BY: Paul Taylor and Fawad Rashid
Paul Taylor is a partner, and Fawad Rashid is a solicitor, at Fox Williams LLP.
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 had undertaken a consultation in May 2019 and provided a response in 2020 that outlined its intention reform Companies House to clamp down on fraud and money laundering activities. The sanctions that have been placed on Russian individuals recently only served to accelerate the considerations around the vulnerability of the UK when it comes to money laundering and/or being seen as a safe haven for ill-gotten gains.
London has developed a reputation for being a favourite of Russian oligarchs to launder money, particularly in the city’s property market due to a lack of transparency of overseas ownership of property, according to the National Crime Agency.
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 submit an application 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 and have led to the likes of Donald Duck and Mickey Mouse being named as directors of UK companies.
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.
Back in 2016, the government tried to inject more transparency into ownership of UK companies by introducing Part 21A of the Companies Act 2006. This requires certain companies and other legal entities to keep a register of people with significant control (PSCs).
Most PSCs are those that hold more than 25 percent of shares in the company; more than 25 percent of voting rights in the company; or the right to appoint or remove the majority of the board of directors.
Although this reform has been welcomed, there has been criticism that companies can often plead ignorance of who their real PSCs are. Further, there has been a patchy record on the legislation’s enforcement.
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 query, the registrar will have the power to impose sanctions on the company or individual. The detail of these sanctions is still under consideration, but criminal sanctions will be reserved for only the most serious of breaches.
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 to queries within 28 days. The white paper outlines the example of a company name which is part of a campaign to target an individual or where the name of an institution is being without permission.
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, although the specifics of how this would be implemented are vague at the current moment.
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, hence why Donald Duck, Mickey Mouse and others could be placed on the register as directors of a UK company.
The white paper proposes the development of a digital identity service to verify the identity of all new and existing directors, corporate directors, and PSCs. 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 (that have not been 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 percent of the shares of the company, but the white paper proposes lowering this to 5 percent. In this scenario, the company would need to file a one-off full shareholder list and update it annually by way of a confirmation statement.
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.
In addition to this, the white paper does not outline in detail the process that follows a query made by the registrar. This will need to be made clear prior to the implementation of the proposals as companies will need to be able to understand the timescales and type of evidence they may be required to submit in the event of a query.
However, some would argue that any additional demands on companies as a result of these proposals will be beneficial for the UK as a whole as they may be an effective tool in curbing manipulation of the register of companies and money laundering. The UK government has clearly been stung that London is seen as the ‘go to destination’ to hide Russian money.
The white paper is simply a proposal at this stage, what will be implemented or whether another review will be launched to refine some of the processes proposed in the current white paper.