Company directors will need to be careful when completing due diligence when wide reaching Economic Crime Bill comes into force, explain Paul Brehony, partner, and Kate Gee, counsel, Signature Litigation
In May, the Home Office tweeted about the Economic Crime and Corporate Transparency Bill (the Bill): ‘Driving out dirty money from the UK. Strengthening the UK's reputation for supporting legitimate business to thrive.’ Shortly thereafter, the Department for Business, Energy and Industrial Strategy claimed that the Bill would enable the government to ‘crack down on kleptocrats, criminals and terrorists who abuse our open economy’.
Clearly, the government wants the Bill to make the headlines, but what is the Bill likely to mean for company directors? It focuses on five key areas:
- reforms to Companies House geared towards making it ‘a custodian of more reliable data concerning companies and other UK registered entities’ and transposing these new requirements to the recently incepted Register of Overseas Entities;
- reforms to prevent the abuse of limited partnerships;
- additional powers to seize and recover suspected criminal cryptoassets;
- reforms to give businesses more confidence to share information to tackle money laundering and other economic crime; and
- new intelligence gathering powers for law enforcement and removal of disproportionate reporting burdens for business.
Combatting economic crime via the Act
The Bill is a core part of the government’s efforts to combat economic crime, and it will sit in parallel with the Economic Crime (Transparency and Enforcement) Act 2022 (ECA), enacted in March this year. As part of the response to the Russian invasion of Ukraine, the ECA took only two weeks from first reading to royal assent.
The ECA created a register of overseas entities (ROEs), which imposes a requirement for overseas entities to identify and register their beneficial owners; expanded the scope of application of unexplained wealth orders by creating an alternative test; and introduced measures that enable the government to impose sanctions more quickly.
Further expansion of measures under the Bill
The new Bill would enhance the framework available to crack down on and combat economic crime.
The provisions include giving Companies House fresh powers to verify the identity of all new and existing registered company directors, people with significant control and anyone delivering information. It will be able to ‘check, challenge, and decline’ false or fraudulent information submitted to, or already appearing, in the register.
The Bill would give Companies House - which provides a public register of businesses, their accounts, and their directors - fresh powers to investigate false (or potentially false) information when new companies are established.
While well-intentioned, these provisions will require transparency when verifying companies as limited partnerships (LPs) or overseas entities are likely to add to the compliance burden of both company directors and their accountants in that respect, as well as in the context of their day to day KYC and verification measures.
In the context of verification of the register of overseas entities, in particular, ICAEW has warned members (and other professional bodies) that, given the liability around related offences is particularly strict, to be ‘extremely cautious’ when offering verification services.
The Bill would also extend the investigative and enforcement powers of Companies House, enabling it to cross-check and share data with public and private entities, and to report suspicious activity to security agencies and law enforcement.
Through the proposed expansion of powers, the Companies House registrar will become a more active – and perhaps interventionist? - gatekeeper over company creation.
ICAEW has long advocated and supported such reforms and the need for companies to provide clear, accurate information, with that being seen as a key measure for cracking down on fraudulent and illegal activity.
As part of its new AML measures, the Bill will amend the criminal confiscation powers and civil recovery powers of the Proceeds of Crime Act 2002, expand the Serious Fraud Office’s pre-investigation powers, and introduce new powers to seize and recover cryptoassets.
Designed to strengthen law enforcement agencies’ ability to target cryptoassets that are subject to fraud, money laundering or ransomware attacks, the proposed amendments will enable agencies to seize, freeze and recover cryptoassets used for criminal purposes.
They will also be empowered to compel businesses, such as digital currency exchanges, to disclose information related to suspected money laundering or other illicit activity.
Beyond new transparency requirements and a limited partnership verification process which aims to identify ultimate owners, the Bill requires LPs to have a connection to the UK. Failure to comply with either requirement could result in the relevant LP being deregistered.
Notably, where appropriate for the purpose of combatting economic crime, the Bill would allow businesses to share information directly with each other, overriding civil liability for breaches of confidentiality. Similarly, it would remove the need for a suspicious activity report (SAR) to be submitted before the National Crime Agency’s financial intelligence unit in certain circumstances, thereby streamlining the steps involved in combatting fraud.
Looking ahead, what does the Bill mean for business?
Undoubtedly, the new procedures pose a threat to privacy and confidentiality rights, and the way in which companies and their advisors engage with and implement the changes – if it is passed – will have important future ramifications.
In response, businesses will need to review their information held in Companies House; update due diligence processes to guarantee compliance in Companies House filings; consider their economic crime information-sharing processes; and review their use of LPs, particularly concerning the UK-connection requirement.
For now, questions arise about funding. During the first parliamentary debate over the Bill in October, MPs noted an absence of new funding proposals for law enforcement agencies.
As Mike Miller, ICAEW’s economic crime manager put it, ‘the ability to implement these changes will be dependent on a sufficient level of resource to ensure that these new powers can be utilised effectively’.
Given the widespread cuts anticipated by the new Rishi Sunak-led government and clearly foreshadowed by the Chancellor Jeremy Hunt, underfunding might hinder the operation of the Bill in practice.
We wait to see whether more detailed spending plans published in the coming weeks or months will present a solution to this problem.
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