How the Economic Crime and Corporate Transparency Act 2023 impacts businesses

The Economic Crime and Corporate Transparency Act 2023 (ECCTA) received Royal Assent on 26 October 2023 and the Bill is now law. It covers a wide range of reforms which seek to tackle economic crime and improve transparency over corporate entities.

Businesses will feel the impact of the reforms to Companies House which will affect the information that will be filed with the registrar and therefore on the public record, as well as the introduction of a new ‘failure to prevent fraud’ offence.

Although the Bill has been enacted and some measures have already taken effect, others will require secondary legislation and Companies House guidance.

Which reforms have already taken effect?

From 4 March 2024 the first set of changes brought in by the ECCTA became effective. These included:

1. New rules for registered office addresses to be ‘appropriate’. This means that documents delivered to the entity at that address would be expected to come to the attention of a person acting on behalf of the entity and that there is the capability for an acknowledgement of delivery. An important change for some is that this would not include the use of a PO Box as a registered office.
2. A new requirement for a business to provide a registered email address. New companies must provide this upon incorporation and existing companies would do so when filing their next confirmation statement.
3. A new requirement for a company to confirm that it is being formed for a lawful purpose.
4. The registrar will have greater powers to query and challenge information that appears to be incorrect or inconsistent with existing information. This also includes stronger checks on company names to prevent the use of names which may give a false or misleading impression to the public.
5. There will also be serious consequences if companies do not respond to a formal request from Companies House; these may include a financial penalty.

What other changes can be expected?

Significant changes are on the horizon which will directly affect the form and content of accounts submitted to Companies House. Currently, small and micro entities are able to take advantage of several reduced filing options. This includes the option to ‘fillet’ the profit and loss account and director’s report from the filing copy and a further option to prepare abridged accounts. Abridged accounts allow simplified formats for the profit and loss account, including combining turnover, cost of sales and other operating income into one line named gross profit or loss. The balance sheet may also omit certain headings.

Moving forwards the removal of these options means that information about an entity will be on the public record for the first time, most notably turnover and for small companies, further indicators such as operating profit and net profit.

Additional changes will require accounts to be filed digitally and fully tagged. There will also be a requirement for a company relying on an audit exemption to include a statement on the balance sheet. Companies House will also close loopholes, which going forwards will limit the number of times a company can shorten its Annual Reporting Period to once every five years, unless there are good business reasons to do this more frequently.

In a bid to improve the accuracy of Companies House data, directors and People with Significant Control (PSCs) will be required to verify their identity. There will be restrictions on the use of corporate directors such that only corporate entities with “legal personality” will be appointable, and the directors of these corporate entities must be natural persons. Corporate directors would need to be registered in the UK. To effect these changes secondary legislation, guidance and systems development will need to be completed. Therefore, it’s currently not known when these changes will be effective.

New offences under ECCTA

Also of significance to businesses will be the introduction of a new corporate offence and reform of the corporate criminal liability laws.

Failure to prevent fraud – this offence will hold an organisation criminally liable where a person associated with it (including employees, agents and subsidiaries) commits a fraud intending to benefit the organisation and it does not have reasonable procedures in place to prevent the fraud.

The offence will apply to all large bodies corporate, subsidiaries and partnerships which would include large not-for profit organisations such as charities. The definition of large is the Companies Act 2006 definition (meeting two out of three of the following: more than 250 employees, more than £36 million turnover and more than £18 million total assets although these thresholds are expected to be revised imminently).

The types of offences that could be committed include false accounting, false representation, failure to disclose information and false statements by company directors amongst others. The government has yet to publish guidance on what reasonable procedures may mean which could be used as a defence, but organisations will need to consider what training and documentation of systems and controls may need to be put in place. Only once the guidance is in place will the offence come into force, but this may not leave a significant transition period so businesses should be considering this now. The penalty if convicted is an unlimited fine.

Corporate criminal liability – at the core of whether a corporate entity commits a criminal offence is that it must be carried out by the “directing mind and will” of the corporation. As organisations have grown, decision making has become more dispersed rather than being concentrated with a few individuals. Reforms being included in the ECCTA provide that in assessing economic crimes, “senior managers” will be included in the consideration of whether the organisation is also guilty of an offence. Senior managers being those who play a significant role in the making of decisions about the whole or a substantial part of the activities of the organisation. Unlike the failure to prevent fraud offence these changes apply to all organisations. Again, businesses will need to consider whether those playing such roles are fully aware of these additional responsibilities.

What should businesses be doing now?

For changes already effective, businesses may need to submit new or further information in their next confirmation statement. For changes yet to come it will be necessary to identify the potential impact; for example, if structural changes may be needed to replace overseas corporate directors or to be aware that information may be on the public record for the first time. It would also be timely to review systems and controls which may be in place to prevent and detect fraud and to consider the need to inform and train staff.

How we can help

Most importantly, businesses should remain alert for further guidance in these areas as changes will be introduced gradually over the course of the coming months and timetables for implementation may be tight.

If you’d like to discuss any of the points raised above, please get in touch with Anna Hicks.