Corporate transparency and Companies House reforms
We examine the UK Government’s recently published White Paper on ‘Corporate transparency and register reform’ which sets out plans to reform Companies House and increase the transparency of UK corporate entities.
On 28 February 2022, the UK Government published a White Paper on Corporate transparency and register reform, setting out its plans to reform Companies House and increase the transparency of UK corporate entities in support of its reforms to clamp down on fraud and prevent UK companies and partnerships from being misused for international money-laundering purposes.
These reforms sit alongside measures proposed by the government in the Economic Crime (Transparency and Enforcement) Bill 2022 and will be introduced through a second economic crime bill.
The White Paper proposals cover:
- Reform of the Registrar of Companies (the Registrar) existing role and powers
- Identity verification and other anti-money laundering (AML) measures
- Enhanced data sharing
- Improved financial information on the register
- Enhanced privacy mechanisms
- New restrictions over corporate directors.
Reform of the Registrar's existing role and powers
The Registrar will be equipped with new powers to query suspicious appointments or filings and, in some cases, request further evidence or reject the filing. The key principles underlying the querying power are:
- all information supplied to the Registrar or information already on the register will be in scope of the new power;
- the power will be used on a discretionary basis (to help ensure proportionality) and
- the registrar will exercise the power using a risk-based approach.
Pre-registration, the new power will mean that Companies House will no longer be obliged to accept documents that are delivered where there is reason to query the information provided. Post-registration, when a query is raised, the recipient entity will have 14 days to respond and provide evidence to support the response. In order to mitigate the risk that an entity is unable to deliver the evidence required within that period, the Registrar will have discretion to extend the time limit where deemed appropriate.
The Registrar will also have a discretionary power to remove material which impacts upon the integrity of the register. Clarity on its use to ensure filers understand the parameters of the power and the categories of information which can be removed under is to be provided. As some material submitted to Companies House has legal consequence once filed, the removal of such material is likely, in the majority of cases, to remain a matter for the courts
Identity verification and other anti-money laundering (AML) measures
Mandatory identity verification will be introduced for most individuals incorporating or filing with Companies House. It will be much harder to appoint fictitious directors or beneficial owners. If an individual fails to verify, the public register will be annotated to show this.
In future, agents will be required to evidence that they are adequately supervised before they can register with Companies House and file on behalf of their clients. This evidence will be cross-checked against information from HMRC and the Financial Conduct Authority to ensure its validity. In effect, overseas agents will no longer be able to access Companies House unless at some future date the government determines that any other jurisdiction should be deemed to have an equivalent supervisory regime.
All new and existing company directors, (and equivalents for other registrable entities), PSCs and anyone else submitting filings will need a verified account at Companies House. These can be set up directly or through a third-party agent. A verified account will be mandatory to file or incorporate with Companies House. Along with company directors, and their equivalents in other entities, PSCs will be required to verify their identity. Alongside identity verification for those managing registrable entities, this will provide a substantial improvement in the reliability of the ownership information on the register. It will also be more difficult to carry out such frauds via agents, as only anti money laundering-supervised third-party agents will be able to register directors (or other officers) at Companies House. Individuals who fail to verify their identity or comply with new requirements under these reforms will be subject to new criminal and civil sanctions
When Trust or Company Service Providers (TCSPs) apply to form a company (or other registerable entity) or to file on a company (or other registerable entity’s behalf) a third-party agent will need to provide evidence of its credentials. The third-party agent will also be required to list the identity verification checks that they have carried out on each prospective director (or equivalent) or details of the director’s (or equivalent’s) account(s) that already exist for those persons. They will also be required to declare that they are satisfied that all relevant identity checks have been carried out.
Under the new rules, all third-party agents will require to be registered and supervised in the UK. However, to make this legislation flexible, the government will have the power to allow third party agent registrations and filings from an overseas jurisdiction that is equivalent to the UK’s, and to amend that list as necessary.
Enhanced data sharing
Companies House will have more extensive legal gateways for data sharing with law enforcement, other government bodies and the private sector. These include the power for the Registrar to proactively pass on relevant information to law enforcement and other public and regulatory bodies, including the electoral commission, as well as anti-money laundering supervisors, when certain conditions are met.
Improved financial information on the register
A new requirement to file a single set of accounts and simplifying accounts filing options should lead to more consistent financial information across different datasets e.g., Companies House and HMRC. Companies will be required to file enough information to accurately identify which accounting category they belong to, making it far more difficult to abuse the accounting framework and file accounts under the wrong regime to hide income levels. Mandatory digital filing and i-XRBL tagging will allow anyone to search information on the register much more quickly and easily. Suspicious filings could then be reported to Companies House, who could then engage the new querying power to challenge the filing and, if fraudulent, use enhanced removal powers to remove the information from the register.
The filing options available to small and micro companies will be simplified by reducing the filing options to just two: micro-entities and small companies. Removing the abridged and “filleted accounts options will make the options easier to understand, reduce fraud and error and increase transparency. All small companies (including micro-entities) will be required to file a profit and loss account. Small companies will also file a director’s report unless they meet the micro-entity thresholds, when they will still have the option to not prepare or file a director’s report. Dormant and small companies will in future be required to file sufficient information for eligibility to be checked. This will include the need to file an eligibility statement which will provide the Registrar with additional evidence to take stronger enforcement action for false filings in future.
Enhanced privacy mechanisms
Anyone whose personal information has been made public on the register in the past will be able to apply to have some of that information suppressed. Additionally, individuals who can provide evidence that having their personal information on the public register puts them at risk of harm can apply to Companies House to have it suppressed.
New restrictions over corporate directors
It will be a requirement to have at least one fully verified person directly associated with each entity on the companies register, and implementation of new restrictions over corporate directors will make it more difficult to create anonymous corporate structures. In future, companies will be allowed a maximum of one ‘layer’ of corporate directors, which must be based in the UK, and the natural persons directing that corporate director will be subject to identity verification.
At present, companies are able to act as directors provided there is one natural person listed on the board. This has led to confusion and uncertainty as to who actually controls a company. However, it is believed that the practice retains value by offering a degree of flexibility should their use be desirable. The reform of corporate director rules will therefore adopt a ‘principle based’ exception which is based on two conditions that must be satisfied:
- that all directors of the company seeking such appointment are themselves natural persons; and
- those natural person directors are, prior to the corporate director appointment, subject to an appropriate identity verification process.
A number of other measures are also in preparation that further tighten the rules for corporate directorship. For example, it will be made clear in law that corporate directors may only be appointed if they have legal personality (that is they are able to function in business like a natural person). It has also been established that such compliance should extend consistently to all appointable entities including limited liability partnerships. Registrations of corporate persons that are not accompanied by a verified person in a management position will be rejected.
The government is not minded to extrapolate the same principle-based restrictions set out above for corporate directors for corporate members of LLPs or corporate general partners of LPs. For these entities, the corporate person will have to provide the details of their director(s) or a managing officer, whose identity must be verified. The government will consider whether any further restrictions on the use of corporate members of LLPs and corporate general partners of LPs will help mitigate the risk of misuse without affecting the legitimate use of these structures, particularly in the investment sector.
All Scottish General Partnerships are to be banned from being appointed as a corporate director, corporate member of an LLP, or corporate partner of an LP.
A useful table of the full set of reforms can be found on pages 65 to 81 of the White Paper.
