The UK is currently undergoing a major overhaul of its legal framework for tackling financial crime following the staggered implementation of the Economic Crime and Corporate Transparency Act 2023 (ECCTA), which first came into law on 26 October 2023.
Monday, 4 March, saw ECCTA’s next stage of delivery: a new set of policing powers for the UK government’s public register of companies, Companies House, which now has enhanced means to query any information submitted to (or already on) its register, challenging filings that are suspicious and potentially criminal. This, alongside a string of new requirements coming into force later this year (or next), means that companies will need to submit more information to Companies House, especially when setting up a brand new business.
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By GlobalDataAt the heart of all this is a drive for greater corporate transparency and reliability of information, says Nicholas Campion, a director and chartered governance professional at 1st Formations, the UK’s largest company formation agent. “Companies House wants to know that the people who ultimately run and control a company actually exist.”
Quite remarkably, this has not been the case since, for many years now, any and all information provided to the register has been unverified. This is one of the reasons why the UK is among the world’s easiest jurisdictions in which to form a business, arguably too easy.
“Right now, I can create a company in 20 minutes and name my address and directors, no questions asked,” says Campion. “In other words, in a matter of minutes there’s nothing stopping someone from sending absolute make-believe rubbish to the Companies House register. The truth doesn’t matter. They’ll still get a my company, limited liability, and a legal vehicle in a respected jurisdiction.”
This porous state of affairs began in 2015, during an initial corporate transparency drive that saw Westminster pioneer the creation of (what is now) a vastly superior, easily accessible and, crucially, free and fully digital public register of all businesses in the UK, courtesy of Companies House. This information is exceptionally useful and, as a dataset, is worth several billion GBP. “Unlike in most other countries, anyone around the world can view the UK’s register of companies without any charge or fee. Not only is this good marketing for the country, but the more eyes you have on the economy, the more inclined people will be to act in good faith, or at least, that was the idea,” says Campion.
In reality, the register has been vulnerable to misuse and abuse by people both in and outside the UK. Under the guise of a limited liability company, criminals have used Companies House to commit fraud, money laundering and other unlawful activity, says Freddie-Nicolle Brace, head of legal at 1st Formations.
Indeed, it is well known that the register is littered with fake directors and inaccurate information, such as one famous case wherein an Italian journalist set up a company in the name of a notorious Sicilian mafia boss, Messina Denaro, headquartering it at 10 Downing Street – a publicity stunt aimed at showcasing the weaknesses in British law that allows people to set up shell companies to launder money across the globe. Meanwhile, the actual Italian Mafia reportedly managed to set up one UK firm with a director named Ottavio Il Ladro di Galline (“The Chicken Thief”), whose job was listed as Truffatore (“fraudster”).
“For years, Companies House has done zero checks and incorporated almost any company that came its way, an approach that allowed some people to abuse the UK’s legal respectability and, in the long run, eroded the UK’s reputation as a stable jurisdiction to carry out business, something that would only decrease the nation’s investment appeal,” says Campion.
ECCTA is set to reverse this trend by improving the reliability and security of the register, or in other words, making sure that the people listed on it actually exist, a crucial step in any effort to counter money laundering and other forms of economic or political crime. As previously alluded to, this means increased reporting requirements (and powers) to Companies House, especially the new identity verification check, something that is set to be rolled out in October of this year. For this, it remains unclear what paperwork Companies House will demand.
Foreign investors to the UK may reasonably question whether ECCTA makes the UK a trickier place to set up shop. The legislation certainly adds more red tape to the process of forming a company in the country.
However, in other respects, ECCTA speeds up the process. When it comes to information sharing and reliability, the UK could be described as behind the curve compared to the likes of France and Germany, where the threshold for submitting information to their equivalent of Companies House is often much higher and stricter. This has meant that, for many foreign investors prospecting the UK, especially for a merger or acquisition, the process has been delayed upon the discovery that, unlike in their home countries, they cannot rely on the information provided by Companies House and do their due diligence properly, in the same way, they might do in other jurisdictions. As a result, said investors are forced to source the information via other means, should they want to know who exactly they are getting into bed with, so to speak, explains Campion.
Meanwhile, some non-Brits and foreign investors have said they feel targeted by ECCTA. But the new rules apply to everyone, domestic or foreign, says Brace. “ECCTA is just about transparency. So, if you’re coming from another country to invest in the UK with honest and legal intentions, there’s nothing to worry about.”
Although ECCTA has been years in the making, the legislation was accelerated by the onset of the war in Ukraine, which led to the introduction of new sanctions against Russia. As a result, the UK government expedited its plans to tackle money laundering by foreign entities, leading to the implementation of ECCTA’s prototype: the Economic Crime (Transparency and Enforcement) Act 2022, which obliged overseas entities to register the beneficial owners of UK properties, as part of an effort to better ensure that assets held by sanctioned individuals can be controlled.
The Register of Overseas Entities, operated by Companies House, has now been running since mid-2022. Any overseas entity that wants to buy, sell or transfer property or land in the UK must identify their beneficial owners and register them if the individual holds more than 25% of the shares or voting rights in the entity. In addition, it can appoint the majority of its directors or have some other significant influence or control over it (including through a trust or partnership structure). Failure to register (or submit false information) is a criminal offence and prevents the entity from being able to buy, sell, or mortgage UK property in future. Entities or their officers who refuse to register or keep their information up to date face restrictions on selling the property, and those who violate the rules could face a fine of up to £2,500 ($3,082) per day and up to five years in prison.
