The Economic Crime and Corporate Transparency Act 2023

Faizan Nayyar

The government has recently introduced new laws aimed at tackling corruption, money laundering and fraud involving corporate entities.  The Economic Crime and Corporate Transparency Act 2023 (the Act) received royal assent on 26 October 2023, and aims to reform the way in which economic crime is tackled and to improve the transparency over corporate organisations.

What are the changes coming into force?

Amongst other things, the Act will provide Companies House with enhanced abilities to ensure compliance with company law and the accuracy of corporate information held by the Registrar.  Companies House will now be able to scrutinise, question and reject information delivered to it and raise enquiries where there are inconsistencies with the information that is held on record by the Registrar. The most significant changes will include:

• Verifying the identity of new and existing company directors. An individual will be unable to become a director unless their identity has been verified.  It will now be a criminal offence for any person to act as a director while their identity is unverified and consequently, the company will also be committing a criminal offence if it allows an unverified individual to act as a director. Companies House will now become the central register for this information and must therefore be kept up to date if individuals wish to commence acting as directors.
• Verifying the identity of the person’s with significant control (PSC), including those delivering documents to Companies House. Individuals who are PSC’s will be required to verify their identities and where a PSC is a legal entity i.e. an RLE, such RLE will be required to nominate a ‘natural person’ who is one of its managing officers.
• Verifying information with other organisations, including sharing any information on suspicious activity with criminal investigation and enforcement agencies.
• Prevent the creation of and removing fraudulent companies from the register. This will include new restrictions on company names. A company will not be able to use a name which is intended to facilitate a criminal offence involving dishonesty or deception.
• Issuing financial penalties for breaches of the Companies Act 2006, where it is considered more appropriate or as an alternative to criminal prosecution.

From the above, we can see that Companies House will become more inquisitorial of corporate entities, whilst the verification checks will prevent criminals from setting up and managing companies by making fraudulent appointments under false names and will avoid people involved in money laundering hiding behind false identities.

Additionally, when it comes to delivering any documents and filings to Companies House, only verified individuals of a limited company or limited liability partnership (LLP), which may include directors, company secretaries, LLP members or employees will be allowed to deliver those documents to Companies House.  Alternatively, your company may decide to use ‘authorised service providers’ to carry out company secretarial tasks on your behalf.  Organisations will be authorised if they are regulated by money laundering regulations, such as auditors, accountants or independent legal professionals.

New offence under the Act

The Act creates a new criminal offence, called ‘failure to prevent fraud’, which will apply to all ‘large organisations’.  An organisation falling within this definition will be held criminally liable if it benefits from a fraud that is committed by either an employee, agent, subsidiary or other person that performs services on its behalf. Such organisations would include commercial businesses, charities, NGOs and public bodies, that satisfy at least two of the following requirements in the financial year that precedes the year of the offence:

• a turnover of more than £36 million
• total assets of more than £18 million
• an average of more than 250 employees

Based on these criteria, it is notable that small and medium enterprises, being those falling below the criteria are currently exempt from the legislation, unless such criteria are modified and amended going forward.

Corporate Criminal Liability

There is a legal principle known as the ‘identification doctrine’ which has been updated under the Act.  Unlike the new failure to prevent fraud offence, the changes to corporate criminal liability will apply to both large and smaller organisations.

The changes implemented are designed to ensure that businesses can be held criminally liable for the actions and wrongdoing of individuals such as their senior managers who commit an economic crime.  Pursuant to the Act, a company will be liable for the offence if one of its senior managers commits an offence whilst acting within the scope of their authority or if such individual conspires or encourages another person to act in a way that could be deemed unlawful.

For the avoidance of doubt, a ‘senior manager’ may be someone who plays a significant role in making decisions about a substantial part of the activities of the business, which could include the company directors and even individuals from your senior management or leadership team.  The Act will look at the roles and responsibilities of the individual rather than just their job title or listed position.

The types of economic crimes to which the provisions will currently apply include bribery, money laundering, fraud (including fraudulent training), false accounting and other related offences such as various offences under FSMA (Financial Services and Markets Act 2000) and FSA (Financial Services Act 2012).

How could this affect me or my business?

It appears that there will now be additional burdens on companies and company directors to ensure that they are both compliant and consistent with the requirements under company law. Smaller businesses in particular, which may often be unaware to some extent of their legal obligations should note the new requirements explained above.  You may be committing a criminal offence if you fail to adhere to any verification requirements as highlighted above.

Some of the reforms highlighted above, particularly in relation to corporate criminal liability, will mean that larger companies will no longer be able to evade scrutiny by implementing complex management structures and will be held liable for any malpractice.  For smaller businesses, this will give rise to a somewhat level playing field and with robust enforcement by agencies and the government, will see the removal and reduction of criminal funds from the economy.

Notably, for businesses that deal with crypto-assets, it is interesting to note that where there is suspected economic crime, the new powers will allow law enforcement agencies to target any crypto-assets that are linked to proceeds of crime or associated with any illicit activity. Prosecutors will be better able to hold large corporations accountable for malpractice.  If your business deals with any form of cash or crypto transactions, it would therefore be important to ensure you have proper customer and client due diligence procedures in place to verify where any funds are coming from.

What should or can I do?

In view of the above, you may consider doing some of the following:

1. As a starting point, it is always good house-keeping to review your statutory registers from time to time to ensure that all information is up to date. With the new law coming into effect, this will be particularly important in relation to directors of the company. It is also common for there to be discrepancies in the filings at Companies House in relation to the share capital of the company. You may wish to speak to your lawyers or accountants to undertake a review of your registers to ensure the accuracy of the information held on record, including at Companies House.
2. Identify members of your board who are registered directors and will need to undergo the verification checks and inform them of the requirement to do so. Additionally, also identify any individuals within your company who are to be appointed to the board or those that wish to become a director of any UK company. It would be prudent to have a standardised process that involves verification for all new directors being appointed to the board.
3. Identify any ‘senior managers’ within your organisation whose actions and conduct may result in the company being held liable for certain economic crimes, this could apply in particular to any finance directors or managers responsible for dealing with the financial aspects of your business. In the absence of structure, you may wish to devise a clear organisational structure where every ‘senior manager’ understands and acts within the scope and limit of their role and responsibilities within the business.
4. It would be good practice to have a good level of corporate governance by implementing the necessary policies and procedures that assist your workforce in understanding and identifying fraud risks so that with proper training and understanding, any potential liability can be mitigated. Showing that the company has reasonable procedures in place to prevent fraud may be a defence if the company is held liable for a failure to prevent fraud.  You may wish to either conduct (or outsource the function of conducting) risk assessments or regular audits within your business to flag any risks or areas that need attention to prevent economic crime.
5. If your company has registered PSCs or your company is an RLE, inform the relevant PSC or nominated officer that they may be required to undergo verification.
6. Ensure that your registered office is located at an ‘appropriate address’, meaning somewhere where documents can be delivered for the attention of someone acting on behalf of the company and where delivery can be formally acknowledged by a recipient. This is important for companies that use a PO box or unstaffed address.  Companies will now also be required to have a registered email address to which Companies House can send emails to an individual acting on behalf of the company – such address must therefore be actively monitored at all times to avoid any issues being unaddressed.

If you would like to discuss the contents of the article above or if you are unsure how this may affect you or your business, please get in touch with our Corporate team.