Compliance
Economic Crime and Corporate Transparency Act 2023
Author
Barbora Korcova
Author
Barbora Korcova
January 24, 2024
Compliance
Corporate Law
Given that the UK is one of the largest and most open economies globally, it presents an appealing environment to start a business. However, this also indicates that UK is exposed to a higher risk of abuse of its open economy and corporate structures through activities such as fraud and money laundering.
According to the House of Commons’ Justice Committee Report on Fraud and the Justice System, the threat of fraud is constantly evolving and accounts for more than 40% of all UK crime, but only 0.75% of the reported cases lead to prosecution.
The Economic Crime and Corporate Transparency Act 2023 (ECCT) received Royal Assent on 26 October 2023 in an effort to address fraud, mitigate its impacts and strengthen the corporate liability regime. The primary objectives of the ECCT include enhancing corporate transparency and addressing economic crime. Additionally, it broadens the corporate liability under the Economic Crime Transparency and Enforcement Act 2022 (ECTEA) which was fast-tracked through Parliament to promptly address the Russian invasion of Ukraine and allow the Government to move quickly when imposing sanctions and target foreign criminals utilising UK property for money laundering.
KEY CHANGES INTRODUCED
ECCT has introduced changes that are in line with the following objectives:
- to enhance the UK’s response to economic crime,
- to prevent bad actors from abusing the UK’s economy, and
- to grant additional powers to Companies House to improve the reliability of its data.
TIMINGS
It is important to emphasise at the outset that some of these changes were not implemented immediately, but they will be implemented in stages as they require further secondary legislation and government guidance before they can come into force.
It is anticipated that most provisions will come into force within the course of 2024. The Government will issue guidance before these changes come into effect. It is possible to monitor updates here.
1. COMPANIES HOUSE REFORM
The Government has initiated the biggest changes to Companies House in over a century, resulting in substantial amendments to the Companies Act 2006. The ECCT will strengthen and expand the powers of Registrar of Companies, aiming to increase the accuracy of the information maintained by the Registrar and to enable Companies House to effectively prevent the misuse of corporate entities. At the moment, the Registrar’s role is practically to register company information and make it available for public inspection. Although Part 35 of the Companies Act 2006 grants the Registrar some administrative powers, they are insufficient to ensure the integrity and accuracy of information. Most significant changes include:
- Power to require additional information. Companies House can demand additional information related to the material companies file with Companies House where it identifies submitted information as potentially fraudulent or suspicious. This includes power to reject and, in some cases, remove inaccurate information. Non-compliance with requests for more information may result in consequences such as financial penalty or prosecution.
- Enhanced scrutiny of company names, especially those with a potential to mislead public.
- Registered office addresses. Companies are required to always maintain an ‘appropriate address’ as their registered address. An address is considered appropriate, if a document addressed to the company and delivered there, would be expected to come to the attention of a person acting on behalf of the company and the delivery of this document is capable of being recorded by the obtaining of an acknowledgement of delivery. Companies will not be able to use a PO BOX as their registered office address anymore. If Companies House deems the registered address inappropriate, they might change it to the ‘Companies House default address’ in Cardiff. Failure to provide an appropriate address within 28 days could lead to an initiation of the process to strike the company off the register.
- Registered email address. Companies now have to provide an ‘appropriate email address’ to Companies House.
- Identity verification. Both new and existing registered company directors, People with Significant Control (PSCs) and those filing on behalf of companies, must undergo identity verification with Companies House, most likely through a digital service put in place by Companies House (otherwise they cannot act for the company). Not complying with this requirement will be treated as a criminal offence punishable by a fine. These measures will require secondary legislation and government guidance.
- Transition to Software-only filings. Companies House will gradually shift to accepting annual accounts exclusively in a digital format. The transition will be phased over the next 2-3 years, depending on various account types based on a company’s size and trading status.
2. NEW CRIMINAL OFFENCES
- ‘Failure to prevent fraud’ offence
The ECCT has introduced an offence holding large organisations liable in case they fail to prevent their staff or other ‘associated persons’ (such as an agent, subsidiary or a person that performs services on behalf of the organisation) from committing fraud intended to benefit the organisation or any person to whom the ‘associated person’ provides services. To be considered a large organisation, a company must meet at least two of the following criteria: turnover of £36 million or more, balance sheet assets of £18 million or more and 250 employees or more. The ECCT provides a defence to an organisation if it can demonstrate (at the time the fraud occurred) that it had ‘reasonable procedures’ in place to prevent such fraud. Large organisations should review and update their anti-fraud measures to ensure compliance with this requirement. The Government is expected to publish guidance in the first quarter of 2024.
- Expansion of the identification doctrine
Previously, a company could only be held criminally liable if the commission of the offence could be attributed to a natural person that was identified as a ‘directing mind and will’ of the company. The ECCT has broadened the scope of corporate criminal liability to encompass ‘senior managers’ rather than just ‘directing mind and will’ of the company. For now, this doctrine applies only to the specific economic crimes set out in the ECCT. The Government intends to extend its application to all criminal offences in the future. Under the ECCT, responsibility can be attributed to a company, if its ‘senior manager’ commits a relevant offence while acting within the actual or apparent scope of their authority or attempts to do so. This provision came into force on 26 December 2023.
Note: The Criminal Justice Bill 2023-24, presently at the Committee Stage in Parliament, is likely to extend corporate criminal liability to all types of crime, if it is passed.
3. LIMITED PARTNERSHIP REFORM
Prevention of abuse of limited partnerships (LPs). Upon implementation, these measures mandate LPs to disclose partners’ names, date of birth and residential addresses. General partners must undergo identity verification, provide a registered office address in the UK, provide a standard industrial classification code and file an annual confirmation statement. The submission of LP information must be conducted through an authorised agent registered with Companies House to ensure data is trustworthy. The Government is expected to publish guidance.
4. MONEY LAUNDERING REPORTING OBLIGATIONS
When a person deals with criminal property, they may be liable for a money laundering offence. However, they can avoid committing the offence if they submit a DAML (Defence against money laundering) and receive consent from the National Crime Agency. On 5 January 2023, the threshold amount (the value of criminal property below which a financial institution can carry out a transaction without submitting a DAML) increased from £250 to £1,000 for acts in operation of an account maintained with a bank.
The ECCT amended money laundering and reporting obligations in the Proceeds of Crime Act 2002 (POCA) to reduce reporting by businesses that carry out transactions on behalf of their customers. It introduced additional DAML exemptions from the money laundering offences, by exempting the AML regulated sector (such as legal sector and accountancy sector), provided that they have complied with their customer due diligence duties under Money Laundering Regulations 2017. This provision came into force on 26 October 2023.
COMMENT
This landmark legislation marks a significant development in the UK’s efforts to prosecute and prevent fraud, with Companies House assuming an important role in addressing economic crime. These new measures will have a considerable impact on administrative practices of UK companies, potentially leading to challenges and increased administrative burdens.
It remains to be seen how Companies House carries out the required process changes, system developments and recruitment to enable it to operate smoothly and effectively perform its new functions.
The downside is that despite the introduction of new measures last October, the majority of them have not yet taken effect, as they necessitate secondary legislation and guidance in order to be implemented. Nevertheless, organisations may wish to start proactively taking steps to prepare for these new changes, e.g., comprehensively reviewing its current fraud prevention practices and putting procedures in place to mitigate the risk of fraud. The Government is set to provide guidance early in 2024 on what constitutes reasonable procedures.
Furthermore, businesses should ensure a thorough understanding of individuals falling within the definition of a ‘senior person’ and provide adequate training to keep them informed about the evolving landscape. This is crucial to raise awareness of potential corporate criminal liability resulting from their actions.
NEXT STEPS
If you have any questions on the Economic Crime and Corporate Transparency Act or corporate law more generally, please contact us Colin.
