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Abdulali Jiwaji and Gavin Collins unpack the Economic Crime and Transparency Act in Thomson Reuters Regulatory Intelligence

By Abdulali Jiwaji & Gavin Collins

Partner Abdulali Jiwaji and Associate Gavin Collins unpack the Economic Crime and Transparency Act’s impact on Companies House and UK Corporate Transparency.

Abdulali and Gavin’s article was published in Thomson Reuters Regulatory Intelligence on 21 December 2023, and can be found here.

Introduction

The Economic Crime and Corporate Transparency Act 2023 (the “ECCTA”) aims to drive “dirty money” out of the UK by strengthening the ability of UK authorities to tackle fraud and corruption.

The ECCTA received Royal Assent on 26 October 2023 and is set to come into force, in part, starting in early 2024. The ECCTA is also designed to bring the UK into line with the latest recommendations of the Financial Action Task Force, the inter-governmental organisation founded in 1989 to develop policies to combat money laundering. One of the most noteworthy aspects of the ECCTA, is its expansion of the role of Companies House from a passive recipient of company information to an active gatekeeper and administrative enforcement body. Under the ECCTA, Companies House will work alongside other public authorities, such as the Serious Fraud Office (“SFO”) and the National Crime Agency (“NCA”) – both of which will receive enhanced powers under the Act – to combat money laundering and economic crime.

Background

The Joint Stock Companies Act 1844 established the office of the Registrar of Joint Stock Companies to maintain the public register of companies. The registrar now sits within Companies House, an executive agency responsible for incorporating and dissolving limited companies and examining and storing company information. Its online register now maintains the records of over five million active companies. Importantly, Companies House is not a regulator, and, in recent years, concerns have been raised about the extent to which sham companies, which provide false information to Companies House, have been incorporated for the purposes of facilitating money laundering and other economic crimes. To crack down on this sort of misconduct, the Government has taken the view that the competencies of Companies House will need to be expanded.

The ECCTA

Under part 1 section 1 of the ECCTA, which amends relevant sections of the Companies Act 2006, the Companies House registrar will, in addition to its registrar functions, now be required to promote the following four objectives:

  • Objective 1: 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).
  • Objective 2: Ensure that information contained in the register is accurate and that the register contains everything it ought to contain.
  • Objective 3: Ensure that records kept by the registrar do not create a false or misleading impression to members of the public.
  • Objective 4: Prevent companies and others from – (a) carrying out unlawful activities, or (b) facilitating the carrying out by others of unlawful activities.

To support the Registrar in the furtherance of these objectives, the ECCTA requires identity verification for directors, people with significant control, as well as individuals who file on behalf of both new and existing registered companies, such as company officers or authorised corporate service providers. Companies will also need to provide Companies House with an email address and an “appropriate” registered address at which a letter delivered by hand or post would be expected to come to the attention of a person acting on behalf of the company. Failure to ensure ID verification of acting directors, or to provide an appropriate address or maintain a registered email address, are offences under the Act and punishable by a fine. Upon incorporation, companies will also have to include a statement by subscribers that they wish to form the company for lawful purposes, and, in the annual confirmation statement, companies will have to deliver to the registrar a statement that the intended future activities of the company will be lawful.

However, it is important to note that authorised corporate service providers, which must be verified under the Act, will only have to provide a statement that they have verified the information they are submitting on behalf of others in order for that information to be deemed verified under the Act. Transparency International UK, as well as other advocacy groups, have therefore raised concerns that the ECCTA might not do enough to deter wrongdoers.

Under the ECCTA, Companies House will also have the power to request information necessary to determine whether a company has complied with its obligations, to remove incorrect information, and to disclose information to any person connected with the exercise of the registrar’s functions or to a public authority for purposes connected with the exercise of that public authority’s functions. Under the ECCTA, failing to comply with a request for information is an offence which, upon conviction, carries a penalty of imprisonment for a term not exceeding two years, a fine, or both. It is similarly an offence under the Act to provide false information.

The new role of Companies House in practice

While Companies House is no longer to be a passive, uncritical recipient of company information, it is not positioned under the ECCTA to engage in complex criminal investigations. Its information sharing function will therefore be essential to aid other public bodies, such as the SFO, NCA, and FCA in criminal prosecutions in relation to sham companies, money laundering and other economic crimes. However, it remains to be seen how Companies House will liaise with other public authorities in practice and how these information channels will operate. This is a potential point of concern, given that the ECCTA does not specify clearly how these additional regulatory functions are to be funded. To this end, there have been calls to increase the price of company incorporation to £50. Even if funding needs are met, however, capacity building will still be required to ensure that Companies House grows into its new role.

One positive development in this regard is the potential for technology to automate significant aspects of Companies House’s new mandate, including identity verification, anomaly detection, and even requests for information from companies and individuals. In the near future, machine learning algorithms could be developed to detect and learn from irregularities in company filings and identity verification documents. These ‘red flags’ could then be reviewed by individuals within Companies House and, if determined to be indicative of wrongdoing, forwarded to the relevant investigative agencies. In the United States, the Securities and Exchange Commission already uses data analytics to detect anomalies in company filings. There is clearly potential for Companies House to develop similar methods to enable it to efficiently manage and verify the information of the over five million companies on its registry.

At present, section 65 of the ECCTA, which will be inserted after section 1110 of the Companies Act 2006, notes that it will be for the Secretary of State to make regulations that deal with the procedure for verifying or reverifying an individual’s identity, including the evidence required, as well as the records that an authorised corporate service provider must keep in connection with the verification or reverification of an individual’s identity. Once such regulations come into force, the operation of the ECCTA, in particular with respect to Companies House, will become much clearer.

Conclusion

Despite open questions concerning implementation, the ECCTA represents the most ambitious change to Companies House since its founding in 1844. Though there are doubts from transparency groups about the extent to which the ECCTA will function as an additional deterrent, as a first step towards cracking down on sham companies implicated in money laundering and other economic crimes, it seems right and logical that Companies House be given the authority to effectively fulfil its modern role as gatekeeper of the UK company registry. A key question is whether those investigating and prosecuting the complex frauds can find helpful strands of evidence in connection with instances of non-compliance with the ECCTA requirements. That, and whether we see actual convictions, will be an important factor in creating a deterrent.

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