Changes and implications of the Economic Crime and Corporate Transparency Act
Following a sometimes challenging parliamentary process of debate and amendment, the Economic Crime and Corporate Transparency Bill received Royal Assent on 26 October 2023, becoming the Economic Crime and Corporate Transparency Act 2023 (ECCTA).
The majority of the measures outlined in the ECCTA will be implemented through secondary legislation, the timing of which is, as yet, unclear. Some of the most significant measures of the ECCTA concern the use of Companies House and will require substantial reforms in terms of resourcing and operations to deliver on the ambitious requirements set out in the Act.
The measures outlined in the Act have been made to reduce the attractiveness and viability of the UK being used by criminals and other nefarious actors to conduct economic crime. The significant changes to Companies House especially are long overdue and, if effectively implemented, should provide an effective mechanism to reduce the prevalence of bad actors committing economic crime in this country.
Accountants and Advisors will be at the forefront of delivering the changes outlined in the Act, working closely with government, Companies House and other key stakeholders on the effective implementation of the reforms. They will continue to play a leading role to support the government in clamping down on economic crime in the UK, working with stakeholders and members to maximise these new measures’ effectiveness and we look forward to seeing secondary legislation introduced to ensure that the measures in the Act can be implemented successfully.
The Act has been making its way through parliament since last September. It follows the fast-tracked Economic Crime (Transparency and Enforcement) Act, which passed into law in March 2022. Taken together, the two pieces of legislation bring in stronger powers to tackle money laundering and other illicit activity, while introducing long-awaited reforms to Companies House. New measures include:
- reforms to prevent the abuse of limited partnerships;
- additional powers to seize and recover suspected criminal crypto assets;
- reforms to give businesses more confidence to share information to tackle economic crime;
- the introduction of a Failure to Prevent Fraud offence;
- introducing identity verification for registered company directors, people with significant control and those who file on behalf of companies;
- improving the financial information on the register so that it is more accurate;
- providing Companies House with more effective investigation and enforcement powers, and introducing better cross-checking of data with other bodies;
- enhancing the protection of personal information provided to Companies House; and
- changing the filing requirements for smaller companies.
Companies House reforms represent one of the most significant measures in the Act, and therefore one of the most challenging and important to implement.
The legislation aims to broaden the Registrar of Companies House’s powers so that the registrar can become a more active gatekeeper over company creation. It will become a custodian of more reliable data, including new powers to check, remove or decline information submitted to, or already on, the companies register. However, the ability to implement these changes will be dependent on a sufficient level of resource to ensure that these new powers can be utilised effectively. Without increasing resources, the ability for Companies House to deliver on its new, stated goals will be severely inhibited.
Identity verification for all new and existing registered company directors, people with significant control and those who file on behalf of companies will be required. The ECCTA improves the financial information on the register so that it is more reliable and accurate.
Companies House will have more effective investigation and enforcement powers, with better cross-checking of data with other public and private sector bodies. The protection of personal information provided to Companies House will be enhanced to protect individuals from fraud and other harms.
While the Act is now part of law, some of the measures, such as identity verification, will not be introduced straight away. Several changes will require system development and secondary legislation before they are introduced. Other measures – such as greater query powers and more stringent checks on company names – will come into force sooner. These earlier measures are expected to be in place by early 2024.
Simplifying filing obligations
The ECCTA simplifies and streamlines the filing options for small companies, which will no longer have the option to prepare and file abridged accounts. Small companies will be required to file both their profit-and-loss account and directors’ report, also removing the option of filing so-called ‘filleted’ accounts. Micro entities will similarly be required to file their profit and loss account, but will still have the option not to prepare or file a directors’ report.
However, in a change to the original Bill, the ECCTA includes provisions allowing the Registrar to make the profit-and-loss accounts of small or micro-entities (or parts of them) unavailable for public inspection. This will provide comfort to those concerned about trading information becoming publicly available on the grounds of commercial sensitivity, while ensuring Companies House receives the information to verify that companies are filing accounts correctly.
Where companies (including dormant companies) claim an audit exemption, the directors include a statement in the balance sheet identifying the exemption being taken and confirming that the company qualifies for the exemption.
Register of Overseas Entities
The Register of Overseas Entities aims to create a new global standard for transparency, particularly around aspects of ownership. Entities that do not declare their “beneficial owner” will face restrictions over selling their property, and those people who break the rules could face up to five years in prison.
This came into force on 1 August 2022. All companies on the register need to file an update statement every year to confirm that the information held by Companies House is correct and up to date, even if nothing has changed. It’s a criminal offence not to file the update statement and entities may face prosecution or a financial penalty if they do not file.
Overseas entities that have not registered with Companies House already face restrictions on selling, transferring, leasing or raising charges against their property or land. Overseas entities also cannot buy any new UK property or land without an Overseas Entity ID.
Significant concerns have been expressed to the Department for Business and Trade and Companies House with regards to the legal liability associated with verification of overseas entities. If a professional accountant undertakes verification and does not carry out the process correctly, then they open themselves up to criminal prosecution, regulatory sanctions and liability for professional negligence. Due to the challenges of carrying out verification, it is likely that many professional accountancy firms will not routinely offer this service because satisfying the necessary criteria may be overly onerous and/or risky.
Failure to Prevent Fraud
As part of the ECCTA, the government is creating a new Failure to Prevent Fraud offence to hold organisations to account if they profit from fraud committed by their employees.
Under the new offence, an organisation will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and it did not have reasonable fraud prevention procedures in place. It does not need to be demonstrated that company bosses ordered or knew about the fraud.
The offence applies to companies in all sectors. However, despite repeated attempts by parliamentarians to widen the scope of the offence, only large organisations are in scope. These are defined (using the standard Companies Act 2006 definition) as organisations meeting two out of three of the following criteria:
- more than 250 employees;
- more than £36m turnover; and
- more than £18m in total assets.
Government has endeavoured to keep the impact of the offence under review and the threshold at which companies are excluded can be amended in future through secondary legislation if necessary.
Based upon initial indications from the government, organisations will be able to avoid prosecution if they have reasonable procedures in place to prevent fraud. The government has committed to publishing guidance providing organisations with more information about reasonable procedures before the new offence comes into force.
While the Failure to Prevent Fraud offence is a welcome addition to the tools available to combat this highly prevalent crime, the success of the offence will be determined by the practicalities of implementation and subsequent enforcement.
In terms of practical implementation, the standard of the aforementioned government guidance and the application of the measures outlined in this offence in a proportional manner will be key to the success or failure of the offence going forward.
It is advised that all professionals have anti-fraud policies, procedures and measures in place. Once this offence comes into effect following the publication of the guidance, being able to demonstrate that said policies to counter fraud are in place will be critical.