An introduction to the key changes for companies in light of the Economic Crime and Corporate Transparency Bill.
What’s the latest?
The Economic Crime and Corporate Transparency Bill (the “Bill”) has made its way through most of the legislative stages. It has now been approved with amendments by the House of Lords, with those amendments currently being considered by the House of Commons. If approved following this review, it will be put forward to receive Royal Assent (i.e. formal approval), which is likely to happen towards the end of this year.
Certain elements of the Bill will take effect within 2 months of the Bill receiving Royal Assent. Other changes, including its impact on the Companies Act 2006, will require significant supporting secondary legislation, which is yet to be published. This means that many of the Bill’s reforms will not be effective in the near-term future.
Companies House has indicated the flagship ID verification regime (detailed below) needs time to integrate into existing systems before it goes live. As such, ID verification may not be in force until 2024 at the earliest, meaning companies will have more time to prepare to comply with the new requirements.
Summary of key updates for companies
ID verification for directors
Individuals will have to have their identity verified if they wish to act as a director. For new director appointments, the ID verification process must be completed before a company notifies Companies House of the appointment of a new director. This requirement also applies to current directors, although companies will have a transition period in which to verify their identities. Note that failure to complete ID verification will not invalidate directors’ acts, but will be an offence.
All directors will be issued a unique identifier when they first have their ID verified. This identifier will link to any of that individual’s other existing or future directorships, removing the need for that person to verify their ID multiple times.
The government also plans to limit the use of corporate directors. The Bill will require all corporate directors to be entities with ‘legal personalities’ (i.e. they are limited companies, LLPs etc). All directors of corporate directors must themselves be natural persons whose identity has been verified by Companies House prior to the corporate director’s appointment. Companies will have 12 months to comply with these requirements, otherwise their corporate directors must resign
ID verification for Persons with Significant Control (PSCs)
The identity of individual PSCs will need to be verified in the same way as directors. Where the PSC is a company or other entity, then the identity of one of that company’s officers must be verified. PSCs will need to maintain their verified status during their appointment, and failure to comply would be a criminal offence (punishable by a fine).
Identity verification regime
Identity verification will be possible either via Companies House’s own system (using facial recognition technology) or by an Authorised Corporate Service Provider (“ACSP”) that completes all necessary identity checks and confirms this in a declaration to Companies House.
ACSPs have two functions:
- Identity verification; and
- Undertaking filings at Companies House.
An ACSP is an intermediary or agent that a company uses to complete its filings at Companies House, and will most commonly be an accountant or legal service provider. In order for the corporate service provider to be issued with their authorised status on behalf of a company, they must first be authorised to deliver documents by Companies House.
Email address and registered address
All companies will be required to provide an ‘appropriate’ email address to Companies House. In this context, ‘appropriate’ means that if Companies House were to send an email to that address, it could reasonably be expected to come to the attention of someone acting on behalf of the company. While this will not be public information, failure to do so will constitute an offence. Companies will also need to ensure their registered office is at an ‘appropriate address’, meaning the address is within the United Kingdom.
Companies will need to ensure their statutory registers contain shareholders’ full names (i.e. both their forename and their surname, not just initials), and a service address for each. Where the shareholder is a nominee for another person or entity, this will also have to be noted in the statutory registers, alongside details of the beneficial owner’s name and address. However, the Bill does remove the need for companies to maintain their own register of directors (including register of directors’ residential addresses) or secretaries.
Incorporation and Confirmation Statements
Incorporating a company will now involve the subscribers confirming they have not been disqualified as directors and that the company is being formed for a lawful purpose. The first directors will also have to verify their identity.
After the legislation comes into force, a company’s first confirmation statement needs to include a full shareholder list, the company’s registered email address, and confirmation that all its directors have had their identities verified. Each subsequent Confirmation Statement will also include a statement confirming that the company has a lawful purpose and its principal business activity remains the same.
The Bill introduces a new strict liability offence for corporates: failure to prevent fraud. This is akin to a Bribery Act offence and will be punishable by an unlimited fine. This offence will apply to all companies, regardless of their size (note that originally it was only going to apply to ‘large companies’).
A company (or other body falling within scope) will be liable where a specified fraud offence (which will be detailed in secondary legislation) is committed by an employee or agent, for the organisation’s benefit, and the company did not have reasonable fraud prevention procedures in place. It will not need to be demonstrated that the company management knew about or ordered the fraud.
Pursuant to the Bill (as proposed), if a senior manager of a company, acting within the actual or apparent scope of their authority, commits or attempts to commit one of the specified economic crime offences, the organisation will also be guilty of the offence. These offences are wider in scope that the list of offences for failure to prevent fraud, as they include bribery, money laundering, tax offences, fraud, some FSMA offences, the market manipulation offences, and AML and sanctions offences.
Other updates in the Bill
The Bill will also make some amendments to the law relating to Limited Partnerships (LPs) in order to tackle their misuse and modernise the approach to their governance. These amendments will tighten registration requirements, require LPs to have their registered office in the UK, increase transparency requirements, and enable Companies House to deregister dissolved LPs.
Recovery of suspected criminal cryptoassets
The Bill also affords greater powers to law enforcement in connection with the recovery of cryptoassets that are the proceeds of crime or connected with unlawful activity (it does so by amending certain provisions under the Proceeds of Crime Act 2002).
Anti-money laundering powers
The Bill will bolster anti-money laundering protection by enabling businesses to share information for the purposes of preventing and investigating economic crime, without incurring liability for breaches of confidentiality.
Short term practical tips
So what should you consider doing in the short term?
- Start the process of collecting the required information as early as possible, including shareholders’ full names and addresses.
- Make sure you have created a registered email address for your company.
- Check the group structure of any corporate directors, ensuring that they are corporate entities with legal personalities and with natural person directors who can have their identity verified.
- Alert existing and any proposed new directors and PSCs to the new identity verification requirements.
- Be aware of the new ‘failure to prevent offence’ and what it means for your internal policies and staff training requirements.
This short guide has been prepared for directors and owners of private limited companies for information purposes only, in particular to provide a summary of key updates relating to the Economic Crime and Corporate Transparency Bill. This guide does not constitute legal advice and should not be relied upon. For specific queries and any further information, please contact Ailsa Clelland for advice relating to your particular circumstances.