On 13 October 2022, the Economic Crime and Corporate Transparency Bill (The Bill) received its second reading in the House of Commons. It is the second of two bills to be fast-tracked through Parliament since February, and is part of an effort by the UK Government to significantly update the role and powers of the registrar of companies (Registrar), Companies House.
Why is Companies House changing?
Companies House provides an unusually open and flexible registration framework which, while highly business friendly, is vulnerable to exploitation by economic criminals (such as those involved in moving illicit wealth around the globe, facilitating international money laundering and corruption). In response to the increasing misuse of UK companies for fraud and money laundering, the UK Government announced in 2020 that Companies House would be comprehensively reformed.
Beyond receiving and making company information available for public inspection, the function of Companies House would extend to actively maintaining the integrity of the register and the UK business environment. The government’s detailed proposals were published in the Corporate Transparency and Register Reform White Paper (the White Paper) of February 2022.
Its core themes are:
- Introducing powers to validate the information held by the Registrar;
- Identifying those responsible for managing and controlling companies and submitting filings;
- Enhancing data collection, and empowering the Registrar to share information with public and regulatory bodies.
Who will this affect?
For the purposes of this article, we’ll focus on the implications of these reforms for private companies and their directors. We will consider the practical effect of the reforms (in effect and anticipated), summarise key changes that directors should be aware of, and explore how best to respond to them.
Before moving on, we should note that the full suite of reforms will affect all companies and include notable changes to the requirements of public companies and limited partnerships. We won’t refer to these in detail below, but if you would benefit from a discussion about how your business will be affected, our experienced Company Secretarial team would be happy to hear from you.
What has already changed?
Fast-tracked through Parliament in March this year, The Economic Crime (Transparency and Enforcement) Act 2022 (the Act) is the first legislative step towards bringing the UK Government’s White Paper proposals to fruition. Its main objectives are:
- to prevent foreign entities laundering criminal proceeds in UK property;
- to allow for corrupt oligarchs to be issued Unexplained Wealth Orders (UWOs);
- to strengthen the UK’s sanctions regime.
The first part of the Act introduces a Register of Overseas Entities (ROE) requiring foreign entities that own property in the UK to disclose information about their beneficial owners. The requirements and implications of the ROE are explored by our property solicitors here.
Where individuals are reasonably suspected to be involved in serious crime, UWOs require that they disclose information about their interest in ‘unexplained’ property, including how they obtained it. Where a respondent fails to do so, the property is liable to be confiscated without further evidence of criminal activity.
Part 2 of the Act introduces a new category of persons against which UWOs can be obtained: the responsible officers of entities that own unexplained property. Further, it makes the investigation of suspected individuals easier and cheaper for law enforcement agencies.
Finally, the Act strengthens existing sanctions legislation by introducing strict civil liability for financial sanction breaches and allowing HM Treasury to publicly identify organisations that it suspects has breached financial sanctions (but on which it has not imposed a penalty). It also allows the designation of individuals or entities on an ‘urgent procedure’ basis for 56 days, if they have been designated by another country. This is despite the absence of reasonable grounds to suspect that they have been involved in sanctionable conduct.
What does The Economic Crime (Transparency and Enforcement) Act 2022 mean for directors?
Register of Overseas Entities
Although the ROE is not covered in this article, directors should consider whether any members of their corporate structure are ‘overseas entities’ for the purposes of the Act, and so determine what registration and disclosure requirements will apply to them. Companies House has published its guidance on how to register an overseas entity – and its beneficial owners or managing officers, to allow the overseas entity to buy and sell land or property in the UK (see the link here).
Unexplained Wealth Orders
Previously, the respondent to a UWO must be the holder of the property in question, and only this person could be required to comply with the order. This meant that company directors could not ordinarily be served a UWO unless they had sufficient control of the company to be regarded as ‘holding’ its assets. This is no longer the case. Now, a UWO may apply to any of the company’s responsible officers, which includes:
- any of its directors (and anyone who performs the role of a director but is not so titled);
- any other manager, secretary or similar officer of the company; and
- anyone in accordance with whose directions or instructions the directors are accustomed to act.
Moving forwards, anyone with day-to-day control of a company should consider that they may be held responsible for identifying the source of its assets. Directors especially should ensure that complex corporate structures are scrutinised, and the true owners of company property ascertained.
The UK Sanctions Regime
Since 15 June, it is no longer a requirement that those breaching financial sanctions laws must have known or suspected that they were in breach, to be monetarily penalised. Since HM Treasury has power to impose penalties of £1m or 50% of the value of a breach, (whichever is higher), it is essential that directors are vigilant about the possibility of becoming involved with funds or economic resources within the scope of the regime.
Practical steps that may be taken to ensure compliance with the regime include:
- Conducting an impact assessment and preparing an action plan, including a commitment to monitoring compliance;
- Clearly defining senior management responsibility for sanctions compliance;
- Regularly screening customers, affiliates and payment transactions against multiple sanctions lists;
- Implementing training on the reporting obligations to the Office of Financial Sanctions Implementation or OFSI (within the Treasury).
What is changing soon?
The Economic Crime and Corporate Transparency Bill (The Bill), aims to deliver the most significant changes described in the White Paper – effectively repurposing Companies House from a passive administrator to an active gatekeeper. The most consequential reforms anticipated are:
- Requiring identity verification for all new and existing directors, PSCs, and anyone who delivers documents to Companies House;
- Empowering Companies House to:
- remove or reject information submitted to, or already on, the register;
- require additional information from those forming or running companies;
- cross-check data with public and private sector bodies, and share information with law enforcement agencies where it finds evidence of anomalous filings or suspicious behaviour.
What does The Economic Crime and Corporate Transparency Bill mean for directors?
If The Bill is passed as drafted (as expected):
- All individuals acting as directors must verify their identities using a process provided by Companies House, and individuals must not act as a director until their identity is verified;
- If a director delivers documents to the Registrar, they must include a statement confirming their verified status. Also, when delivering documents on behalf of the company, directors must include a statement confirming their authority to do so;
- Companies will have a new duty when appointing directors, to provide a statement confirming that the proposed directors have verified their identity and that none are disqualified under directors’ disqualification legislation or are otherwise ineligible to be a director.
Although a transition period will apply, directors should note that failure to comply with these requirements may result in criminal sanctions or civil penalties. In any case, the companies register will be annotated to reflect that non-compliant directors are ‘unverified’, and such individuals are unlikely to be permitted to make statutory filings.
Changes to registered information:
- Company Name – new restrictions will apply to company names, and Companies House may direct that offending names be changed. Failure to respond to a direction will be an offence, and will enable Companies House to replace the name with the company number;
- Registered Office Address – a company must ensure that its registered office is an ‘appropriate address’ – one to which a document delivered to the company can be expected to come to the attention of someone acting on its behalf, and delivery can be recorded and acknowledged;
- Registered Email Address – for the first time, companies must register an email address, with requirements equivalent to those of its registered address. A company would need to provide their email address alongside the filing of their next confirmation statement;
- Statutory Registers – private companies will no longer be required to keep internal registers of directors, directors’ residential addresses, secretaries, or PSCs. This information will be held in the Companies House central register; however,
- Register of Members – private companies will be required to maintain their own register of members.
Alongside the changes described above, The Bill will provide Companies House a general discretion to reject or remove information from the register where it identifies error, omission, or inconsistency, and to require companies to submit additional information to resolve an issue.
Other Expected Changes (this list is not exhaustive):
- Directors – it would be a criminal offence for persons knowingly designated under sanctions legislation to be company directors, and a person who is disqualified under the Company Directors Disqualification Act 1986 cannot be appointed as a director. Existing directors cease to be one when disqualified. It would also be a criminal offence for someone to act as a director unless the company has notified Companies House of their appointment (and that their identity has been verified). This places an additional obligation on directors not to act unless their appointment has been notified and is intended to ensure that all directors are included on the register.
- Company Incorporation – an initial shareholder (or a subscriber) on incorporation of a company would be required to state their full name and to expressly state that the company is formed for a lawful purpose and that the subscriber is not disqualified to act as a director. There will also be a statement from the subscriber, or their agents making the application, to confirm that the proposed directors and PSCs are not disqualified from acting as directors. The Registrar would reject applications containing false statements.
- Third Party Agents – third party agents or professional intermediaries (such as accountants, legal advisers, and company formation agents) will be required to evidence that they are adequately supervised before they can register with Companies House and file on behalf of their clients. If based in the UK, such agents are required to be supervised by HMRC or a professional body under existing money laundering regulations. In effect, overseas agents will no longer be able to access Companies House. This is unless further changes occur that will allow any other jurisdiction to be deemed to have an equivalent supervisory regime. The registration by relevant third-party agents or professional intermediaries will enable them to conduct the identity verification checks that will allow directors, partners of LLPs, general partners of LPs and PSCs to open an account with Companies House.
- Identity Verification and Linking Accounts – all directors, PSCs, and those presenting information on the register will have an account that includes a verified identity and links their appointments in one place. This will make existing legislation easier to enforce, allow consumers to check the register and potentially recognise fraudulent or suspect companies before transacting with them, and eliminate fraudulent director appointments.
- Improving Shareholders and PSCs Information – the information held on the shareholders and PSCs will be improved via the introduction of requiring full names of shareholders in the registers to provide a one-off full shareholder list (for private companies and traded companies where shareholders hold at least 5% of the issued shares of a company). Any change will be updated annually when filing a confirmation statement; collecting and displaying more information from companies claiming an exemption from the requirement to provide details of its PSC, and collecting and displaying the Relevant Legal Entity or RLE conditions satisfied to be recorded as a PSC.
- Data Sharing – Companies House will be given extra powers to proactively share the intelligence it has collected with law enforcement partners and other relevant agencies where certain conditions are met.
- Privacy – it is not currently possible to suppress a director’s residential address (used as a historic registered office address), business occupation, the day of birth and signature contained within historic filings filed before 10 October 2015 (commencement of the Small Business, Enterprise and Employment Act). Under the new reforms, applications for suppressing such information will be allowed.
- Corporate Directors – corporate directorships will be restricted to entities registered in the UK. The current practice of allowing corporate directors incorporated in overseas jurisdictions will cease. The corporate person will have to provide the details of their directors (who must all be natural persons) or a managing officer, whose identity must be verified.
Before these changes come into effect, it would be prudent to conduct a review or assessment of your company’s records and affairs to prepare for the changes that are to occur and to ensure compliance with the legislation. Some examples of this are:
- Is your company using a legitimate address as its registered office address? This would be one that you have authority to use, have access to, and from which you are able to receive or acknowledge communications sent to the company?
- Have you engaged third party agents or professional intermediaries providing company services or to file information on your behalf at Companies House? If so, are they UK registered and adequately supervised under the UK’s money laundering regulations? If not, you may need to revisit your engagement with such providers to make sure that you and your company are properly supported by an authorised person during the transition.
- Are your company’s statutory registers up to date and do they include the full names of your directors, shareholders or PSCs? If not, it would be a good idea to start updating the individuals’ records now and to make sure that the filings made at Companies House reflect the same.
- Does your company have a corporate director which is an overseas entity? If so, you may need to put in place a plan for the transition regarding its removal and/or to replace it with a UK corporate director if so desired (ensuring that all directors of any UK corporate director are natural persons).
- You may need to inform all your directors and PSCs in advance of the upcoming changes. This is to give them a heads up that each individual will be required to undertake the relevant identity verification check either directly at Companies House or via your trusted professional intermediaries or authorised third-party agents.
If you have several companies, directors, shareholders and PSCs, the above exercise may take some time so it is best to prepare in advance; this could help to make the transition as smooth as possible.
The Bill is expected to come into force in spring of next year. We will update this article then, and with any significant developments in the meantime. The UK Government’s White Paper made more proposals for reform than are provided by the legislation considered above, and it is likely that further changes to the roles and responsibilities of directors are yet to come.
If you’d like to discuss how Companies House reforms will affect your business, Michelmores’ Company Secretarial team has a wealth of experience in statutory compliance and all aspects of corporate governance. Please do get in touch with any member of the team or email firstname.lastname@example.org.
This article is for general information only and does not, and is not intended to, amount to legal advice and should not be relied upon as such. If you have any questions relating to your particular circumstances, you should seek independent legal advice.
 National Crime Agency v Baker and others  EWHC 822 (Admin)
 Prohibited actions under the sanctions regime can be found here, and broadly relate to financial dealings with entities on the sanctions list.