ID checks will ensure more transparency

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To enhance corporate transparency and prevent the UK economy being abused by organised criminals and kleptocrats, the much-awaited Economic Crime and Corporate Transparency Act 2023 (ECCTA), came into force in late October, bringing with it sweeping changes to UK company administration.

ECCTA had previously introduced the Register of Overseas Entities, a regime which compels all overseas entities that hold ‘qualifying property’ in the UK, to register at Companies House. It also established a new strict liability offence of ‘failure to prevent fraud’ which applies to larger organisations, and which is likely to go live in the early part of 2024.

The driving principle behind the reforms is to give greater powers to the Registrar of Companies to ensure the integrity of the information held at Companies House. The Registrar’s role will evolve from passive watchman to corporate gatekeeper and custodian of data. Examples of the new powers include the ability to query filings, request additional information, proactively share data with public authorities, and even to change a company’s name or registered office address.

Perhaps the headline grabber is the introduction of mandatory identification which will use likeness matching technology for directors and PSCs (persons with significant control over corporate entities).

No individual will be able to become a UK company director unless their identity has been verified, and it will not be possible to incorporate a new company unless the directors have been ID-verified. This will also be extended to existing directors, and it will become a criminal offence for an unverified person to act as director.

An everyday example of the new regime’s impact is the way in which documents will be delivered to Companies House. Currently anyone can deliver documents to Companies House, but under the proposed changes this will be restricted only to persons who have been ID-verified, and to authorised corporate service providers (who must be regulated under the UK money laundering regulations). This is to prevent unauthorised filings, which is a good thing although brings with it additional compliance.

Anyone worrying about how to cope with these further regulatory and compliance requirements need not panic just yet, because the new regime will not have immediate effect. The changes are so extensive that further legislation and significant development and funding of Companies House will be required before they can be brought into force. However, it is never too early to plan for what is coming down the track and if you are a director or owner of an SME, some of the things you can consider, or action to get ahead of the game, are:

  • For directors – check for any ineligibility and ask them to ensure they have up to date photographic ID, birth, or marriage certificates, etc.  Also, complete your own identity checks on new directors, because, in due course, you will be required to confirm you have verified their ID, and that they are not disqualified or otherwise ineligible to act.
  • For PSCs – get them ready for ID-verification. In the case of corporate PSCs, they will be required to nominate a registered officer to represent that entity, who will, as you would expect, require to be ID-verified.
  • For company filings – consider who will file on your behalf and ask them to prepare identity documents or appoint an agent to do so.
  • For registered offices – a registered office, (with a verifiable physical address), will need to be manned, and at a location where delivered documents will come to the attention of someone acting on behalf of the company, and be able to be formally accepted as delivered. A monitored email address for communications will also need to be supplied to the Registrar.
  • For company books – the requirement to keep certain registers in the company’s statutory books (such as the register of directors and the PSC register) will disappear, and a strict 14-day filing deadline will be introduced. This will require time allowed for ID -verification because it will be an offence for a director to make a filing if that has not been undertaken, yet you will still have the legal duties that arise from acting as a director.
  • For accounts filing – you will need to transition to new software. That is better done now than later because accounts will only be fileable using specialised software (no more paper or web-filing). SMEs and micro-entities will be required to file a profit and loss account, and a directors’ report.  As late filings will continue to result in financial penalties, it is crucial to stay on top of these deadlines.

If we put to one side the considerable administrative burden that the new legislation will bring, having a Companies House with reliable and verified data and transparent beneficial ownership of UK entities is right and proper, and good for business.

As it is with all such measures, these new identity checks, and statements that directors and, in certain circumstances new investors, are not disqualified from acting, will ensure there is extensive information and verification of the identities of the honest director and potential investor. Nonetheless there is still the risk that the dishonest and disqualified directors will be driven underground and use nominees and complex ownership structures to avoid these checks, and thus frustrate the new measures.

Time will tell whether that turns out to be the case, but what is clear for now is that it is essential to embrace these changes sooner than later and, as always, to take advice.