Introduction
On 26 October 2023 the Economic Crime and Corporate Transparency Act 2023 (ECCT Act) received Royal Assent. Through a broad range of measures, it aims to strengthen the UK’s response to economic crime, prevent abuse of the UK economy, and support enterprise.
The ECCT Act forms part of the same legislative package as the Economic Crime (Transparency and Enforcement) Act 2022, which was fast-tracked through Parliament last year. Amongst other things, this Act established the Register of Overseas Entities (ROE).
The ECCT Act contains a number of different measures to prevent and tackle economic crime, including the recovery of crypto assets and amendments to the ROE regime. However, this briefing note focuses on the reform of Companies House, key changes to the legal framework for limited partnerships, and new measures to make it easier to hold businesses to account for economic crimes, including the new failure to prevent fraud offence.
Part 1: Reforms to Companies House – delivering "the biggest upgrade to Companies House for 170 years"
How will Companies House change?
Companies House (the UK Government agency which manages the UK’s corporate register) will now play a much more significant role in handling economic crime. This will be broadly achieved through two key new measures.
Firstly, it will become an "active gatekeeper" over both the information it holds and the information submitted to it, to meet its new statutory objective to promote the integrity of the register.
Secondly, new measures will ensure greater transparency of UK corporate entities both in relation to the information required to be provided and held at Companies House, and new identity verification requirements.
The reforms to Companies House have been on the horizon for several years. The Government first consulted on options to enhance the role of Companies House and increase the transparency of UK corporate entities in 2019, and there have been a number of related consultations since.
What will be the new role of Companies House?
Four new statutory objectives have been included in the Companies Act 2006 to enable Companies House to promote the integrity of the records it holds. Companies House must seek to promote these objectives when carrying out its functions. These include ensuring that information contained at Companies House is both accurate and complete, as well as preventing companies from carrying out unlawful activities or facilitating unlawful activities by others.
To enable it to meet these objectives, Companies House has been given several new powers, which include the ability to reject documents which contain discrepancies. This will allow Companies House to refuse to accept a document if it is inconsistent with other information held by, or available to, Companies House, and, in light of the inconsistency, Companies House has reasonable grounds to doubt that its content complies with any requirement. A document that is refused on this basis will be treated as not having been delivered to Companies House, which is a marked shift from current practice.
Companies House will also have new investigative powers and will be able to require information to be provided to it to enable it to promote the integrity of the registers.
This power will cover any information submitted to Companies House, together with all information already held on the register. A Government factsheet published alongside the then ECCT Bill noted that Companies House "will exercise the power with discretion, using a risk based approach" given the volume of information submitted, and held, on the register.
Finally, Companies House will have a new role to carry out an analysis of information held by Companies House for the purposes of preventing or detecting crime.
This analysis will also include information provided by external sources (for example, law enforcement bodies such as the Serious Fraud Office). The ECCT Act specifically allows information to be shared with Companies House for the purposes of enabling the exercise of any of Companies House’s functions.
Companies House will also be able to externally disclose information it holds in connection with the exercise of its functions. This will include law enforcement bodies including the Serious Fraud Office and the Insolvency Service, together with supervisory bodies such as His Majesty's Revenue and Customs, and the Financial Conduct Authority.
New identity verification measures
New mandatory identification requirements are being introduced for all new and existing directors, persons with significant control (PSC), and those delivering documents on behalf of entities. These are designed to increase transparency and prevent the appointment of fictitious directors.
There will be two ways to verify an individual:
- directly via a new process at Companies House (which is currently still under development); or
- indirectly through a verification statement issued by an authorised corporate service provider (ACSP) which is also an intermediary (such as a law firm or accountancy firm) registered with a supervisory body for anti-money laundering purposes.
All new directors will need to have their identity verified before they can act as a director of a UK company (and it will be an offence not to do so). If a company appoints an unverified director, the company and all its directors may be liable for a fine.
There will be transitional arrangements in place to ensure that all existing directors are verified as well.
In addition, the verification requirements will also apply to:
- PSCs (broadly, individuals who hold 25% or more of the voting rights or shares in a company or who otherwise have significant control of it); and
- relevant legal entities (RLEs) (broadly, UK and certain non-UK incorporated legal entities who hold 25% or more of the voting rights or shares in a company or who otherwise have significant control of it), who will need to have at least one officer (e.g. a director) verified.
In a Government factsheet published alongside the then ECCT Bill, it is noted that the Government expects identity verification to be a one-off requirement for individuals, who will then be “verified” for all roles (e.g. director, PSC, or officer of an RLE) that require verification in relation to any company. Despite this, there may be circumstances when re-verification is required, and these will be set out in secondary legislation.
How to prepare for new identity verification requirements
Companies may wish at this stage to identify who will fall within scope of the new identity verification requirements.
The initial identify verification requirements during the transitional period may be onerous, particularly for large organisations, although we will have a clearer idea of the process once further details of the new system is available from Companies House.
A 2022 impact assessment estimated that over seven million individuals will fall within the scope of the new requirement when it is brought into force. Although there will be a transitional period to enable the required verifications, it is expected that there may initially be significant pressure on the new system given the number that will need to be processed.
What other measures will be introduced to reform Companies House?
The ECCT Act also introduces other measures that aim to modernise Companies House and assist with its new expanded role and powers, including:
- Requirement for all registered office addresses to be at an "appropriate address". Each company must ensure its registered office address is one at which a physical document delivery would be expected to come to the attention of a person acting on behalf of the company and be acknowledged. This means that, for example, a PO box address will not be appropriate as a registered office address.
- Requirement for companies to have a registered email address. Each company must provide an appropriate email address either on incorporation or, for existing companies, at the time of their first confirmation statement after the relevant provision comes into force. An appropriate email address is one at which, in the ordinary course of events, emails sent by Companies House would be expected to come to the attention of a person acting on behalf of the company. The registered email address will not be made public.
- A person disqualified under the "directors disqualification legislation" cannot be a director of a company. A person who falls within scope of the relevant directors disqualification legislation listed in the ECCT Act (for example, persons subject to bankruptcy restriction orders) will not be able to act or be appointed as a director of a company.
- Abolition of the requirement to maintain certain company registers. A company will no longer need to keep its own register of directors, register of directors’ residential addresses, register of secretaries, or PSC register. The only register that a company will need to maintain is its register of members.
- Requirement for existing companies to provide one-off membership information with confirmation statement. The ECCT Act will require that companies include fuller information about their members (for example, an individual should have their full forename and surname included in the register of members, and not simply A Smith). Once this provision is in force, all existing companies will need to submit a one-off membership information statement with their confirmation statement confirming, for non-trading companies, the name and number and class of shares held by each member. For traded companies this requirement will only cover those members holding at least 5% of the issued shares of any class of the company.
- Requirement for micro-entities to file accounts. Micro-entities, previously exempt from the requirement to file annual accounts, will be required to do so.
New offences relating to the filing of false statements
In order to maintain the integrity of the register, there are also new false statement offences. This includes an offence for delivering (or causing to be delivered) a document or making a statement to Companies House that is materially misleading, false, or deceptive without a reasonable excuse. It is an aggravated offence under the ECCT Act to do so knowingly.
How will these reforms apply to Limited Liability Partnerships (LLPs)?
A Government factsheet has noted that, to the extent that the ECCT Act does not already amend the relevant legislation applicable to LLPs, secondary legislation will be passed in due course to ensure that LLPs fall within scope of these reforms.
For example, all members of LLPs will be required to have their identities verified – if a member is a corporate entity, all directors (or equivalents) of that entity will need to have their identities verified. Any PSCs of the LLP will need to be verified as well.
When will these new measures come into effect?
None of these measures are currently in force and it is unclear when they will come into effect. Secondary legislation and guidance will be required as well as the introduction of the new verification system by Companies House.
It is likely that these measures will come into force in stages. A recent Companies House blog post noted that certain measures, for example the requirement to provide an appropriate registered office address and registered email address, together with the new powers for Companies House to query information, could be introduced in "early 2024".
What should companies do now in anticipation of these additional measures?
Companies could identify at this stage an appropriate email address to be supplied to Companies House.
We expect that most companies will already have a registered office address that meets the new requirements under the ECCT Act, but if that is not the case, then companies will need to identify a new appropriate registered office address.
The one-off membership information statement may be onerous for some companies, particularly for those with a large shareholder base, and companies may wish to consider at this stage the shareholder information that will need to be submitted to Companies House.
Part 2: Reforms to the legal framework for limited partnerships (LPs)
Why are these reforms needed?
The measures contained in the ECCT Act in relation to LPs are long-awaited. The Government first consulted on the reform of LP law in 2018, to target both the risk of misuse of LPs and to modernise the legal framework, and published its response later that year.
The ECCT Act will introduce broadly two key areas of reform:
- greater registration and transparency requirements for all LPs; and
- a clearer process in relation to the dissolution of LPs and new powers for Companies House to remove dissolved LPs from the register so it is a more accurate record.
In addition, the broader Companies House reforms noted in Part 1 of this briefing note will also apply to LPs – for example, the expanded role and powers of Companies House will equally apply to documents and information submitted on behalf of LPs.
Enhanced registration and transparency requirements
Increased registration requirements
LPs will need to provide more detailed information to Companies House, including enhanced information in relation to each general and limited partner, and details of the partnership business, by applying the UK Standard Industrial Classification code (UK SIC Code).
LPs will also need to have a registered office address. This will need to be an "appropriate address" in similar terms to companies (as detailed in Part 1) and this address must be in the part of the UK where the LP is registered.
The registered office address must also be either the principal place of business of the LP, the usual residential address of an individual general partner (or the registered or principal office address of a corporate general partner), or the address of an ACSP acting for the LP. In other words, LPs must maintain a connection to the UK and there must be a UK address through which Companies House (and others) can communicate with the LP.
LPs will also need to provide a registered email address for Companies House notifications in similar terms to the new requirement for companies, as detailed in Part 1.
The new requirements will apply on registration of a new LP. For existing LPs there will be a transitional period of six months from the date that the relevant provisions come into effect, for the general partner to provide additional details to Companies House.
Restrictions on acting as a general partner
In a shift from the current arrangement whereby any person or entity may be appointed as a general partner of an LP, under the ECCT Act, a general partner cannot be disqualified under the "directors disqualification legislation" (as detailed in Part 1 above). There will also be a new duty for the general partners to take "any steps that are necessary" to ensure that anyone disqualified ceases to be a general partner.
A general partner will also not be able to take part in the management of the LPs business until notice of their appointment has been provided to Companies House.
New requirement to provide details of a "registered officer" and "named contact"
For a corporate general partner, there will be a new requirement to provide Companies House with details of a "registered officer" who is an individual, who is one of its managing officers, and whose identify has been verified under the new verification requirements.
If a general partner has a corporate managing officer, then a "named contact" for that corporate managing officer must be provided (who must be an individual and a managing officer of the corporate managing officer).
These provisions will make it easier for Companies House to contact an individual person in relation to a corporate general partner.
New requirement to deliver an annual confirmation statement
The ECCT Act has introduced a requirement for the general partners of all LPs to deliver an annual confirmation statement to Companies House. This requirement already applies to Scottish LPs.
Does the ECCT Act extend the beneficial ownership requirements to LPs?
No, only Scottish LPs are subject to the PSC regime (to reflect that Scottish LPs have a separate legal personality). However, the verification requirements for PSCs and RLEs of companies discussed in Part 1 will also apply to Scottish LPs.
LPs can no longer register or file directly at Companies House
Most filings in relation to an LP will now need to be made by an ACSP, and cannot be made by the LP, or any other person directly.
This requirement has been introduced so that there’s "an extra layer of checking" on the LP: an ACSP will need to carry out its necessary anti-money laundering/KYC verification requirements before they can act on the LP’s behalf and file the necessary documentation.
It is a very significant change and the extent to which ACSPs will in practice be willing to undertake filings on behalf of LPs remains to be seen.
At the time that verification requirements were introduced in relation to the ROE, the Law Society issued guidance noting that solicitors should “approach verification with diligence and caution”. It will be interesting to see whether similar guidance is provided in relation to the new ACSP filing requirements.
What should LPs do now in anticipation of these measures coming into force?
There are a number of steps that LPs could take at this stage in anticipation of these measures coming into force, including:
- identifying an appropriate email address and, if not already in place, an appropriate registered office address;
- identifying the relevant UK SIC Code for the LPs business; and
- identifying a “registered officer” for a corporate general partner and a “named contact” for any corporate managing officer of a general partner.
New measures relating to the dissolution and winding up of LPs
In relation to the dissolution and winding up of LPs, the ECCT Act generally updates and modernises existing provisions.
This includes a new provision to allow the Secretary of State (and Scottish Ministers, in relation to Scottish LPs) to petition the court to wind up an LP when this is "expedient in the public interest".
The ECCT Act will also allow the court to make any order, including to wind up, where an LP is dissolved and it appears to the court that there has been a failure to wind up the LP.
If Companies House has reasonable cause to believe that an LP has been dissolved, it may publish a notice in the Gazette stating that fact upon which, subject to following the relevant statutory process, the LP will be dissolved (if it was not already). The explanatory notes to the then ECCT Bill note that there are thousands of LPs on the register which Companies House either knows, or suspects, are inactive and this provision will allow Companies House to take steps to clear up the register.
If an LP is dissolved, the general partner must notify Companies House of the dissolution within 14 days (or, if there is no general partner, then a limited partner must do so instead). Companies House then has a duty to remove the LP from the index of names and to include a note in the register that the LP has been removed due to its dissolution or deregistration.
New provisions will also be introduced to provide that Companies House no longer needs to make any information relating to an LP available for public inspection after 20 years (beginning with the date on which the LP is dissolved or de-registered). Companies House can also move the records of the LP to the Public Records Office two years after it is dissolved or de-registered.
This should ensure that only active LPs remain on the register and provide a more reliable and transparent record.
Part 3: New measures to hold organisations accountable for economic crimes
The Government introduced two new measures into the then ECCT Bill earlier this year to make it easier to hold organisations to account for economic crimes.
The first is a new failure to prevent fraud offence and the second is a reform to the identification doctrine for economic crimes.
New failure to prevent fraud offence
What is the new offence?
A new failure to prevent fraud offence has been included in the ECCT Act. An organisation falling within scope of the new offence will be guilty of an offence if a person associated with it commits a fraud offence intending to benefit (whether directly or indirectly):
- the organisation itself; or
- any person to whom the associated person provides services to on behalf of the organisation (for example, customers of the organisation).
It is a strict liability offence: there is no requirement to show that the directors of a company had ordered, or knew, about the fraud. This is to discourage organisations from turning a blind eye to fraud offences that may benefit the organisation.
Which organisations will fall within scope of the new offence?
Under the ECCT Act any large organisation will fall within scope of the new offence. Broadly, this means in the year that the fraud was committed, an organisation will need to meet two or more of the below criteria:
- a turnover of more than £36 million;
- a balance sheet total of more than £18 million; and /or
- more than 250 employees.
If an organisation is part of a group, then the group in aggregate will be assessed to see if it meets two or more of these thresholds. If the group is within scope, its parent undertaking can be liable for the new offence.
The new offence will also apply to partnerships, charities, and other not-for profit organisations and incorporated public bodies.
What is the available defence?
There is a defence if the relevant organisation can show that, at the time that the fraud offence was committed, it had in place reasonable prevention procedures.
If there are no prevention procedures in place, the organisation would need to demonstrate that the risk of fraud was so low that it would be unreasonable to expect the organisation to have any prevention procedures in place.
The Government is hoping that the new offence, and available defence, will drive a shift in corporate culture to encourage more organisations to implement, or improve, their fraud prevention policies.
The Government will issue guidance about the types of reasonable prevention procedures that relevant bodies can put in place. This guidance has not yet been published.
When will the new offence come into force?
The new offence will not be brought into force until the Government has issued statutory guidance in relation to the procedures that organisations can put in place to prevent persons associated with them from committing fraud offences.
What should organisations do now in anticipation of the new offence?
Organisations within scope of the new offence should take steps to review their current policies and, once the statutory guidance has been published, ensure that their own prevention procedures meet the recommendations contained in that guidance.
Reform to the identification principle for economic crime offences
The ECCT Act has also reformed the common law identification doctrine for economic crime offences and put this on a statutory footing.
Currently, under the common law, an economic crime offence must be committed by the "directing mind and will" of an entity to attribute that same offence to the entity itself. While that is the case, the governance and management of entities has become more complex over time, and a Government factsheet published at the time of the ECCT Bill noted that it is often difficult to determine who "really pulls the strings and directs the whole business function".
The ECCT Act has therefore reformed and expanded the identification principle to cover a senior manager of the relevant entity.
A senior manager plays a significant role in decision-making in relation to how all , or a substantial part, of the activities of an organisation are managed or organised (or who plays a significant role in the actual managing or organisation of these activities).
The ECCT Act also provides that an organisation will be liable where a senior manager has acted within the "actual or apparent scope of their authority" and committed a specified economic crime offence – the previous so-called "directing mind and will test" has been removed.
By broadening the scope of this offence, it should be easier to hold organisations to account and reflect modern corporate management structures.
Whilst the identification doctrine will only apply to specified economic offences, the Government is committed to introduce this reform to apply to all criminal offences (although these broader reforms will not form part of the ECCT Act).
When will this provision come into force?
The new identification doctrine measures will come into force on 26 December 2023.
What are the next steps?
The measures in the ECCT Act are broad and, once implemented in full, will introduce significant changes relevant to all UK entities. While that is the case, the provisions implement long-awaited measures, with increased clarity, that have been "on the horizon" for a number of years .
It looks likely that the provisions will be introduced in a broadly piece-meal fashion over time, and we will provide further updates once we have a clearer indication of the timetable for implementation, together with the relevant guidance and secondary legislation.
In the meantime, if you have any questions in relation to the ECCT Act, please contact Christina Sinclair, Tom Swan or the Regulatory Risk and Compliance group.