Overview

The Economic Crime and Corporate Transparency Act 2023 has been on the horizon for a while, in part a response to the invasion of Ukraine and the realisation that the UK is not so much a "good place for business" as governments often want to portray, but rather a good place for criminal activity. The Act therefore seeks to bolster the rights, responsibilities and powers of Companies House, as well as adding more onus on companies to help prevent fraud, with a new failure to prevent offence. The impacts are quite wide-ranging from an accountant's perspective, including changes to the filing requirements for small and micro companies/LLPs as well as strict new identity verification requirements for directors and others and some amended anti-money laundering legislation (AML) as we will see below. 

The Act received royal assent on 26 October 2023 and so passed into law as statutory instrument 2023/56 on that date. Many of the substantive parts of the Act require secondary legislation though and therefore the timing for implementation for most elements discussed below is not yet clear.

Let’s look in a little more detail at some of the key areas of change.

Strengthening Companies House

New objectives

Four objectives are created for the Registrar to promote the integrity of the register as follows:

1.     To ensure that any person who is required to deliver a document to the registrar does so (and that the requirements for proper delivery are complied with).

2.     To ensure that information contained in the register (this includes any records kept by the registrar under any enactment) is accurate and that the register contains everything it ought to contain.

3.     To ensure that the records kept by the Registrar do not create a false or misleading impression to members of the public.

4.     To prevent companies and others from:

a.     Carrying out unlawful activities; or

b.     Facilitating the carrying out by others of unlawful activities.

The Companies Act 2006 (CA2006) is amended to add that the subscribers must state they wish to form a company for lawful purposes in their application for registration. Subscribers to a company will also be required to give additional information including their name and a service address. There is also a provision to allow the secretary of state to vary the information required on subscription to allow flexibility for easier changes to the requirements in future. It might seem that criminals are hardly likely to be deterred by having to state that their activities will be lawful, but no doubt it may make it easier in criminal prosecutions to identify that the company has been misused for criminal purposes.

Identity checks

One of the key changes to strengthen Companies House information is a requirement for identity verification for relevant individuals. This will apply to all new and existing registered company directors, People with Significant control (PSCs) and those delivering documents to the Registrar. This verification will either be carried out by Companies House, using electronic identity checks with videos/photos of the individual and the relevant documents, or by Authorised Company Service Providers. The intention is that the latter role would be undertaken by accountancy or law firms for example, using their normal AML checks, though there remain concerns about the liabilities facing these firms should any errors be made.

Before implementation of these changes both secondary legislation and guidance is needed as well as systems work at Companies House to allow the identity checks. A  policy paper on this gives further information.

New powers

There are more powers for Companies House so that they can be a more effective gatekeeper over company creation and a custodian of more reliable data. This includes new powers to check, remove or decline information submitted to or already on the companies register. Currently clearly incorrect information gets filed, because the Registrar has no power to reject or remove it. Many of you will have seen examples of clearly made-up information or cartoon characters names being used on information filed at Companies House.

Accounts filing requirements

One of the difficulties facing Companies House in the past is that it wasn’t possible to tell whether an exemption taken with regard to a company being small or micro was valid, on the basis of the filed information. With no profit and loss account, one of the criteria for taking the exemptions was unavailable and therefore as long as one other criteria, either balance sheet total or employees was within the limits there was no choice but to assume the exemption was available.

In future small companies will have to file a profit and loss account and a director’s report, and micros will need to file a profit and loss, but will keep their exemption from the directors’ report requirements. All options to prepare and file abridged accounts have been removed in a bid for further simplication, but also more transparency.

When these proposals were first mooted, they instilled fear in a great many small business owners, who were not happy with the prospect of their income and profitability being visible to competitors, friends or others. The final legislation, however, has an option for the Secretary of State to make regulations that will mean that the profit and loss accounts are not publicly accessible, even though they must be filed. As we have not yet got these regulations, we cannot be certain of their implementation or of what they will say, but it would be odd to include the ability for this secondary legislation and then not take advantage of it.

Finally, in terms of this article at least, there are changes to the Proceeds of Crime Act to help ensure information of concern regarding anti-money laundering can be exchanged without breaching the law or confidentiality requirements. For example, this would help to ensure that where a client moves from one firm to another, or engages an additional advisor, there can be communication with the other firm about any AML concerns which have led to protective action (such as resigning/not accepting the client, or refusing a particular product or service to the client). Currently, there are provisions for this where the two firms are the same type (e.g. both accountants, both lawyers) but even so concerns about breaches of confidentiality or the creation of a civil liability to the person who is the subject of the report, has often created a barrier. The legislation will specifically provide restrictions on civil liability in certain situations (see s188) related to this, to allow relevant information on concerns to be shared.

Failure to prevent fraud offence

This new offence holds large organisations to account if they profit from fraud committed by their employees. This adds a similar responsibility to that existing in regard to the failure to prevent the criminal facilitation of tax evasion. Both place on the organisation a responsibility to have reasonable procedures in place to prevent the offence. In the case of the new offence it must be the organisation who profit from the fraud committed by their employees for the employer to be accountable.

The offence of failure to prevent fraud will only apply to large corporates, subsidiaries and partnerships. This means that large not-for-profit organisations such as charities are also in scope as well as incorporated public bodies. The definition for large is the standard Companies Act definition – i.e. meeting two out of three of the following:

·      More than 250 employees;

·      More than £36m turnover;

·      More than £18m total assets.

If resources held across a parent and its subsidiaries cumulatively meet the threshold that group will be in scope and fraud within a subsidiary benefiting the parent for example also gets caught.

The government will publish guidance providing more information about what reasonable procedures might mean.  and the offence will only come into effect once this is published. The penalty for committing this offence is an unlimited fine, so it will be vital for those caught be the legislation to check that their procedures properly meet the standards set. Even though smaller companies are not impacted by thte law, it may be useful for them to consider whether their procedures do enough to prevent fraud as there are still reputational consequences of a lapse.

Conclusion

As we have seen, whilst the Act has now received Royal Assent, many of the substantive measures from an accountant’s point of view require secondary legislation and/or guidance, as well as practical steps at Companies House to be undertaken. Now is a good time though, to ensure you are aware of what is coming and that you consider any impact on your own systems, policies and procedures and your communications with clients. In the long run, this will mean better quality information at Companies House, but it will also mean more hoops to jump through for those with companies/LLPs and certain other types of entity registered in the UK. It will also attempt to make it more difficult for fraudsters to thrive, something which should benefit us all, given the huge amount of fraud currently recorded in the UK. So whilst there are many benefits it will, no doubt,  also mean more work for accountants!

Further information can be found here.