The Bill’s introduction
In February 2022, in a very different geopolitical context than the one which evolved less than a month later, the Government published its white paper on corporate transparency and register reform, which outlines its plans to reform Companies House. The white paper included suggestions to remove the incentives to create anonymous or fraudulent shell companies and partnerships in Britain and increasing the role of the Registrar as the gatekeeper of an open and transparent economy.
The impact of the White Paper was somewhat drowned out by the political events which succeeded its publication and the swift passage through Parliament of the first piece of legislation targeting economic crime and corporate transparency, the Economic Crime (Transparency and Enforcement) Act 2022 (“ECTEA”), shortly thereafter.
By virtue of the ECTEA, the Registrar of Companies found herself hastily endowed with powers which she was not entirely ready to make use of. Companies House reform, a vital element in the plan, lagged sadly behind.
Several months later, has the law finally caught up? The second bill is designed to fill the gaps left by the swift passage of the first and make provision for things which might otherwise have held up the progress of the first bill, had they been included in it. At the time of writing, the Bill has had its second reading in the House of Commons and is now at Committee Stage.
Three stated objectives
The Government summarise its aims in the Explanatory Notes accompanying the Bill. Once enacted, it is hoped that the new legislation will:
- deter those with the means or intention to abuse the UK’s economy to hide or launder their ill-gotten gains;
- enhance the powers available to law enforcement and those operating in the financial services sector to prevent or detect economic crime; and
- achieve much needed reform of Companies House.
Tackling the ineffectiveness of Companies House
Any ambition to improve the effectiveness of Companies House as a gatekeeper to UK Plc relies on the expansion of both the role and powers of the Registrar of Companies. The Bill sets out to achieve just that by enabling the Registrar to challenge suspicious appointments and filings, divert the income received from fees to undertake investigations and enforcement, and be able to more easily and effectively share information with law enforcement and the private sector.
For example, if the Bill were implemented as drafted, the requirements for filing under section 9 Companies Act 2006 would be extended so that an applicant must expressly state that its purposes will be lawful. False declarations and/or inconsistent documentation would warrant the Registrar rejecting the filing. The Registrar would also be given the power to prevent registration where she considers the purpose is to facilitate something which, in the UK, would constitute an offence of dishonesty or deception.
New provisions would require the verification of the identities of the proposed company directors, People with Significant Control, and those delivering documents to the Registrar. There would also be more regulation around the registration of limited partnerships to tackle the misuse of registered addresses and email addresses. Failure to provide sufficiently clear information supported by evidence may result in one or more of the partners committing an offence and could result in the Registrar having reasonable cause to believe that the limited partnership has been dissolved. Further, the Bill creates a new offence where general partners who are bankrupt or disqualified (including by virtue of being subject to financial sanctions) continue to manage a firm.
Information sharing in the regulated sector
The Bill also heralds significant changes for financial services firms in the regulated sector. It provides for the disapplication of civil liability for breach of confidentiality where one firm informs another regulated firm that it has terminated, restricted or refused business to a customer so that the second firm can prevent, investigate or detect economic crime. Note that the information must have been requested by the recipient firm for the purposes of conducting due diligence (or the like) on a potential customer. “Economic crime” is defined in Schedule 8 and includes money laundering, sanctions evasion, fraud, bribery, terrorist financing, false accounting, market abuse, and tax evasion. The Secretary of State reserves the right to amend the offences covered so that law enforcement and businesses can be responsive to changes in the nature and patterns of economic crime in the future.
In similar circumstances, and in strict compliance with GDPR, disclosures of customer information to third party businesses will also not amount to a breach of confidentiality. Third party business are defined as: (i) a deposit-taking body; (ii) an electronic money institution; (iii) a payment institution; (iv) a cryptoasset exchange provider; or (v) a custodian wallet provider.
Targeting cryptoassets
By amending Part 2 of the Proceeds of Crime Act 2002 (“POCA 2002”), the Bill aims to tailor existing asset recovery powers to cover the unique characteristics of cryptoassets, including by creating pre-arrest powers to seize cryptoassets and cryptoasset related items. Under the draft provisions, a court appointed receiver may even destroy the crytpoassets if there is no way to realise the cryptoasset or realising the cryptoasset would be contrary to public interests.
The Bill also recognises the prevalence of cryptoassets in criminal activity. It aims to tackle this by bringing cryptoassets expressly within the ambit of civil recovery powers under Part 5 of POCA 2002 and ensuring the investigatory powers that would ordinarily be available to a cash or personal property recovery investigation are also available for cryptoassets. The express extension of non-conviction based asset recovery powers to crytpoassets is expressly designed to target the use of ransomware, where there is often no means of prosecuting the perpetrator but it is clear that criminality has occurred.
Reducing the SARs burden
The NCA is coming under increasing pressure to deal with a mounting number of suspicious activity reports (“SARs”) and the Bill aims to reduce that burden by creating new ways for those operating in the regulated sector to avoid committing a principle money laundering offence, without first seeking consent for a transaction. Under the provisions as drawn:
- regulated firms may pay away £1000 or less by reason of terminating a business relationship with a customer; and
- regulated firms may allow their customers to deal with that portion of their property in respect of which there is no suspicion as to money laundering (whereas currently, the whole amount of ‘mixed’ property would be frozen while awaiting a defence against money laundering (“DAML”)).
The legislation would also increase the scope for the NCA to proactively investigate suspicious activity by removing the requirement for the NCA to have received a SAR before it issues a request for further information under POCA 2002, s 339ZH. The Bill includes a catch-all provision that the NCA may make an information order if “it is reasonable in all the circumstances for the information to be provided”.
Empowering the SFO to pro-actively investigate fraud
There are proposed provisions extending the SFO’s pre-investigation information gathering powers under s2A of the Criminal Justice Act 1987 beyond bribery and corruption investigations to fraud cases, as advocated by Lisa Osofsky in her evidence to the Treasury Committee earlier this year. This means that investigative powers (including the right to issue warrants to enter and search premises and to take possession of relevant documents), which are currently reserved for offences under the Bribery Act 2010 only, could be utilised by the SFO in other scenarios even before a formal investigation is opened. The other scenarios are not defined by the Bill, leaving the SFO’s powers broader than ever.
Some less newsworthy changes
The Bill heralds a change in procedure for the introduction of changes to the UK’s high risk third country lists to reflect that of FATF by making it a function delegated entirely to the Treasury.
To encourage legal services providers to uphold the economic crime agenda, the Bill also proposes reforms to the way in which the Solicitors’ Regulation Authority (“SRA”) penalises its regulated population for breaches of its rules, specifically where there is a risk of underlying economic crime. This would appear to reflect some disquiet around the way in which the profession has responded to evolving geo-political events earlier this year. The Law Society has responded saying it is “concerned” about the government’s proposal to allow the SRA the ability to impose limitless financial penalties for economic crime disciplinary matters and urges the Government to “consider carefully the proportionality of any further regulation”.
Finally, the Bill aims to introduce amendments to the ECTEA for the purposes of legislative consistency. This is no doubt because the legislation was introduced in a more piecemeal fashion than had perhaps first been anticipated.
What’s next?
Some have criticised the Bill for not going further in its efforts to prevent economic crime by introducing a “failure to prevent” offence for fraud and money laundering, especially when the Government estimates money laundering to have costed the UK economy more than £100 billion each year. The Law Commission floated the proposal for a new offence earlier this year in its Options Paper on reforming corporate criminal liability. Although it has not been taken on board yet, given the rapid pace at which the Government is legislating in this area, it would not be surprising if such an offence were introduced with less notice than we have previously been used to.
In the more immediate future, the following suggestions will help your business prepare for the enactment of the Bill as it is currently drafted.
- Ensure that internal systems and controls allow you to properly comply with the proposed process for identity verification for company directors, People with Significant Control, and those delivering documents to the Registrar.
- Check that existing information about your business filed with Companies House is accurate.
- If operating a limited partnership, confirm that the registered office address and email addresses are correct.
- If your business is a financial services firm in the regulated sector, you may want to consider:
- preparing a policy for information sharing to ensure that it always falls within the Bill’s carve out (currently in clauses 148-149); and
- preparing revised anti-money laundering, counter terrorist financing and counter proliferation financing policies to take account of the additional defences to money laundering offences which will become available
- Check that your business’ AML, CTF and CPF policies are drafted appropriately so as not to exclude cryptoassets by definition. The best way to ensure your policies are future-proofed is to make reference to POCA 2002 and the definitions therein, however they may change over time.
