Tackling economic crime and improving transparency in UK companies

Answer

This article was originally published on 5 February 2024.

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) received royal assent on 26 October 2023 and introduces a wide variety of reforms to tackle economic crime and improve the transparency of UK corporate entities.

These reforms will come into force in a phased way and it will be important to keep sight of the implementation timetable, government guidance and Companies House blog.

The key focuses of reform are:

• introducing a new failure to prevent fraud offence;
• reforming corporate criminal liability laws to hold corporations liable in their own right for economic crime;
• changing the way in which UK companies and LLPs manage themselves;
• modernising the law governing limited partnerships (including Scottish limited partnerships); and
• giving Companies House much greater powers to query and reject information and cross reference and share information with other government/public bodies to identify discrepancies and economic crime.

Failure to prevent fraud offence

Under this offence, large organisations will be criminally liable if an employee or third party acting on its behalf commits external fraud (not fraud against the firm itself).

Large organisations are companies and partnerships that meet two of the following three criteria:

• Turnover: more than £36 million.
• Balance sheet total: more than £18 million.
• Employees: more than 250.

The types of fraud covered by this offence are very broad and so firms could be automatically liable for greenwashing offences and false statements in marketing materials. If convicted, the organisation is liable to an unlimited fine.

However, it will be a complete defence for the firm to show it had reasonable preventative procedures, or that it was reasonable not to have them, in place at the time of the offence.

Extension of corporate liability

This offence came into force on 26 December 2023 and extended corporate liability to make it easier for law enforcement to prosecute economic crimes committed by senior managers. Specifically, companies could face prosecution for money laundering, bribery, tax evasion, sanctions violations and terrorist financing offences committed by senior managers.

Unlike the failure to prevent fraud offence, this applies to all commercial organisations, irrespective of size, and there’s no statutory defence to rely on. Organisations will have to rely on their compliance programmes to prevent such incidents from occurring or using them to mitigate penalties.

Companies House and company law changes

The ECCTA aims to broaden the powers of Companies House and the information it must receive from registered entities.

Directors

All new and existing directors will have to verify their identity, using photo ID, with Companies House. The registration of a new director will not be accepted unless their identity has been verified first and an individual who isn’t appropriately verified or notified to Companies House must not act as a director of a company. It will be a criminal offence to do so. However, a breach will not affect the validity of the person’s acts as a director.

Corporate directors (being a corporate entity registered as a director of a UK company) will no longer be allowed unless:

• the corporate director is incorporated in the UK and has only natural persons (whose identities have been separately verified) on its own board;
• there’s at least one natural director sitting alongside the corporate director (which mirrors existing law).

Once this reform comes into force, existing companies with corporate directors will have 12 months to comply.

Persons with significant control

Every existing and new ‘person with significant control’ (PSC) will also have to verify their identity with Companies House. For ‘relevant legal entities’ (RLE), this will mean verifying the identity of an individual who’s a relevant officer of that RLE.

Companies House will collect and display more information from companies claiming an exemption from the requirement to provide details of their PSCs. For example, if the PSC is a RLE listed on a regulated market, the name of the market on which it is listed.

Shareholders will not need to verify their identity. However, private companies (and certain traded companies) will need to provide a one-off shareholders list, which must be annually updated through their confirmation statements.

Presenters

Anyone making filings on behalf of a UK entity must first be verified or authorised by Companies House. This includes company secretaries, formation agents and other third-party suppliers (eg, law and accounting firms).

Company records

Companies will no longer need to keep their own registers of directors, directors' residential addresses, secretaries, and PSCs (but will need to notify Companies House of any related changes). The only register a company will need to maintain is a register of members (ie, shareholders).

A company must have a registered office address which is ‘appropriate’, meaning somewhere that documents delivered to it would be expected to come to the attention of a person acting on behalf of the company and can be recorded by obtaining an acknowledgement. PO Boxes will not be appropriate.

Further, all companies will need to maintain an ‘appropriate’ e-mail address where messages can reach a person acting on behalf of the company.  This will be used by Companies House and not made public.

Accounts

Accounts filed at Companies House will need to be fully tagged in iXBRL digital format. Each financial element within the accounts will need to be tagged (ie, labelled) appropriately. For example, the net assets figure should be labelled using the net assets tag. These tags will be machine readable, making the information easier to interrogate, compare and check.

Filing options for small and micro companies will be simplified and those companies, together with dormant companies, will need to file a statement confirming they’re eligible for their accounting/filing treatment.

Sanctions for non-compliance

These will be varied but, in certain circumstances, will include criminal liability as well as civil penalties. These can attach to relevant individuals, as well as to the UK entity involved.

Timeline for implementation of ECCTA

A detailed implementation schedule hasn’t been published by the UK government. Instead, announcements are being made as and when various of the reforms are being addressed. 

For instance, Companies House has confirmed that the following reforms will come into play on 4 March 2024:

• Greater powers for Companies House to reject, query and remove information on its register.
• Stronger checks by Companies House on company names.
• New rules for registered office addresses and a new requirement for all companies to supply a registered email address.
• Requirement for subscribers to confirm they’re forming any new company for a lawful purpose (existing companies will need to confirm annually that their future activities will be lawful).
• Ability for Companies House to annotate the register to inform users of potential issues with the information that’s been supplied.
• Data sharing with other government departments and law enforcement agencies.

Lené Bray is a trainee solicitor at TLT LLP.