Another step towards transparency: the Economic Crime and Corporate Transparency Act 2023 becomes law

The Economic Crime and Corporate Transparency Act 2023 (ECCTA), which gained Royal Assent on 26 October 2023, is part of a package of reforms aimed at tackling economic crime and preventing the abuse of corporate structures in the UK by improving the transparency of corporations and those behind them. It is far-reaching in scope and Companies House have called its enactment “one of the most significant moments in [its] history”.

Amongst other things, the ECCTA reforms Companies House and turns the Registrar of Companies into a more effective regulator with clear objectives and greater enforcement powers, introduces ID verification for directors and other key individuals, makes a number of changes to the Companies Act 2006 (CA 2006) to improve the transparency of UK corporates, reforms the formation and administration of limited partnerships (including Scottish limited partnerships), augments the disclosure requirements for overseas entities on the Register of Overseas Entities and introduces a new corporate offence of failing to prevent fraud.

Although implementation of most of the changes will happen over time, companies should start familiarising themselves with the new regime as soon as possible.

Key action points for companies

• Raise awareness: although much detail remains to be settled, company secretaries and in-house legal teams should start familiarising themselves with the upcoming changes – updates to internal procedures and processes will be required.
• Check the public register: Companies House will become a regulator with teeth – check now that filings are up to date and accurate.
• Check your PSC details: in this notoriously complicated regime, the requirements for persons with significant control (PSCs), and relevant legal entities in particular, are set to increase – get ahead by checking your filed details are up-to-date and correct.
• Prepare for ID verification: work out who in your organisation will need to have their identity verified – warn them and start to plan for verification.
• Review group structures for companies with corporate directors: it is expected that the prohibition on corporate directors will be brought into force with limited exceptions – companies will have to ensure any corporate director meets the new eligibility criteria.

Overview and background

The ECCTA is part of a wider Government initiative to crack down on economic crime and improve transparency over corporate entities in the UK. It follows the Economic Crime (Transparency and Enforcement) Act 2022 which, amongst other things, introduced the Register of Overseas Entities aimed at combatting the flow of illicit finance into the UK via the ownership of real estate. The ECCTA will have a much wider impact on all UK corporates, fundamentally changing the way they are formed and administered.

Much of the detailed changes introduced by the ECCTA will be contained in regulations which are still to be drafted and it is recognised that both Companies House and its customers will need time to adapt their processes to cater for the new regime.

A detailed implementation timetable has not yet been released, but this Companies House blog post has confirmed that whilst changes such as ID verification will need longer to implement, it expects that various of its new powers (including those enabling it to query, reject and remove information and annotate the register to highlight potential issues) and some of the more straightforward changes to company information (for example, the requirement to have a registered email address and requiring registered offices to be at an address where the company can actually be contacted) will come into force in early 2024.

This update gives an overview of the key corporate aspects of the ECCTA and further updates will follow as provisions are implemented and accompanying regulations published.

However, the ECCTA is broader than this in scope including, amongst other things, changes to criminal liability for corporations and provisions on money laundering and cryptoassets. An update on the introduction of a new corporate offence of ‘failing to prevent fraud’, a widening of the law governing the attribution of economic crimes to corporate bodies and the new money laundering provisions included in the ECCTA can be found here.  

Companies House and the Registrar

The ECCTA will change the role of Companies House and the Registrar of Companies significantly: Companies House has historically been a passive information depository and the Registrar currently has limited powers to query the accuracy of information submitted to it or to flag and investigate suspicious activity.

The EECTA establishes clear objectives for the Registrar to promote the integrity of the public register and minimise unlawful activities. The Registrar will move from simply recording and providing access to the information submitted to it, to being an active gate-keeper and regulator, responsible for the reliability of the information collated by it, and will have new and enhanced investigative and enforcement powers in its arsenal to drive compliance. It will take an active role in law enforcement through its ability to share information with other public bodies.

According to Companies House, certain of the new powers of the Registrar are likely to be in force early in 2024, which means we are soon likely to see a much more pro-active approach from Companies House. Companies may wish to use the time before implementation to tidy up any known gaps or errors in their filing history.

Identity verification

Identity verification is a significant part of ECCTA. Its aim is to increase the transparency of individuals’ interests in UK corporates and decrease the opaqueness of corporate structures. Identity verification will apply to directors, all members of LLPs, PSCs and those who file documents at Companies House.

Identity verification will take place either directly via Companies House or by using an intermediary (such as a lawyer, accountant or formation agent) which has been authorised as an authorised corporate service provider (ACSP).

The changes will require significant investment by Companies House to introduce the necessary technology and integrate it with the current systems and procedures and secondary legislation also needs to be passed. UK businesses will need time to understand how the changes will affect them in practice, prepare for the verification process and adjust their ongoing procedures. As such, we are expecting it to take some time before these changes come into force.

Changes to company administration

A number of the changes included in the ECCTA relate to the administration of day-to-day company secretarial matters.  Directors and company secretaries will need to familiarise themselves with the revised regime as sanctions for non-compliance (including a proposed power, under new regulations, enabling the Registrar to levy a civil fine for non-compliance) are expected to be more regularly enforced by the newly empowered Registrar. We have set out some of the key changes below.

Dealing with Companies House

As part of the drive to improve the veracity of the register and to deter the filing of information by unauthorised individuals, the ECCTA introduces restrictions on who can file information with Companies House. 

Following implementation, a firm (meaning any entity that is not an individual) making a return will have to have that return filed on its behalf by an individual who is an officer or employee of that firm (or of a corporate officer of that firm) and whose identity has been verified, or by an ACSP acting on its behalf. Individuals filing on their own behalf will also need to have their identity verified. There are other restrictions on filings by and on behalf of individuals disqualified under director disqualification legislation.

As these changes are dependent on the identity verification process being in place, there should be some time before implementation to prepare.

Improving the transparency of company ownership

Improving the transparency of corporate ownership has been part of Government strategy since the introduction of the PSC register in 2016. The ECCTA continues this by introducing new requirements including:

• requiring the full names of subscribers to be included on an application for incorporation and the full names of shareholders to be included in a company’s register of members;
• requiring companies to make a one-off disclosure of full shareholder information to Companies House with their first confirmation statement following implementation; and 
• making changes to the PSC regime, including in relation to the duties on companies to collect information on their PSCs and report this to the Registrar.

The Government is planning to use powers under CA 2006 in tandem to tighten the disclosure requirements for companies claiming an exemption from the requirement to provide PSC details and for companies naming a relevant legal entity as a PSC.

These changes will require secondary legislation and systems changes at Companies House and so implementation will not be immediate. A proposal that the ECCTA require shareholders to confirm they are not acting as a nominee for another person (or to confirm details of the beneficial owner if they are) was not included in the final version, but the ECCTA does give the Government the power to pass new regulations to expand the information required to be supplied by members to a company.

Directors

Given one of the aims of the ECCTA is to prevent criminals using UK corporates to abuse the UK’s open economy, it is not surprising that the ECCTA tightens provisions around directors, including:

• introducing identity verification checks for all directors;
• making it an offence to act as a director (or for a company to permit a person to act as a director) without having a verified identity, or where the person’s appointment as a director is not notified to Companies House within 14 days; and
• widening the grounds for director disqualification.

In addition, the Government intends to bring into force the ban on corporate directors (passed into law in 2015 but never implemented) together with a limited exception for corporate directors that are entities with legal personality and have all natural directors who have had their identity verified.

“Appropriate” registered office address and email address

Registered offices for both existing and newly incorporated companies will need to be at an “appropriate” address, where a document delivered to the company would be expected to come to the attention of that company and where an acknowledgement of delivery can be obtained. The Government intends to give the Registrar the power to change a company’s registered office if it is not satisfied the relevant address is “appropriate”.

Companies will be required to maintain and register with the Registrar an email address at which emails from the Registrar would be expected to come to the attention of the company. The email address will not be part of the public record and is intended to facilitate communications between the Registrar and companies.

Both changes are expected to come into force in early 2024.

Abolition of the requirement for companies to maintain certain registers

Under the ECCTA,  companies will no longer be obliged to maintain their own registers of directors and directors’ residential addresses, secretaries and PSCs. This information will only be required to be filed and kept up to date at Companies House. In addition, a company will no longer be able to elect to hold its register of members at Companies House.

New restrictions on company and business names

The existing restrictions on company names will be broadened by including, for example, prohibitions on names intended to facilitate an offence of dishonesty or deception; names suggesting a (non-existent) connection with a foreign government or similar organisation (e.g. NATO); and names containing computer code. Some changes will also be extended to business names. The Registrar is being given new powers to enforce the changes, including the ability to direct a change in name and to remove a company’s name and replace it where the company fails to comply with such a direction.

Protecting personal information and preventing fraud

Recognising that increased transparency in relation to those establishing and running companies can potentially lead to an abuse of personal information on the public record (for example identity theft and fraud), the ECCTA contains measures designed to strike a balance between openness and protection by extending the circumstances when individuals can apply for the suppression of certain information from public view.

The detail of who will be able to apply for suppression of information and the process for doing so will be contained in regulations which are yet to be drafted.

The provisions will only come into force once the relevant regulations and guidance are drafted and the necessary systems changes at Companies House have been made.

Financial information filing for smaller companies

The ECCTA clarifies what financial information small companies and micro-entities need to file with the Registrar and aligns this more closely with the financial information they are required by law to prepare.

Small companies (including micro-entities) will now need to file both a balance sheet and profit and loss account. Small companies (but not micro-entities) will also need to file a directors’ report.  Auditors’ reports will need to be filed, unless the company can take advantage of an audit exemption. In addition, the option to prepare abridged accounts will be removed and companies seeking to rely on an exemption from audit will need to identify the exemption being relied upon and to provide an appropriate directors’ statement.

Limited Partnerships

Limited partnerships (LPs) historically required very limited information to be filed publicly. However, following various high-profile abuses of LPs, the Government is using the ECCTA to modernise the Limited Partnerships Act 1907 and tackle the misuse of LP structures. The reforms apply to both English LPs, Scottish LPs and certain Scottish general partnerships. The key changes include:

• tightening registration requirements and limiting those who can file documents at Companies House to ACSPs acting on behalf of the LP only;
• requiring LPs to maintain a connection to the UK, particularly through the new “appropriate” registered office address requirement;
• requiring general partners to appoint registered officers and named contacts and requiring registered officers to have their identities verified;
• increasing transparency obligations for LPs and their partners by requiring submission of more information about them, and requiring ongoing annual confirmations to be made to the Registrar, and granting HM Revenue & Customs a right to request accounts to be prepared and delivered to it; and
• empowering the Registrar to dissolve LPs on grounds of failure to comply with the new laws or in accordance with a court order, as well as having the power to deregister dissolved or non-trading LPs, ensuring the register is as up to date and accurate as possible.

The two immediate points to consider for any company that has a LP in its group, or itself acts as a general partner to a LP are as follows.

Requirement for a “connection to the UK”

The ECCTA requires that a LP’s registered office is an “appropriate” address (as above for companies) but applies further conditions including that such address has to be in the part of the UK where the LP is registered and be at least one of: (i) the address of principal place of business of the LP; (ii) the residential address of the general partner (if an individual) or the registered or principal office of the general partner (if a legal entity); or (iii) the address of the ACSP acting for the LP.

The Act makes consequential changes to the UK Alternative Investment Fund Managers Regulations 2013 to avoid an LP that has migrated its jurisdiction outside of the UK being considered a UK alternative investment fund simply because it now has a UK registered office. 

Requirements during transitional periods

The ECCTA legislates for multiple notification statements that general partners must deliver to the Registrar during one or more transitional periods of six months beginning when the relevant parts of the ECCTA come into force. These notifications include confirming who the partners are, specifying the registered office address, specifying the registered email address, and whether there are any corporate managing officers. As the implementation dates for the various parts of the ECCTA have not been published, when these transitional periods will commence is not yet known, however, it is important for general partners to familiarise themselves with the required notifications as failure to provide the requisite information could be grounds for the Registrar to dissolve the LP. After this, LPs will be subject to ongoing reporting requirements, including delivering an annual confirmation statement.

Register of overseas entities

The ECCTA makes a number of amendments to Register of Overseas Entities regime, including a requirement for overseas entities to supply property title numbers and additional information relating to trusts, and to disclose changes in beneficial ownership that occurred between 28 February 2022 and 31 January 2023. 

The scope of who qualifies as a ‘registrable beneficial owner’ of an overseas entity has been extended: where an overseas entity holds qualifying UK property as a nominee for another person, that other person (or if that other person is a legal entity, the beneficial owner of it) will qualify as a ‘registrable beneficial owner’ of the overseas entity and will need to be disclosed on the register.

But the proposed change to require an overseas entity to make ‘real time’ and pre-transaction updates to the Registrar was dropped. Updating the Registrar will continue to be on an annual basis. 

No implementation timetable for these changes has been released but, when they do take effect, we expect the disclosure amendments to be rolled into the annual update process. 

For more information on the regime and the annual update process, see our update from 31 July 2023 here.  

What should companies do to prepare?

As highlighted in our update, much of the detailed changes will be contained in regulations which have not yet been drafted and significant changes need to be made to the systems and processes at Companies House before many changes can be introduced.

The Government has not published a detailed timetable for implementation but as and when it does, and regulations are published, we will provide further updates covering the changes and their impact in more detail. The Government has, however, released a number of useful factsheets explaining the proposed changes: these may be useful in the interim to help directors, company secretaries and in-house legal teams familiarise themselves with what to expect.

For more information, or to discuss how the ECCTA will affect your business, please contact the authors or your usual CMS contact.