Tackling economic crime: The journey so far

05 December 2022

Since the onset of the pandemic, fraud has continued to be the fastest growing form of crime in the UK. And having campaigned for many years for the Government to take steps to tackle economic crime, the topic became front of mind this year in light of Russia’s invasion of Ukraine.

To minimise the risk of foreign elites abusing the UK’s open economy, the Economic Crime (Transparency and Enforcement) 2022 Act (ECTE Act) was created earlier this year, with a follow up Bill currently making its way through parliament.

In this blog, we look at key objectives of the Bill, track its progress through Parliament so far and consider how the legislation will affect the insolvency profession…

Review following Royal Assent

In March, the new ECTE Act received Royal Assent following an expedited passage through Parliament. Introduced following Russia’s invasion of Ukraine, the new legislation has three main features:

1. the creation of a register of overseas entities and their beneficial owners;
2. amendments to unexplained wealth orders (UWOs); and
3. amendments to and strengthening of sanctions legislation.

This legislation, however, did not go far enough on its own and further, wider-ranging reforms were promised by the Government to help tackle economic crime and improve transparency over corporate entities.

An additional Bill

Following the ECTE Act, on 22^nd September a second, complimentary piece of legislation – the Economic Crime and Corporate Transparency Bill (ECCT Bill) –  was introduced to Parliament.

The Bill gives effect to long-awaited reforms to Companies House, which the Government consulted on in 2019 and 2021. The Bill’s Impact Assessment says that the reforms to Companies House aim to address three “core issues”:

1. increasing timeliness, usefulness, and accuracy of Companies House data;
2. misuse of UK registered companies and other entities; and
3. meeting high levels of demand for Company House services.

Among other measures, the Bill introduces identity verification for those registering a company in the UK, to improve the accuracy of its data and support business decisions and law enforcement investigations.

The investigation and enforcement powers of Companies House will also be upgraded, enabling the organisation to cross check data with public and private partners, as well as reporting suspicious activity to security agencies and law enforcement.

A missed opportunity?

While we broadly welcome the introduction of this Bill, having long-called for the reform of Companies House and for the tightening of procedures around company formation and oversight, the Government has missed a crucial opportunity to close some of the loopholes currently exploited so easily by fraudsters.

It is our view that the Bill’s proposals will be limited in their ability to bring about real change to preventing and disrupting economic crime if companies used as vehicles for fraud continue to be dissolved and struck off the Companies House register automatically, with next to no due diligence carried out to ascertain whether the company has been involved in fraudulent activity, and with no clear avenue for the company’s assets to be identified and distributed back to creditors when fraudulent companies are struck-off the register.

Mentioned in the House

Ahead of the Bill beginning its passage through Parliament, we briefed a number of MPs on our recommendations on reforming Company House’s strike-off process and making the restoration of a company an administrative process.

In the Bill’s Second Reading Debate, we were pleased to see Kate Green MP (Labour) mention R3 directly, going into detail about our concerns regarding the current automatic strike-off process and citing our recommendations directly in her speech.

Margaret Ferrier MP (Independent, formerly SNP) also quoted directly from our briefing, noting that companies are often struck-off the register before they can be assessed for fraud.

Amendment tabled

In the Committee Stage debate, Seema Malhotra MP highlighted that rogue directors will often go on to commit repeat frauds despite being disqualified and that a much more significant deterrent occurs when the company is put through an insolvency process and directors are held to account for the assets that have been misappropriated.

If a company has been dissolved and automatically struck off the Companies House register, an insolvency process can only take place if the company is first restored. Former directors or members of a company can apply to restore a company administratively, avoiding a court process, but that option is not available for a former liquidator or creditor of a company.

In response to this amendment, the Minister Kevin Hollinrake MP, responded that while the Government is reluctant to allow a former creditor to apply to restore a company administratively, “there may be a case for giving [liquidators] access to the less cumbersome administrative process”, and said that the Government would “commit to go away and look at the liquidator’s element”.

Continuing to campaign

Given that there are a number of key issues with the ECCT Bill that we would like to see the Government address, the jury may still be out on whether and to what extent this new Bill will be any more effective at tackling fraud than existing legislation.

As the Bill continues its journey through Parliament, we will work to ensure that the profession’s concerns and suggestions about this piece of legislation are heard at every opportunity, so the UK remains the safest place possible to do business.