How the new Economic Crime and Corporate Transparency Bill will affect you

The UK’s Economic Crime and Corporate Transparency Bill will soon become law. Angled towards clamping down on corporate fraud and enhancing corporate transparency, the legislation has several crucial aspects that demand the attention of finance professionals.

The bill has received Royal Assent and will come into force in 2024, after peers dropped their insistence that a new ‘failure to prevent fraud’ offence should apply to small businesses. It is the second element of a package of measures aimed at preventing the abuse of corporate structures. The first — the similarly named Economic Crime (Transparency and Enforcement) Act 2022 — made important changes to the UK’s sanctions regime and created a register of overseas entities at Companies House.

The new law — which runs to 250 pages — contains sweeping reforms to corporate criminal liability that make it easier to prosecute companies for the actions of their staff and agents. It also introduces new registration and transparency requirements for businesses and limited partnerships, and expands the powers of Companies House; moving it from being a passive recipient of information to an active gatekeeper over company creation.

Company directors and finance professionals will therefore need to get ahead of the changes, Nikhil Manek, head of anti-financial crime (internally) for KPMG UK, explains.

“My advice to finance directors is to get your businesses ready for the new identity verification process for directors, persons of significant control and persons submitting documents to Companies House,” says Manek. “Don’t wait until the legislation and guidance has been issued because it will be too late.”

Filing requirements

In the single biggest change to the role of Companies House, or the UK Registrar of Companies, since it was created in 1844, it will be given the power to check, remove or decline information submitted to, or already on, the companies register.

The registrar will also have power to proactively pass information to other parties, such as the electoral register or anti-money laundering (AML) supervisors, under strict data protection provisions.

“It will be able to query information filed and ask for supporting documentation should it believe the information is incorrect or inconsistent with other information about that entity or individual, and to reject such information if adequate documentation is not provided,” says Claire Thomson, an associate director at Grant Thornton.

For small businesses, one of the biggest impacts is going to be around the disclosure requirements. Small companies and micro-enterprises will no longer be able to file abridged accounts, but will have to file a profit and loss account.

Under current legislation, there are possible exemptions from filing certain elements of the statutory financial statements, meaning there is less publicly available financial information on the register.

However, the bill will remove these filing options, meaning that small and micro companies will publish the same level of financial information as larger companies. Financial statements will also need to be submitted in Inline Extensible Business Reporting Language (iXBRL) format.

“Mandatory iXBRL filing will allow Companies House to better analyse data provided by entities and increase the accessibility of the information held. The file format will be similar, but not identical, to what many companies will currently attach to their CT600 tax returns,” Thomson adds.

Mandatory identity verification

Key to Companies House reforms is the introduction of mandatory identity verification for all new and existing registered company directors, people with significant control, and others associated with those entities, such as their agents.

In a significant change to the Companies Act 2006’s current provisions, directors will not be considered legally appointed unless their ID is verified, and they will be unable to act in that capacity or make filings at Companies House.

ID verification can be obtained either by uploading approved ID documents, or through an ‘authorised corporate service provider’ – which are likely to be intermediaries such as accountants, legal advisers, and company formation agents.

All UK companies will also need to maintain their own register of members and maintain an appropriate email address – one that could reasonably be expected to come to the attention of a person acting on behalf of the company – and ensure that its registered office is an ‘appropriate’ address. Thomson advises finance directors to undertake a “clean sweep” to make sure everything at Companies House is correct in the build-up to the reforms becoming law.

“Companies will need to make sure their Companies House records are up to date. It is easy to forget to submit a directors’ resignation form, for instance,” Thomson explains.

Individuals who fail to comply with the verification requirements could face criminal proceedings and civil penalties issued by the registrar against offences under the Companies Act. Companies House may also decline to register documents.

“These new powers, coupled with the increased powers given to the registrar and increased filing requirements, are likely to lead to a significant number of fines,” Kathryn Westmore, who co-heads the economic crime group at the Royal United Services Institute, says.

Corporate liability

The bill will also make it easier to prosecute companies for economic crime. Key to this is the reforming of the ‘identification principle’ - the requirement to prove that individuals who constitute the ‘directing mind and will’ of the company knew about the wrongdoing – to allow companies to be convicted for a range of economic crimes based on the actions of their senior managers.

The bill introduces a test for who constitutes a ‘senior manager’ of a company based on the individual’s role and responsibility. Senior managers are defined as an individual with a “significant role” in deciding how a substantial part of the company is run.

John Bedford, a partner at law firm Dechert LLP, said the scope of the test has been expanded after the Serious Fraud Office (SFO) and other law enforcers have struggled to prosecute large corporates because of the high bar imposed by the existing test.

“The point of reforming the identification principle is to make it easier to prosecute corporations. By focusing on senior managers rather than the directing mind and will, the test is clearly defined,” Bedford said.

For those individuals who fall within the scope of senior managers, which is likely to include director roles and roles such as CEO and CFO, “any involvement on their part in the offending could well trigger a corporate prosecution”, Kathryn Westmore adds. “Ultimately, this will significantly broaden the scope of the companies that can be charged with corporate criminality.”

The bill also introduces a new corporate criminal offence of ‘failing to prevent fraud’, which expands on similar offences for big companies failing to prevent bribery by their employees or agents and failing to prevent tax evasion.

After months of wrangling between the House of Lords and the government over the scope of the offence, with peers seeking to widen the number of companies caught to include small businesses, they finally accepted government plans that stipulate the ‘failure to prevent fraud’ rules apply only where they meet two of three criteria:
250 or more employees
£36m+ in sales
£18m+ in assets

The offence will operate on a strict liability basis, meaning prosecutors wouldn’t have to prove the company intended to commit the crime, or even knew about it. However, companies can avoid liability if they can prove ‘reasonable measures’ were in place to deter the offence.
These are still under development, but will be closely aligned to existing guidance on the other ‘failure to prevent’ offences.

“Ultimately, companies will need to carry out a risk assessment and ensure that there are appropriate controls in place to mitigate the risks identified.

“This will include training, the tone from the top, communications, ongoing monitoring controls and due diligence controls,” Westmore concludes.

The main aims of Companies House Reform

• Broadening the registrar’s powers so that it becomes a more active gatekeeper over company creation and custodian of more reliable data.
• Introducing identity verification requirements for all new and existing registered company directors, people with significant control, and those delivering documents to the registrar. 
• Providing the registrar with more effective investigation and enforcement powers and introducing better cross-checking with other public and private sector bodies.
• Tackling the abuse of limited partnerships (including Scottish limited partnerships), by strengthening transparency requirements and enabling them to be deregistered.

Failure to prevent fraud: What offences are in its scope?

The ‘failure to prevent fraud’ offence captures the fraud and false accounting offences most likely to be relevant to corporations:

• Fraud by false representation
• Fraud by failing to disclose information
• Fraud by abuse of position
• Obtaining services dishonestly
• Participation in a fraudulent business
• False statements by company directors
• False accounting
• Fraudulent trading
• Cheating the public revenue

The offence list can be updated through secondary legislation, although limited to economic crime.