Economic Crime and Corporate Transparency Bill: Three key concerns

15 December 2022

The Economic Crime and Corporate Transparency (ECCT) Bill, which began its Parliamentary journey in September, will introduce long-awaited reforms to Companies House, alongside other measures which aim to strengthen the UK’s corporate governance framework.

The new legislation is welcome, but we believe the reforms it will introduce will be limited in their efficiency if some of the loopholes currently exploited so easily by fraudsters are not closed.

While our recently published fraud paper, Insolvency and the fight against fraud outlines our proposals to strengthening the UK’s corporate governance framework overall, in this blog we look specifically at the ECCT Bill and the three key areas we’d like to see addressed before the Bill passes…

Deterring repeat offenders

The Government would like to expand Companies House’s role from being a largely passive recipient of information to a much more active gatekeeper over company creation and custodian of more reliable data.

But it is not clear how the proposed reforms – including the new requirement for identity verification of new and existing registered company directors, Persons with Significant Control (PSCs), and those delivering documents to the Registrar, and the Registrar’s new powers to query, change, remove and refuse misleading information or documents – will significantly improve the current deterrents to culpable directors.

Our members report that those who commit economic crime are often repeat offenders, with a number of individuals responsible for a volume of the frauds that take place within the UK.

Although these individuals are the ultimate economic beneficiaries of the fraud, it is not uncommon for other individuals to be listed as the company’s directors. So, while the Bill’s proposed new requirements for identity verification of directors, PSCs, and those delivering documents to the Registrar will go some way to tackling economic crime, the results may not be as widespread as the Government might have hoped.

Striking-off fraudulent companies

The Registrar’s new powers include a discretionary power to change the address of a company’s registered office without an application, as long as the Registrar is satisfied that the company is not authorised to use the address. The Government has said that the Registrar will have the power to change a company’s address to Companies House’s own address, and to then strike the company off the Companies House register.

Around 400,000 companies are dissolved and struck-off the Companies House register each year. However, through the current automatic strike-off procedure there is very little due diligence carried out by Companies House and others to identify whether or not fraud has occurred. This allows directors to either build up debts or sell company assets ahead of the company being dissolved, and to abscond with the proceeds.

With this in mind, we have called for the Government to reform Companies House’s automatic strike-off procedure. If instead of companies being automatically struck-off, those that have failed to file accounts when due were automatically placed in a compulsory liquidation procedure, this would allow for earlier investigation into the conduct of directors and for the earlier recovery of misappropriated company assets – for the benefit of all the company’s creditors.

Resourcing the Registrar

As it stands, the Bill gives the Registrar powers to proactively query the accuracy of information received by Companies House, and to change, remove and refuse misleading information or documents where deemed necessary.

However, the Government has not explained how the Registrar will be resourced in a way that enables this new querying power to target the companies who have submitted fraudulent information to the register.

Resourcing issues may mean that fraudulent companies, and the information they have submitted to Companies House, are not always proactively queried by the Registrar and that serious instances of fraud continue to go undetected.

To help tackle this, we would like to see insolvency practitioners able to request access to Company House’s “back-end” information about any other corporates linked to their appointments. This would allow a wider body of professionals to carry out investigations more effectively into corporate affairs and director conduct and identify and disrupt more cases of fraud.

An ongoing process

The Bill has now finished at Committee Stage and after briefing MPs on our concerns, in early November we were pleased to see an amendment to the Bill tabled based on our recommendations.