In our insight article in November 2022, we wrote about the key points for companies in The Economic Crime and Corporate Transparency Bill ("the Bill"). The Bill has been through most of its legislative stages and will be back in the House of Commons on 4th September for consideration of the House of Lords' amendments. The Bill is, therefore, likely to receive Royal Assent in September or October.
The Bill has had much parliamentary scrutiny and there have been numerous amendments proposed during its legislative passage, some of which have been accepted – for example, the new offence of failure to prevent fraud – and others which were rejected.
Various pieces of legislation, including the Companies Act 2006, will be amended by the Bill's provisions but there will also be a significant amount of detailed secondary legislation implementing the changes. The Government will publish a timeline for the secondary legislation once the Bill has been enacted.
Currently, there is no firm information on when the changes will be implemented but Companies House indicated, in a letter to a parliamentary committee, that the ID verification measures will take some time to implement and integrate with their existing systems. We think ID verification may not be in force until 2024, giving companies more time to comply with what will initially be quite onerous requirements. All measures which require ID verification such as the proposals on corporate directors will also be delayed.
Key issues for companies
ID verification for directors: Individuals will have to have their identity verified in order to act as a director; failure to have been ID verified will not, however, invalidate directors' acts. All prospective directors will need to have their identity verified before notifying Companies House of their appointment. Existing directors will also need to verify their identity during a transitional period – this will need to be done before the company files its first confirmation statement after the IDV provisions come into force. All directors will receive a unique identifier when they have their ID verified and this unique identifier should link to all directorships and companies for that person, removing the need for that person to verify their ID for future director appointments.
As yet, there is no detail on how identities will be verified other than it will be possible to do so via Companies House' own system (yet to be revealed) or through an Authorised Corporate Service Provider, which law firms are likely to apply to become to enable them to file at Companies House on behalf of their clients.
ID verification for PSCs: The identity of individual PSCs will need to be verified in the same way as directors. Where the PSC is a company or other entity, then the identity of one of their officers must be verified. PSCs will need to maintain their verified status and failure to comply would be a criminal offence, punishable by a fine. The company can verify the identities of its PSCs but it will be the PSC's ultimate responsibility to do so and Companies House will have powers to force PSCs to confirm ID verification.
Email address: The Bill requires all companies to provide an 'appropriate' email address to Companies House – this won't appear on the public register but failure to do so will be an offence. Companies will also need to make sure their registered office is at an 'appropriate address'. In both cases, 'appropriate' means that the email or correspondence (sent by post or delivered by hand) will come to the attention of someone acting on behalf of the company.
Register of Members: Companies will need to ensure that shareholders' full names – in other words, both forename (rather than an initial) and surname – and a service address are entered on the Register of Members. Where the shareholder is a nominee for another person or entity, this will also have to be noted on the company's Register of Members with details of the beneficial owner's name and address. These new transparency requirements could be an administrative burden for companies, particularly where there are shareholders whose details have been lost.
Annual confirmation statement: A company's first confirmation statement after the legislation is in force will need to include a full shareholder list, the company's registered email address (see above) and confirmation that its directors have all had their identities verified, Going forward, the confirmation statement will require an annual statement that the company has a lawful purpose and that its principal business activity remains the same (as evidenced by its SIC code).
Statutory registers to be reduced: The Bill removes the need for companies to maintain their own PSC register. Companies will also no longer have to keep registers of directors, directors' residential addresses or secretaries.
Incorporation: Incorporating a company will involve the subscribers confirming they have not been disqualified as directors and that the company is being formed for a lawful purpose. The first directors will also have to have their identity verified (see above). There is speculation that the incorporation fee will be increased but there has been no official comment on this yet.
Delivery of information to Companies House: The Bill tightens up who can deliver information about a company and, essentially, will require anyone submitting information to Companies House to have their identity verified and confirm they have authority to file on behalf of the company. Authorised Corporate Service Providers will also be able to file on behalf of a company, provided they have permission from the company to do so, and the individual making the filing confirms they are an employee acting in the course of their employment with the Authorised Corporate Service Provider.
New offence of failure to prevent fraud & identification doctrine
The Bill introduces a new strict liability offence for corporates of failure to prevent fraud, similar to a Bribery Act offence, and punishable by an unlimited fine. A company (or other body falling within scope) will be liable where a specified fraud offence (which will be detailed in secondary legislation) is committed by an employee or agent, for the organisation’s benefit, and the company did not have reasonable fraud prevention procedures in place. It will not need to be demonstrated that the company management knew about or ordered the fraud. The government will publish guidance providing more information about reasonable procedures before the new offence comes into force but they are likely to include training and a fraud prevention policy.
When the offence was introduced into the Bill, it applied only to 'large companies' (with size criteria set out); however, the Lords removed the size criteria and, as the clause stands, it will apply to all companies regardless of their size. It remains to be seen whether the Bill, when enacted, includes the original 'large company' application.
The Government has also put the so-called 'identification doctrine' onto a statutory footing and has extended it to senior managers as well as directors. Currently, a company can only be criminally liable where the offence can be attributed to someone who was the "directing mind and will" of the company and this tended only to mean directors of a company. The Bill provides that if a senior manager of a company, acting within the actual or apparent scope of their authority, commits or attempts to commit one of the specified fraud offences, the organisation will also be guilty of the offence.
Top tips for companies:
- Start the process of getting any additional information needed, eg email address for the company and shareholders' full names and addresses;
- Alert your directors and PSCs to the forthcoming IDV requirements;
- Start thinking about and taking advice on a fraud prevention policy and other procedures including training for all staff
Once the Bill has received Royal Assent and the draft regulations containing the detailed implementation provisions are published, Brodies will be publishing regular updates and information on the new regime. In the meantime, please get in touch with the authors or your usual Brodies' contact for more information.
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