The UK Government’s position on how it deals with economic crime has been on a rollercoaster journey over the last couple of months, navigating through a dramatic ministerial resignation, the National Crime Agency reportedly being overwhelmed by criminal outfits, and announcements that the Economic Crime Bill was off indefinitely and then back on again - but for the end of this year.
Now the speed of the escalation of the crisis in Ukraine has prompted the UK Government to respond with a variety of measures, including the publication of a white paper on corporate transparency on 28 February 2022 (the White Paper), which sets out reforms to the role of Companies House with the intention of setting a new global standard for corporate transparency.
In this Law-Now we summarise the key proposals and some practical issues for companies and their directors and advisers to consider.
1. Companies House Powers
The role of Companies House has traditionally been passive, in that it has been limited to acting as administrator and publicly accessible repository of company information, rather than as a regulator. The White Paper proposes to change that, so the Registrar will be able to scrutinise and challenge information filed with it and play a part in the wider fight to promote and maintain the integrity and reliability of the UK business landscape. The new powers will include a new querying power as well as the expansion of Companies House’s power to remove material from the register.
The Querying Power
Currently, Companies House is required by law to accept any information that is properly delivered and has limited powers to correct or query any suspected incorrect or fraudulent information filed. The new proposed power would enable Companies House to challenge or reject new filings, but it would also enable it to challenge any existing filings where information is identified as fraudulent, suspicious or otherwise undermining the integrity of the register. In some cases the Registrar would have the power to remove information already registered. This power would be discretionary, so the Registrar would have no legal obligation to exercise it, but it would be focused on those cases the Registrar believed posed the biggest risk to the integrity of the register.
Guidance will be produced to give a better understanding of how and why this new querying power may be used, and setting out examples (rather than a definitive list) of appropriate evidence to support responses to the Registrar’s queries.
For any new filings, Companies House would no longer be required by law to accept any information that is merely properly delivered if the Registrar had reason to query the contents of the filing. In such cases the Registrar would reject the filing and give a reason, after which a filing could be re-submitted but the applicant would have to address the query raised and provide any evidence (if required). If the re-submission did not satisfactorily address the query, it would again be rejected. Where filings are queried, this is likely to increase the administrative burden on companies who will need to respond to any queries in a timely manner.
For any existing filings that were reviewed by Companies House retrospectively, Companies House would be able to raise a query and the recipient would have 14 days to respond and provide evidence to support the response. Any extension to the time limit for response would be at the discretion of the Registrar.
Extension of the Removal Power
Currently, the Registrar may remove certain materials from the register in only very limited circumstances, outside of which a court order must be obtained to require the Registrar to remove the offending filing. There are proposals to expand the Registrar’s powers in this respect, in particular, to give effect to the new querying power. However, the power would be discretionary and targeted, and as a consequence, not all filings with errors would be caught, challenged or rejected prior to registration (or removed after registration).
Failure to respond to a query or to provide sufficient or appropriate evidence to support a response could result in the Registrar taking a range of actions, including imposing penalties on the relevant entity – the Government have stated that a range of possible penalties is being considered but the details have not yet been announced.
Data Sharing Powers
In addition, the (currently limited) powers of Companies House to share information with other agencies are proposed to be expanded, so that the Registrar would be able, in certain circumstances, proactively to pass information that it flags as suspicious to law enforcement or other regulatory bodies (including anti-money laundering regulators).
2. Verification Requirements
It is proposed that all entities registered at Companies House will need to have at least one fully verified natural person linked to them. The verification process would likely require a natural person to upload an identifying photograph, together with an identification document. A digital comparison would then verify a match between the photograph and the document and create a verified account. The verification process would only need to be completed once. It is proposed that the verification itself will be carried out by third party service providers and Companies House would be given access to the data. Both parties would need to comply with any data protection law requirements.
The requirement to create a verified account with Companies House would apply to any new or existing company director (or the equivalent in respect of any other registrable entities, such as members of a limited liability partnership (LLP) or the general partner of a limited partnership (LP)), persons with significant control (PSCs) and anyone who needed to be able to file information in respect of such entities at Companies House.
Directors (or their equivalents) must already be registered at Companies House within a certain time period after appointment. Under the proposals, the Registrar would be able to refuse to register them at all unless they had created a verified account. PSCs would also be asked to open a verified account if they did not already have one, but it appears that Companies House will not refuse to register the PSC without a verified account, marking the PSC as “unverified” instead after which the sanctions regime would apply.
The White Paper indicates that certain restrictions and identity verification requirements would also be imposed on corporate directors, including a requirement that all directors of any corporate director must be natural persons, each of whom would also be subject to an appropriate identity verification process. In particular, corporate directors of limited companies must be entities with legal personalities (i.e. other limited companies, or LLPs). Appointments of corporate directorships would also be restricted to entities registered in the UK.
For now, it is proposed that corporate members of LLPs and corporate general partners of LPs would simply need to provide details of their directors or nominate a managing officer whose identity must be verified. The White Paper says that further restrictions on the use of corporate members in these contexts may be imposed if necessary to “mitigate the risk of misuse without affecting the legitimate use of these structures”. However, it will be a requirement to have at least one designated member who is a natural person to successfully register an LLP.
Failure by directors (or their equivalents) or PSCs to comply with identity verification requirements within the requisite time would result in the relevant person having committed a criminal offence and potentially being liable to civil penalty. A company that is directed by an unverified director would also have committed an offence, although a defence would be available if the director was unable to verify their identity due to a technical failure at Companies House.
While the majority of persons doing business in the UK already do so legitimately and transparently, the new rules require proactive steps to be taken by most companies and will impact the structuring and/or timetable considerations in respect of future M&A and private equity transactions, amongst others.
Any person who is currently a director (or equivalent), a PSC or otherwise needs to make filings at Companies House would have to create a verified account with Companies House if and when these new measures were put in place. Given this will affect a large number of people already on the register or who file information at Companies House, it is possible there will be technical issues and/or delays when the system first comes into effect. However, we would think, in line with other new registration requirements introduced in the past, there is likely to be a window of time in which initial registrations can be made without incurring any penalties or being locked out of the system. Those who are not already on the system but who are contemplating being appointed as directors or PSCs in the future should consider creating a new account in advance of such appointment in readiness.
The proposals in the White Paper also suggest that in respect of any existing corporate directorships, the registers would need to be checked to ascertain whether: (a) they meet the new all-natural person board requirement, given that at present a registered entity may have a corporate director which is not a natural person as long as there is at least one other fellow director who is a natural person; and (b) they may need to be replaced if they are non-UK entities, such as those incorporated in the Channel Islands, etc. Private equity sponsors should be particularly aware of these developments, given the large number of companies they tend to control (including portfolio companies and companies embedded in ‘newco stacks’ for tax and finance structuring purposes). Private equity sponsors may need to make a large number of natural person director appointments depending on the extent of their use of corporate directors.
Persons who regularly make filings at Companies House and their advisers would also need to familiarise themselves, once it appears, with the new Companies House guidance on filings or information that may fall within the scope of challenge, types of evidence that would be accepted to clear any challenge and the relevant timeframes in which challenges must be cleared before penalties may kick in.
Businesses and their advisers would also need to factor into any deal or advisory timetables the timing and other practical issues (such as the availability of technology) necessary to (a) obtain a verified account with Companies House for any first time users; and (b) the potential for challenges to company filings, especially if they are time-sensitive in the context of a wider transaction.
The proposals in the White Paper are likely to be put forward later this year in a supplement or additional bill to the Economic Crime Bill, which was introduced to Parliament on an expedited basis on 1 March 2022.
If you would like to discuss any of the above, please contact Emma Clark or your regular CMS contact.