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BUSINESS BEAT
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Company registration and regulation changes will mean less fraud and more paperwork
Against the backdrop of the Russian invasion of Ukraine, the government recently enacted the Economic Crime (Transparency and Enforcement) Act 2022. At the same time, it published a white paper, corporate transparency and register reform, in an attempt to increase the suite of powers that its agencies possess in tackling attempts to thwart sanctions, money launder and commit fraud.
Long before the invasion, the government outlined its intention to reform Companies House to clamp down on fraud and money laundering activities. With this in mind, the white paper was given a particular focus on changing the way in which UK companies are registered and regulated.
CURRENT POSITION OF COMPANIES HOUSE
Currently, anyone may apply to Companies House to incorporate a company and nominate its director(s). All that is needed is a UK address and one individual over 16 who is prepared to act as a director; UK PLC often celebrates how easy it is to set up business in the UK.
The checks undertaken are not particularly stringent.
The registrar at Companies House has limited powers to query any information provided to it or to remove any information from the register. And this has led to a lack of transparency as to the real ownership of companies on the register, including those that are used to launder money from illicit gains. At the present, only the courts are empowered to demand changes to the register such as ordering a company to change its name.
THE WHITE PAPER
The government’s white paper proposes reforms to Companies House by transforming its powers and processes:
Powers of the registrar: Taking the first, the powers of the registrar, the white paper outlines a new statutory role for the registrar to promote and maintain the integrity of the register of companies.
And to enforce this, the registrar would be granted a new suite of powers including the power to query information, both prior to and post registration if it is apparent that information may be fraudulent, suspicious or could impact on the integrity of the register. This power will also allow the registrar to reject documentation where there is a reason to query the accuracy of information provided.
Another is the power to impose sanctions. Here, if a company fails to respond to a query or provide sufficient evidence in response to a query, the registrar will have the power to
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impose sanctions on the company or individual.
The third proposed new power allows the removal of information from the register on the basis that it impacts its integrity. However, information that would have legal consequences for the company would still be for the courts to decide upon.
Lastly, the registrar would be granted the power to change the registered address and name of a company where it is apparent that they are not authorised to use that address. The registrar may also direct a company to change its name if it does not answer queries within 28 days.
If implemented, this could potentially impose greater requirements on companies or individuals when filing for incorporation or any updates to their companies. The white paper proposes that this suite of powers would be accompanied by enhanced data sharing between the registrar and other law enforcement agencies.
Measures relating to identity verification: Currently, a company may file the appointment of new directors by providing information relating to their name, date of birth and occupation. There is no additional evidence required to have this approved and displayed on the public register.
The white paper proposes the development of a digital identity service to verify the identity of all new and existing directors, corporate directors, and people with significant control (PSC). The proposal would impose a minimum requirement on companies to have at least one director fully verified on the register.
Under these powers, a director or PSC that has not verified their identity by the end of a set period will be liable for a civil penalty and the company which they are a director of will also have committed an offence. This will be accompanied by a note on the register to indicate that the director has not been verified. Corporate
directors would also be required to be a UK company, all their directors would have to be natural persons, and those persons must have had their identities verified.
This would also assist in allowing the registrar to void the appointment of, and prevent the registration of, directors that are disqualified, in bankruptcy (not discharged), or a sanctioned individual.
One of the more significant changes is the proposal surrounding the threshold of who is considered a PSC. The current threshold to be listed as a PSC is ownership of 25% of the shares of the company, but the white paper proposes lowering this to 5%. Measures relating to the filing of financial information: In addition to identity verification, the white paper proposes enhanced validation checks on financial information that is displayed on the public register. This would include a new power to query financial information to ensure that that provided is coherent and consistent.
Another proposal is to require companies’ accounts to be filed in Inline Extensible Business Reporting Language (iXBRL), an industry standard coding language that allows information to be tagged and made easier to navigate and interrogate.
The white paper also pledges to further explore a system of a single filing of financial information for companies, rather than separate filings to each government agency such as Companies House and HMRC.
MOVING FORWARD
At first glance, the proposals could add additional demands on companies when providing information in their usual filings with the registrar. It may also reduce the attractiveness of the UK as a place to quickly incorporate and start a business. By extension, it could also present uncertainty as to whether filings with Companies House will be accepted or queried; this may cause additional pressure on companies regarding deadlines for accounts and confirmation statements.
But the white paper is simply a proposal at this stage, it’s not known what will be implemented or whether another review will be launched to refine some of the processes proposed in the current white paper.
Paul Taylor and Fawad Rashid
Paul Taylor is a partner, and Fawad Rashid is a solicitor, at Fox Williams LLP
