The Economic Crime and Corporate Transparency Bill: Strengthening Identification for Company Directors

Introduction

The Economic Crime and Corporate Transparency Bill received Royal Assent on 26 October 2023 with a view to redress oversight and transparency of corporate structures in the UK. The Economic Crime and Corporate Transparency Act 2023 (ECCTA), as it will be known, will look at everything from economic crime and failure to prevent fraud. In the ever-evolving economic landscape, there are numerous methods used by individuals and corporations to engage in illicit financial activities.

Impact on the Companies House

As part of its response to the ever-present threat of economic crime, the UK government is making the Companies House less of a passive recipient of information and a more proactive watchman over creating companies. Among its key provisions, one of the most important requirements is for stricter identity verification of company directors, as well as shareholders and persons in control.

A Need for Stricter Identity Verification

Ensuring the authenticity of the identities of company directors is vital in preventing economic crimes such as money laundering, tax evasion, and fraud. In many cases, criminals have violated the anonymity provided by shell companies to launder money and engage in illicit activities. To address this issue the Bill places great emphasis on verifying the identity of those individuals serving as directors of companies.

Key points in the Bill:

1. Enhanced Due Diligence: Companies are now required to conduct more rigorous due diligence when appointing directors’ by verifying their identities, addresses, and previous affiliations. Enhanced due diligence measures also apply to third-party service providers that assist with director appointments.
2. Verification of Ultimate Beneficial Owners: The bill mandates that companies must identify and verify the ultimate beneficial owners, who are the individuals with a significant interest in or control over a company. This measure is crucial in coming to terms with the ownership structure and preventing the use of nominees or hidden actors in corporate governance.
3. Register of Directors: A centralised register of directors is to be established with the Companies House so that authorities, law enforcement agencies, and the public can access information about company directors. This increased transparency can act as a deterrent to individuals with malicious intent.

Why is Stricter Identity Verification good?

1. Stopping Economic Crimes: Enhanced identity verification will significantly reduce the potential for money laundering, tax evasion, and other economic crimes, as criminals will find it more challenging to hide behind anonymous corporate structures.
2. Improved Corporate Governance: Stricter identity verification promotes better corporate governance by ensuring directors are held accountable for their actions and decisions. This will enhance general trust in the business environment which must be a benefit to all.
3. Increased transparency: A centralised register of directors improves transparency as well as the accessibility to relevant information, which offers benefit to regulators and the public. This will in turn improve trust in the corporate sector as it provides insight into who is running companies.

Challenges and concerns over the Bill

This reform of the Companies House is nothing short of a historical change for the Companies House executive agency (all the British government) but whether this Bill sees its way through the chain will be another matter entirely. While the Economic Crime and Corporate Transparency Act is a significant step forward in the fight against economic crime, it does raise some concerns. Critics argue that the legislation may increase the administrative burden on legitimate businesses and privacy concerns for those serving as directors. Ultimately, it is about achieving a balance between security and individual rights and the process of doing so may prove to be a challenge. For the most part, the Act will be implemented through unpublished secondary legislation. Some changes will also require significant development and upgrades to Companies House systems and procedures. These have yet to be announced or enacted so watch this space!

So, what does this mean for companies?

The Registrar of Companies has listed the following changes as likely to be implemented as early as 2024:

• lawful purpose confirmation requirements – requiring those persons who set up a company to confirm it is set up for lawful purposes and to repeat that confirmation from time to time.
• for all companies to register an email address with the Companies House
• new rules on registered office addresses; need to confirm this is a legitimate address, this is to prevent the use of third parties or private individuals address where there is no connection to the company.
• for the Companies House to have greater power to question and fact-check information, to eliminate inaccurate information so that they may forward to other government departments and law enforcement agencies necessary data.

There has been no mention of the new identity verification regime in this list of early measures but in a society where dependency on digital advancement is growing, it is something which we are all now imminently aware of.

If you have any questions or concerns regarding these changes or have concerns about your company, reach out to Alec Brooks, our company commercial expert at Lamb Brooks via email at hello@lambbrooks.com or call us on 01256 844 888.