful activities. Among the new powers to be given to the Registrar are powers to share data with any persons for purposes connected with the Registrar's functions or with other public authorities for purposes connected with their functions. The Registrar's powers to remove material from the register will also be expanded and the Registrar will have greater powers to change the address of a company's registered office and take action against those who persistently fail to provide an appropriate registered office address.
Although there are already certain restrictions on the use of company names, the Government considers that they are not sufficient to prevent abuse. Currently, the Secretary of State can only direct a company to change its name where it is too similar to an existing name, where misleading information has been given for the purposes of registering a name, or where the name gives an obviously misleading indication of the nature of its activities.
The new legislation will permit the Registrar to refuse to incorporate a company where, in the Secretary of State’s view, the name could be used to facilitate certain crimes or where the name suggests a non-existent connection with a foreign government or an international institution. To protect other users of the company register, the Registrar will also have the power to reject names which comprise or contain a computer code. The Secretary of State will have new powers to direct companies to change their names if they fall into these categories and the Registrar will be able to replace a company's name with its company number on the register if it fails to act.
To prevent their misuse, limited partnerships will now need to file more information at Companies House and to maintain a connection to the UK. Transparency requirements will increase, including requiring fuller information about partners. The Registrar will be able to deregister limited partnerships which are dissolved, no longer carrying on business or where a court determines that it is in the public interest to do so.
Corporate director prohibition
The UK already has legislation in place enabling it to impose a ban on the use of corporate directors, but the relevant provisions have not yet come into force. The Government has confirmed that those provisions will come into force in parallel with the reforms outlined above. For more detail on the prohibition and the limited exceptions to it, see our separate briefing: Prohibition on corporate directors: what to expect.
Register of Overseas Entities changes
The Economic Crime and Corporate Transparency Act 2023 follows the Economic Crime (Enforcement and Transparency) Act 2022, which established the UK's Register of Overseas Entities (ROE). The ROE requires overseas entities holding UK property to register details of their beneficial owners at Companies House. The 2023 Act will now introduce changes to the ROE regime, most notably to require not only beneficial owners of overseas entities to be disclosed but also beneficial owners of the properties held by those entities: see our latest briefing: Overseas entities register – closing a loophole.
Corporate criminal liability
The Act introduces reform of the identification doctrine for the purposes of establishing corporate criminal liability. As the law currently stands, liability for a criminal offence can only be attributed to corporates if it can be established that the offence was committed by a “directing mind and will” of the corporate who was acting within the capacity of their role. The Act introduces a new test whereby senior managers will now also be in scope of attribution to a corporation.
Some of the measures that the Act introduces, such as identity verification, will not be introduced straightaway, as they will require both secondary legislation and system development at Companies House. Companies House has, however, confirmed that it expects other changes to come into force sooner – in early 2024. These include the Registrar's greater powers to query information, stronger checks on company names, the new rules for registered office addresses, a requirement for all companies to supply a registered email address and annotations on the register to let users know about potential issues with the information on it.