51: Changes for companies on the way – how will the Economic Crime and Corporate Transparency Act 2023 affect charities?

The Economic Crime and Corporate Transparency Act 2023 (the ECCT Act) received Royal Assent on 26 October 2023. The ECCT Act will introduce what has been advertised as the ‘biggest changes in the role of the [Companies] Registrar since it was created in 1844’, with Companies House undergoing a ‘full transformation’ from registrar to regulator. The changes will affect any charity which is established as a company or which has a company (or LLP) within its structure (eg. a trading subsidiary company or a corporate director).

What changes will be introduced?

As the title of the ECCT Act suggests, its dual focus is to tackle economic crime and to improve transparency over corporate entities (mainly, but not exclusively, companies). The move is a recognition that, while the ease of setting up and running a company in the UK is an important factor in making the UK an attractive place to do business, it can also make it attractive for bad actors wishing to use that same mechanism as a cover for fraud, money laundering and corruption.

As a result, significant parts of the ECCT Act are devoted to major reforms of Companies House, which will be noticed by anyone who transacts with it. These follow a number of consultations over the last few years which resulted in a Government White Paper in February 2022 prior to the legislation.

In overview, the ECCT Act includes provision for:

• Companies House reform;
• limited partnership reform;
• additional law enforcement powers relating to crypto assets;
• enhanced powers to tackle money laundering; and
• a new criminal offence for organisations of failure to prevent fraud and changes to corporate criminal liability laws relating to economic crime.

Further information and detail can be found in a series of factsheets produced by the Government. We consider below some of the changes which are most likely to impact charities.

Companies House reforms – how might these affect charities?

Companies House has been preparing for some time for the changes as they will be so significant both for it and for all those who interact with Companies House.

In particular, the ECCT Act will introduce the following changes:

• Identity verification will be required for all new and existing company directors, PSCs (People with Significant Control) and those making filings to Companies House;
• the Registrar of Companies will take on more of the role of a regulator. This will be in part through new and wider powers to check, remove, challenge and decline information submitted to or already on the companies register, the idea being for the Registrar to be ‘a more active gatekeeper over company creation’ and ‘custodian of more reliable data’ on the companies register;
• the Registrar will have wider investigation and enforcement powers to enable cross-checking of data with public and private partners. It will also have powers to report suspicious activity to security agencies and law enforcement; and
• requirements for company accounts and filing will change, with a view to improving the accuracy and relevance of financial information on the register. This will include changes for small companies and micro-entities (some with a view to making the requirements clearer).

Overall, those who deal with Companies House should expect the process to be more time and labour-intensive in a number of ways, at least in the earlier stages as everyone (including Companies House) gets used to the changes.

Once implemented, this will start with the need for identity verification for all directors (and PSCs) as well as those who file at Companies House. The precise details of the process are yet to emerge.

Then, when documents are filed, the new powers of the Registrar may result in more querying of information, in contrast to the current position where we are used to information simply being accepted. The Registrar has indicated that it will take a risk-based approach to using these powers, so it might be hoped that charities may be low-risk in most cases.

Companies House will also be reviewing its fees, some of which will increase in early 2024, although it will continue to operate on a cost-recovery basis.

Ban on corporate directors – with some exceptions

In addition, outside the ECCT Act, charities should be aware that the Government will bring into force pre-existing provisions to ban corporate directors (previously introduced in the Small Business, Enterprise and Employment Act 2015).

Some exceptions will be allowed, but we will need to wait for secondary legislation for the details of those exceptions. It is expected that the exceptions will be based upon ‘principle based’ proposals which were previously the subject of consultation. However, it was pointed out (including by us) that the proposals in that consultation failed to take into account other corporate legal forms (such as CIOs and Royal Charter corporations). The Government subsequently accepted in its White Paper that non-company corporate legal forms, such as CIOs, should be permitted within the exception.

If charities are affected by the ban once it is brought into force, and not within the permitted exceptions, there will a lead-in time in which to take steps to comply.

What other changes should charities expect?

As noted above, the ECCT Act will introduce a new criminal offence of failure to prevent fraud. The new offence is aimed at discouraging organisations from ‘turning a blind eye’ to fraud by employees which may benefit the organisation.

Broadly, an organisation would be liable under the new offence where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have ‘reasonable’ fraud prevention procedures in place. It would not need to be demonstrated that organisation’s bosses ordered or knew about the fraud.

While charities are not exempt from the new offence, only large charities would potentially be in scope as the offence was limited during the Parliamentary process to apply only to ‘large’ bodies corporate, subsidiaries and partnerships (where a ‘large’ organisation is one which meets two out of three of the criteria: more than 250 employees, more than £36 million turnover and more than £18 million in total assets).

It will be a defence to the offence if the organisation has ‘reasonable procedures’ in place to prevent fraud. This is similar to the defence available in respect of Bribery Act offences and, as for that Act, the Government has confirmed that it will produce guidance about reasonable procedures before the offence is brought into force.

When is all this going to happen?

The ECCT Act will introduce significant changes, but Companies House has been quick to offer reassurance that these will not be introduced imminently.

With over 5 million companies on the companies register, a lot of people will be affected by the reforms and we should expect a lot of notice and guidance to ease us into the changes. In particular, the new identity verification processes will still require further system development and secondary legislation before they are introduced.

It may (or may not) offer some reassurance that even Government departments can be confused about the new legislation, with the latest BEIS Annual Report and Accounts, published on 20 October 2023, stating that the ECCT Act ‘was passed into law on 15 March 2023’, more than 7 months ahead of it actually happening. (It seems likely that the Report meant to refer instead to the similarly named Economic Crime (Transparency & Enforcement) Act which was enacted in March 2022).

However, Companies House has indicated that we are likely to see some measures start to come in in ‘early 2024’. These may include Companies House starting to query information filed and a requirement for all companies to supply a registered email address.

Generally, charities likely to be affected should be aware that these changes are coming so that they can be ready to adapt when necessary.

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