Last year, we reported on the Economic Crime and Corporate Transparency Bill, which is now in the final stages of its journey through Parliament. Once in place, the Act will deliver comprehensive reforms to strengthen the UK's response to economic crime, prevent abuse of UK companies and other corporate entities such as limited partnerships, and increase the reliability and accuracy of information held at Companies House.

With the Bill now having been reviewed by the House of Lords and amendments currently being exchanged between the two Houses, we have a clearer picture of what the final reforms will be. In this article, we provide an outline of the key reforms under this new legislation that will apply to limited companies (although note that the majority of the reforms also apply to LLPs). We have also prepared a separate briefing on the application of the legislation to limited partnerships.

New offences under the Bill

Failure to prevent fraud: A new failure to prevent fraud offence is being created 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 (including offences under the Fraud Act and fraudulent trading) is committed by an employee or agent for the organisation's benefit, and the organisation 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.

As originally drafted, the offence would only apply to large organisations, (defined as where an organisation satisfies two or more of the following conditions in the financial year preceding the year of the offence: (i) comprising more than 250 employees; (ii) recording more than £36 million turnover; and / or (iii) holding assets of more than £18 million. Amendments by the House of Lords to widen the scope of the offence to include smaller companies have been rejected in the House of Commons, but this is still under debate.

Liability for economic crimes: Corporate criminal liability laws for economic crimes will be extended so as to hold corporations liable where an offence is committed by a senior manager of the corporation. Currently, the law applies where an offence is committed by someone regarded as the "directing mind and will" of a corporation. This is much easier to identify in smaller companies, which may only have one or two directors with oversight of the whole business. Hence, it can be easier to convict smaller companies than larger ones under the existing legislation. The change being brought about through these reforms is intended to level the playing field by including senior people who have decision-making power over substantial areas of the business.

Identity verification

Directors: Every director of a UK company (or member of an LLP) will need to have their identity verified under the new reforms, and a company will be obliged to ensure that a director does not act until the verification has been completed.

There will be a transitional period to give existing directors or members time to comply with the new requirements. For new companies, the verification must take place before the company is formed, and the formation application will only be accepted if it includes a statement that the proposed directors have verified their identity. New directors will also have to confirm that they are not disqualified directors.

Corporate directors: Although it does not form part of the Bill, the Government has indicatedin its factsheet on identity verification that it intends to introduce the long anticipated regulations regarding corporate directors at the same time as the Bill is enacted. At the time of writing this article, the proposals set out that a company can have corporate directors (who must be corporate entities with "legal personality"), but the directors of any company that acts as a corporate director must all be natural persons and their identity must be verified.

Persons with significant controls (PSCs) / relevant legal entities (RLEs): All existing PSCs will need to verify their identity, and a person who becomes a PSCs on incorporation of a company will have 14 days within which to confirm to the Registrar that their identity is verified (if the company has not submitted the information along with the application).

There are new requirements to ensure that a verified individual is always traceable for each RLEs. All RLEss must provide to the Registrar the name of a "relevant officer" (a director where the RLEs is a company or member in respect of an LLP) whose identity is verified, together with a statement by that individual confirming that they are the relevant officer. For new companies, this must be supplied either at the time of submitting the incorporation documentation, or within 28 days of incorporation. Going forward, the RLEs will need to remember to notify the Registrar of any change in the relevant officer (e.g. if a director resigns) and confirm that the identity of any new relevant officer is verified.

The legislation will not create an immediate requirement for all existing PSCs/relevant officers to have their identities verified, but envisages that further regulations will be passed creating a deadline for compliance.

Verification: There will be two ways of verifying identity:

  1. Direct verification via Companies House. This will require the individual to take a photograph or scan of their face and of an identifying document, such as a driving licence or passport. The two will be compared, using likeness matching technology, and the identity verified.
  2. Verification by an Authorised Corporate Service Provider (ACSP), who is registered with Companies House for the purpose of carrying out these services. ACSPs will be intermediaries such as accountants, lawyers and company formation agents who are registered with a supervisory body for anti-money laundering purposes.

In general, verification will be a one-off process and once a person is verified, they will obtain verified status.

Filing: An individual who delivers documents to the Registrar on their own behalf must have their identity verified. An individual may only deliver documents on behalf of another person if they have had their identity verified or they are an ACSP (or employee of an ACSP) and the document is accompanied by a statement confirming their verified status and that they have the person's authority to deliver the document.

Members

Register of members: Private companies will have to maintain their own register of members and will no longer be able to keep that information on the Companies House central register. The full name of each of their members will also be required (rather than just using an initial letter, for example).

Confirmation statement: After these obligations come into force, the first time a private or non-traded company files a confirmation statement, the statement must contain the names of each member and the number of shares of each class held by them. For traded companies, the statement must contain the name and address of each member who holds at least 5% of the issued shares of any class of the company.

Statutory registers

The obligation to maintain a register of directors, directors' residential addresses or PSCs register will be abolished. Instead, these registers will be held centrally at Companies House, and companies will be required to ensure that the information is kept up to date.

Company names and addresses

Company name: An additional consideration on choosing a company name will be that the name can be rejected by the Registrar if: it could be used to facilitate an offence of dishonesty or deception (including outside the UK); it suggests a non-existent connection with a foreign government or international institution; or if it contains computer code.

Registered email address: Companies (both new and existing) will be obliged to provide the Registrar with an appropriate email address. This address will not be in the public domain and will be solely for use by the Registrar to communicate with the company.

Appropriate registered office address: Companies will be obliged to ensure that their registered office is an "appropriate address". This is defined as where it would be expected that any documents delivered would come to the attention of a person acting on behalf of the company and where it is possible for such a delivery to be acknowledged and recorded.

Accounts and reports

Specific filing obligations for micro-entities are added, meaning that micro-entities are required to file a balance sheet, a profit and loss, and may choose to file a directors' report. Small companies that are not micro-entities are no longer able to prepare abridged accounts, but must file annual accounts and a directors' report.

Companies House role and powers

Companies House will be re-branded as an active corporate gatekeeper and will have new powers to check, remove or decline information submitted to, or already on, the Companies House register (for example, to query suspicious appointments or filings, and to reject documents that are not consistent with the information held by the Registrar).

The Registrar will be required to ensure that all documents are properly delivered, and that the information contained in them is accurate. Additionally, the Registrar must minimise the risk of information on the register creating a false or misleading impression, and the extent to which companies carry out unlawful activity or facilitate such unlawful activities being carried out by others.

What will the reforms mean for UK businesses?

There are a significant number of reforms within the legislation that will impact all new and existing UK companies, and although the legislation is yet to be enacted it is now clear what most of the reforms will look like. While the deadline for compliance will not be immediately from the date the Bill comes into force, it is important for organisations to be aware of what they need to do, and to monitor the position closely.

If you would like to discuss these changes and how they will affect your business, please contact Jeremy Millington, Sharon Ayres or your usual Gowling WLG contact.

UPDATE: the Bill received Royal Assent on 26th October, the House of Lords having finally accepted the Government view that the failure to prevent fraud offence should apply only to large (and not small or micro-entity) companies. This was the main issue outstanding, and the other elements of the Bill referred to in this briefing remain the same. We now await the necessary secondary legislation to bring the provisions of the Act into effect.