The Economic Crime and Corporate Transparency Act 2023 - What does it mean for corporate entities?
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Following last year’s Economic Crime (Transparency and Enforcement) Act 2022, the Economic Crime and Corporate Transparency Act 2023 (the Act) is the next step in the UK Government’s attempts to address economic crime and improve transparency over corporate entities.
The Act substantially amends the Companies Act 2006 (CA 2006) introducing new requirements regarding the way in which companies registered in England and Wales interact with, and submit information to, Companies House. These include new identity verification requirements for directors, persons with significant control and members of a limited liability partnership, restrictions on who can file documents at Companies House on behalf of companies, changes to company record keeping requirements, restrictions on the use of corporate directors, and new powers for Companies House to check, remove or decline information submitted to, or already on, the companies register.
Many of the measures introduced by the Act will require secondary legislation and Companies House guidance, as well as the development of Companies House systems to implement the changes. As such, it is anticipated that it will be at least a year until many of these provisions are in force. There are, however, things that companies can be thinking about in anticipation of the changes coming into force.
You can read more about these changes, including the steps companies should be taking now, below.
Identity verification for directors, persons with significant control (PSCs) and limited liability partnership (LLP) members:
The Act introduces an identity verification requirement for all new and existing company directors, PSCs and relevant officers of a registrable relevant legal entity (RLE).
For directors of new companies, identity verification must take place before an application for the formation of the company is delivered. Post-incorporation, a newly appointed director must verify their identity as soon as possible, and before their appointment is notified to the Registrar of Companies. A director will not be permitted to act as a director, and companies must ensure that a person does not act as a director, unless their identity has been verified. Breach of these requirements by either the company or the director will be a criminal offence. If PSCs or relevant officers of a registrable RLE are not verified within a short time after they have become a PSC or registrable RLE (as the case may be), they too will commit a criminal offence.
It is anticipated that Companies House will adopt a staggered approach to verifying the identities of directors. Existing companies will therefore have a transition period in which the identities of their directors and PSCs will need to be verified. Those that do not comply by the end of the transition period may face criminal sanctions or civil penalties. The company’s register will also be annotated to reflect its unverified status.
It is anticipated that there will be two types of identity verification:
1. direct verification via Companies House; and
2. an indirect verification route through an Authorised Corporate Service Provider (ACSP).
Where a person is verifying their identity directly with Companies House, identity verification will link a person with a primary identity document, such as a passport or driving licence. For a corporate service provider to be issued with ACSP status, they must be registered with a supervisory body for anti-money laundering (AML) purposes.
Companies House expects identity verification to be a one-off requirement. However, there may be instances where re-verification is required, for example if there is reason to doubt the validity of the identity verification, such as on suspicion of fraud.
Whilst the UK Government hopes that identity verification will make it harder to register fictitious directors or beneficial owners, concerns have been raised that the new requirements are overly burdensome. It is hoped that the secondary legislation to implement the process will be workable in practice and allow for a risk-based approach towards identity verification.
The Act introduces restrictions on who can file documents at Companies House on behalf of companies:
Any individual delivering documents to Companies House on their own behalf must have had their identity verified and the document they are delivering must be accompanied by a statement confirming their verified status. An individual (A) may also deliver documents on behalf of another individual, but only if A’s identity has been verified or if A is either an ACSP or an officer or employee of an ACSP.
An individual will be able to deliver documents on behalf of a firm (which includes companies, LLPs and limited partnerships), if:
- the individual is an officer or employee of the firm, or of a corporate officer of the firm, and the individual’s identity has first been verified; or
- the individual is an ACSP or an officer or employee of an ACSP.
The identity verification requirements for those filing documents at Companies House pose some tricky issues for companies to consider. Under the amendments to CA 2006, companies will only be able to file on behalf of themselves via a director, officer or employee. Many corporate groups have numerous subsidiary companies, some of which, for example, may be holding companies or dormant companies with no employees or company secretary. It is hoped that secondary legislation will provide some clarity on how corporate groups can most efficiently ensure compliance with the filing requirements for these entities.
Company record keeping requirements are also set to change:
Companies will be required to record in the register of members both an individual member’s forename and surname and a service address (or the corporate or firm name and service address for a corporate member). For the purposes of ensuring that its register of members includes the required information, a company may send a notice to a member or former member requiring them to provide this information. There is also a requirement for companies to include old information in respect of members and former members in their register of members.
Traded companies and non-traded companies will be required to deliver to Companies House a one-off confirmation statement containing certain membership information. For a traded company, the statement must include the name and address of each person who, at the end of the confirmation date, held at least 5% of the issued shares of any class of the company, and the number of shares of each class held by each such person at that time. For a non-traded company, the statement must confirm the name of every person who was a member of the company at the confirmation date, and the number of shares of each class held by each person who was a member of the company at that time.
This information must be delivered on the first occasion on which the company delivers a confirmation statement with a confirmation date that is after the day on which the new requirement comes into force. As companies which meet these definitions are already required to provide these details, this does not require the disclosure of new information, but has been included to enable Companies House to display this information in a more user-friendly way in the future.
Criminal sanctions will be imposed on members of companies who fail to inform the company of their details, or that their details have changed, within two months of becoming a member or the change occurring. Members will therefore need to ensure that such notice is provided promptly to ensure they do not inadvertently commit an offence for what, in many cases, could be an administrative oversight.
The Act also removes the requirement for companies to maintain their own: (1) register of directors, (2) register of directors' residential addresses, (3) register of secretaries; and (4) PSC register. All relevant information relating to these categories will now only be held on the public register at Companies House.
Concerns have been raised about how the new provisions relating to company registers will operate in practice. Placing an increased record keeping burden on companies (including in relation to historic information) may be problematic. Companies may, for example, not know whether the information on their register of members is incorrect and, if it is incorrect, any notice requesting information from a member will likely not end up in the hands of the intended recipient of the notice.
A Joint Working Party of the Company Law Committees of the City of London Law Society (CLLS) and the Law Society of England and Wales has expressed concern that a company should not be required to verify or validate any information provided to it by a member unless there is an obvious reason to doubt such information. To provide certainty for companies, their officers and advisers, the Joint Working Party recommended that the explanatory notes to the Act set out a non-exhaustive list of circumstances in which a company is likely to have a “reasonable excuse” for non-compliance at any given point in time.
The Act permits the Secretary of State to make provisions, by way of secondary legislation, for the purpose of enabling a company to find out who its PSCs are in cases where shares are held by a nominee. These regulations may impose obligations on a company with a view to obtaining information about whether a person has become or has ceased to be a nominee shareholder and, if they have, information about the shareholding, the nominee and the person for whom the nominee holds or held shares.
Use of corporate directors:
Legislation already in place to restrict the use of corporate directors will be brought into force, along with regulations which will set out the more limited basis upon which companies will be permitted to use corporate directors. In December 2020, the then Department for Business, Energy & Industrial Strategy consulted on a “principle based” exception which will form the basis of the regulations. Only corporate entities with “legal personality” will be appointable as corporate directors. All directors of the latter will have to be natural persons and those natural person directors must, prior to their appointment, have had their identity verified.
Existing companies with corporate directors will be given 12 months after the legislation is brought into force to comply, and new companies, or companies appointing a corporate director, must ensure that they satisfy the conditions from the date the new measures are in force.
New powers to check, remove or decline information submitted to, or already on, the companies register:
Currently, Companies House is required to accept information if it is “properly delivered” and has limited powers to correct or query information where there is a suspicion that something submitted is erroneous or fraudulent. The Act gives Companies House new powers to reject and query new filings, as well as to query information already on the register, where such information is identified as potentially fraudulent, suspicious, or might otherwise impact the integrity of the register or wider business environment.
The new powers will also permit the Registrar of Companies to compel a person to provide information so that they can make a decision about the queried filing. If an entity fails to respond to a query, or to provide sufficient evidence in its response, the Registrar may take action, including imposing sanctions.
A recent Companies House policy paper has suggested that these powers will be used “sparingly” and companies will be given guidance to help understand how and why the new power might be used, and to provide examples of appropriate evidence. Concerns have been raised however that, even if the powers are exercised based on a risk-based approach, any delay to the process of registering filings (particularly filings relating to actions which do not take legal effect until registration), may negatively impact the need for certainty on legitimate transactions.
Changes are also due to be made to the rules governing the Register of Overseas Entities to ensure consistency with the changes affecting companies and other entities registered under CA 2006, and the rules relating to annual confirmation statements, company names and financial reporting requirements for micro-entities, small companies and companies seeking to rely on an audit exemption.
For the changes outlined above, further detail will be included in secondary legislation and additional Companies House guidance in due course. For that reason, it is anticipated that it will be at least a year until most of these provisions are in force. There are, however, things that those responsible for company record-keeping and administration can be thinking about in the meantime. These include:
- identifying who may be subject to the new identity verification requirements;
- looking at current practice for routine and transactional filings at Companies House and thinking ahead as to how these might continue or need to be adapted based on the new restrictions on who can file documents at Companies House on behalf of companies;
- ensuring that company records, including those relating to shareholders, PSCs and directors are complete and up-to-date; and
- checking whether any companies within a group structure have corporate directors appointed to their board.
If you would like further information on any of the above, please speak to your usual A&O contact.