The battle against economic crime: Closing loopholes to combat fraud

27 July 2023

With one of the largest and most open economies globally, the UK is an attractive hub for international business. However, this openness has also made the UK vulnerable to individuals with malicious intentions to take advantage of the system, harming not only legitimate businesses but also ordinary people.

The Government has been working to tackle these challenges, but while legislation is moving in the right direction, we’re concerned it won’t go far enough to tackle fraud in the UK.

In this blog, we look the progress of the Economic Crime and Corporate Transparency Bill to date, the further reforms we would like to see and the consequences of the loopholes currently open to fraudsters not being closed.

Advocating for amendments

The Economic Crime and Corporate Transparency Bill began its journey through Parliament in late September last year, and at every stage we have worked closely with MPs to put the profession’s case across and suggest amendments to the legislation that will help.

At the beginning of 2023, the Bill entered Report Stage at the House of Commons, and we worked with Shadow Insolvency Minister Seema Malhotra on three amendments:

1.       To allow a former creditor or liquidator to apply for a company to be restored administratively.

The Government should simplify the process of restoring dissolved companies, making it an administrative procedure instead of involving court applications.

Currently, only former directors or former members of the company who was a director or member at the time the company was dissolved can apply for administrative restoration, but this limitation deters creditors and former liquidators from pursuing restoration due to associated costs and time.

Allowing creditors and former liquidators to apply for administrative restoration without court involvement would streamline the process and make it more accessible.

2.       To require the Government to report on whether the appropriate mechanisms are available to the Secretary of State to prosecute directors of companies struck off the Companies House register and to recoup money on behalf of creditors.

Instead of automatic strike-off, companies failing to file accounts should enter compulsory liquidation overseen by the Official Receiver. This would enable earlier director investigation and asset recovery.

3.       To allow insolvency practitioners (IPs) to proactively request information not publicly available on the Companies House register about a corporate over which they have been appointed, or any other corporates linked to that of the entity to which they have been appointed.

IPs need the authority to request access to "back-end" information on Companies House, without relying on the Registrar's discretion. The effectiveness of this power depends on adequate resources allocated to the Registrar and while it's positive that IPs are included in proactive information disclosure, resourcing challenges may hinder the Registrar's ability to address fraudulent companies.

Leaving the door open

Despite receiving support for these proposed amendments, the Government did not incorporate any of them into the Bill. So, what might the consequence be if these amendments are not accepted at a later stage of the legislative processes and the loopholes remain open?

R3 members and other stakeholders have observed that individuals involved in economic crime often engage in repeated fraudulent activities. While the proposed identity verification requirements for directors and other key parties in the Bill are a step towards addressing economic crime, their impact may not be as extensive as anticipated.

Serious rogue directors often continue their fraudulent activities even after disqualification, contributing to repeated business failures or breaching disqualification terms by operating as shadow directors or advisors.

Additionally, Compensation Orders, introduced to recover losses for specific creditors affected by director misconduct, do not address the broader group of the company's creditors, so other fraud cases involving the same directors remain uninvestigated and unidentified, as dissolved companies are not subject to scrutiny.

Reforming the automatic strike-off procedure and replacing automatic strike-offs with compulsory liquidation will allow the profession to investigate director conduct earlier. This would potentially allow for earlier asset recovery, benefiting all company creditors – including the Government – while holding directors personally liable for liquidation costs would provide a stronger deterrent to fraudsters.

The campaign continues

The Bill has now passed through Parliament and awaits Royal Assent in the autumn. As the Bill becomes law, we will continue to seek out any given opportunity to address those loopholes that remain open. We will push this parliament and the next to make the most of this once in generation opportunity to tighten the powers of Companies House and improve its efforts to tackle fraud and director misconduct.