What is the Economic Crime and Corporate Transparency Act?

The Economic Crime and Corporate Transparency Act (the “Act”) received royal assent on 26 October 2023. The Act introduces, among other things, fundamental changes to the purpose and role of Companies House. These changes are arguably the biggest since the creation of the role of Registrar in 1844 and aim to ensure that the legal framework that underpins its operations meets the demands of an increasingly digitally based 21st century economy.

The Act builds on the Economic Crime (Transparency and Enforcement) Act 2022, which introduced the Register of Overseas Entities in August 2022. Together, both acts are a major step forward in tackling economic crime and improving corporate transparency in the UK.

Under the Act, Companies House will, amongst other things, be empowered to require companies to file digitally, moving away from the remaining paper-based functions. This move will hopefully drive greater efficiency for businesses and Companies House, providing better value for money and a more powerful data set for those searching the public register.

With an expanding statutory role, Companies House is moving away from being a largely passive recipient of information to a much more active gatekeeper and  custodian of company creation and more reliable data, maintaining the integrity of the register. Recent years have seen a rise in the misuse of companies, raising concerns over the accuracy of the companies register and challenges in safeguarding personal data on the public register. Therefore, these changes will look to combat these issues and ensure that companies on the UK register are run responsibly, transparently and with accountability.

What are the key changes introduced by the Act?

• New querying power – the Registrar’s existing role is to register company information if it is ‘properly delivered’ and to make it available for public inspection.

The intention now is for the Registrar to have the power to reject and query new filings submitted for registration. This includes querying information already registered on the public register if identified as potentially fraudulent, suspicious, or likely to undermine the quality of information or enable individuals to pursue illicit activity, such as fraud and other economic crime.

This discretionary power will be exercised using a risk-based approach and we understand that a query might be instigated either from information within the Registrar’s own knowledge, or because of a concern raised by a third party. If a query is raised and the company fails to respond, or fails to provide sufficient evidence in its response, the Registrar will be able to take a number of actions. These actions include imposing financial penalties or passing to law enforcement to consider criminal sanctions.

• Company names – the range of circumstances where the use of a company name can be prohibited is expanding. Companies will be restricted from being registered with names that, in the opinion of the Secretary of State, are intended to facilitate an offence involving dishonesty or deception or suggest a false connection with a foreign government or authority. Companies will also be prohibited from being registered with a name that consists of or includes computer code. The Secretary of State and the Registrar will have power to direct companies to change their names if they fall within any of the above categories.

If a direction is made and a company fails to change its name within a prescribed period, the Registrar will be able to change or remove a company’s name from the public register and replace it with its company number. If a company fails to respond to a direction or continues to trade under the name that the Registrar has changed, it will be guilty of an offence and liable to a fine of up to £1,000.

• Identity verification – all new and existing directors (and equivalents for other registrable entities), persons with significant control and the majority of those submitting documents to the Registrar for filing will have to prove they are who they say they are by verifying their identity.

Identity verification can be undertaken either directly via Companies House or indirectly via a corporate service provider that must be registered with a supervisory body for anti-money laundering purposes and must have been authorised by the Registrar to deliver documents to it. If the user is verifying their identity directly with Companies House, they will need to create an account at Companies House and upload a photo of their face and their photo ID document, whereby the verification system will link both photos and the system will check the documents for authenticity.

Alternative methods will be available for individuals without photographic ID and digitally assisted / non-digital identity verification will be available for users who cannot use the digital identity verification system. An individual who is under an obligation to verify their identity and fails to do so could, depending on the circumstances, be subject to, amongst other things, criminal proceedings or civil penalties. The public register will also be annotated to reflect their unverified status.

• Enhanced data sharing – the Registrar will be able to proactively pass on relevant information and there will be more extensive legal gateways for data sharing with law enforcement and other public and regulatory bodies. There will be more efficient sharing of suspicious activity with law enforcement and an establishment of feedback loops with other government bodies and the private sector.

This will lead to a quicker identification of discrepancies between information on the public register and information held by other bodies. Suspicious activity may be identified by reports made via Companies House, discrepancies reported by regulated professionals or members of the public and cross checks with data held by other bodies or an internal analysis of data held by the Registrar.

• Enhanced privacy mechanisms – enhanced privacy across the public register will look to prevent abuse of personal information on it. Any individual whose personal information is available to view on the public register will, subject to any exceptions which we understand the government will set out in further regulations, be able to apply to have some of it suppressed. While information may be supressed from public view, the Registrar will be able to share suppressed or protected information with law enforcement agencies and other public authorities if deemed necessary.
• False statements – the Act makes it a criminal offence for a person, without reasonable excuse, to deliver to the Registrar a document or statement that is misleading, false or deceptive. Where a basic false statement offence is committed by a corporate entity, every officer in default also commits the offence and will be liable to a fine.

There is also a new aggravated offence for any person who knowingly delivers to the Registrar a document or statement that is misleading, false or deceptive. Where an aggravated false statement offence is committed, liability can be a fine or up to two years imprisonment (or both).

• Lawful purpose statement – all companies will be under a duty to confirm lawful purposes and will need to include a statement, at the same time that it makes a confirmation statement to the Registrar, that the intended future activities of the company are lawful. When a company is incorporated, the application for registration will also need to include a statement that the subscribers wish to form the company for lawful purposes.
• Statutory registers – the Act abolishes the requirements imposed on companies to keep a local register of directors, register of directors’ residential addresses, register of secretaries and a register of people with significant control (sometimes referred to as a PSC register). Such information will instead need to be provided to the Registrar to keep centrally.
• Improving financial information on the register – Companies House will have the power to reject accounts that do not meet certain statutory requirements and the option for small companies and micro-entities to file abridged accounts will be removed.

Further changes are intended to be made at a later date, including requiring company accounts to be filed with Companies House in a digital format using the industry standard Inline eXtensible Business Reporting Language (iXBRL) with fully tagged financial information. There are also plans to reduce the number of times a company can shorten its accounting reference date.

When will the changes take effect?

The above changes are expected to come into force early this year, except for identity verification which we understand will take a bit longer to come into effect. Companies House will be increasing their fees this year too but, at the time of writing, we do not have information on the changes to fees or when they will come into effect.

To stay informed about Companies House fees, we recommend regularly checking their website, where they will share information about these updates.

How TWM can help you

With the framework and operations of Companies House changing so drastically, it is important that you understand what you need to do differently when you file information with Companies House and by when you need to do it.

Our experts can provide support in understanding the impact of the Act, including the enhanced measures against fraud, the effect on corporate liability and the sanctions and penalties imposed by failing to comply with the new reforms. If you have any questions or require assistance, please contact our Corporate team today.