Economic Crime and Corporate Transparency Bill: an update

The Government’s Economic Crime and Corporate Transparency Bill continues to make its way through Parliament, having now completed its committee stage.

The Bill has been subjected to a number of amendments from both the Government and opposition parties. It is now due to enter “report stage”, during which Members of Parliament will debate the amendments that have been put forward.

We have set out the key amendments and proposed amendments below insofar as they affect UK companies and limited partnerships and the UK’s Register of Overseas Entities.

For more information on the Bill generally, see our previous Corporate Law Update.

Identity verification

As we previously noted, the Bill would introduce a requirement for directors and persons with significant control (PSCs) of companies, as well as general partners of limited partnerships, to verify their identities with Companies House.

This follows up on one of the Government’s principal commitments in its white paper and is one of the most substantial new requirements that would be introduced by the Bill.

Amendments to the Bill following Committee stage would enable the Government to extend this requirement to overseas companies that are required to register in the UK.

Under the Companies Act 2006, a non-UK company must register with Companies House if it opens an “establishment” in the UK. This obligation is separate from the requirement for overseas entities to register with Companies House if they hold registered land in the UK. See below for more information.

An overseas company would need to ensure that the identity of each of its directors is verified. The Bill does not set out the consequences of non-compliance, leaving the Government to specify this in secondary legislation. However, unlike for UK companies, legislation will not practically be able to prevent directors of non-UK companies from acting if they have not been verified.

Discrepancy reporting

A new clause in the Bill would give the Government power to require businesses to carry out so-called “discrepancy reporting”.

Currently, under the Money Laundering Regulations 2017, certain categories of person must carry out “client due diligence” when entering into a business relationship with a new customer and subsequently at periodic intervals. These categories are termed “relevant persons” and include financial institutions, legal advisers, accountants, tax advisers, insolvency practitioners and estate agents.

Before a relevant person can enter a new customer relationship with a UK company or limited liability partnership, they must first obtain certain public information on the entity’s beneficial ownership from Companies House. If they discover any discrepancy between that information and their own client due diligence, they must inform Companies House.

Similar requirements apply when entering into a relationship with a trust that is required to register under the Trust Registration Service (TRS) and, from 1 April 2023, to an overseas entity that is required to register in the UK’s Register of Overseas Entities.

Under new amendments to the Bill, the Government would be able to impose discrepancy reporting requirements on any person who is carrying on a business in the UK. The Bill would allow the Government to specify what kind of information a person would need to gather from customers and what they would need to provide to Companies House.

It’s not clear whether the Government would be able to apply this requirement selectively to persons carrying on certain types of business, or whether it is an “all or nothing” obligation that would need to apply to anyone doing business in the UK. However, in either case, this would represent a significant expansion of existing mechanisms for ensuring the integrity of information on the public register.

The Register of Overseas Entities

The Government has included two key new amendments to the Bill that will have a significant impact on the UK’s Register of Overseas Entities (or ROE).

As a reminder, a non-UK legal entity that holds registrable real estate in the UK is required to register on the ROE and provide details of itself and each of its registrable beneficial owners. In some cases, the entity must also provide details of any trusts that sit above it in its corporate structure.

Details of the entity and its registrable beneficial owners are publicly available. Details of trusts are private and can be disclosed only to HM Revenue & Customs (HMRC).

Requirement to provide details of land

Under the first change, an overseas entity that applies to be included on the register would need to provide Companies House with details of all land in the UK that is registered in its name. This is not required under the regime as it currently stands.

If an entity owns only one or two parcels of land, this is unlikely to be significantly more burdensome than at present. But if an entity owns multiple parcels, this could entail a substantial information-gathering exercise. This is exacerbated if the entity holds registered land in all three legal jurisdictions in the UK (England and Wales, Northern Ireland and Scotland): each part of the UK has its own separate real estate register(s) and the entity will likely need to engage advisers in each jurisdiction.

Registration of trustees (and trusts)

The second change concerns trustees. Currently, an overseas entity can register another legal entity as its beneficial owner only in certain circumstances. These include where the beneficial owner is a non-UK entity that provides trust services and providing trust services is a regulated activity in that entity’s home jurisdiction. However, the legislation in this area is ambiguous and gives rise to several questions, including:

• whether it needs to provide trust services as a business or merely be acting as a trustee;
• whether a legal entity can be registered as a beneficial owner if it usually provides trust services but it is not acting as a trustee of the shares in the overseas entity; and
• what the position is if providing trust services is regulated in the entity’s home jurisdiction but the entity itself is for some reason unregulated (e.g. because it falls within an exemption).

The amended Bill would address this by stating that all trustees are automatically registrable if they satisfy the conditions for being a beneficial owner. There would be no need to show that an entity provides trust services on any regular basis, nor that it is subject to any level of regulation.

This change has been coupled with a related amendment, which states that a beneficial owner cannot be exempt from registration if they are acting as a trustee.

These two amendments together would create two principal effects:

• Every trustee beneficial owner in the chain of ownership would need to be registered and their details disclosed publicly at Companies House, and not merely the “first” trustee beneficial owner “up the ownership chain”.
• The entity would need to provide details of every trust in its ownership chain to Companies House. This includes details of beneficiaries and any protector or enforcer of the trust. This information would still be available only to HMRC.

These changes are unlikely to satisfy calls by the Labour Party for more public transparency of trust arrangements and to extend the regime to trusts over land itself.

However, the changes do represent a notable extension of the Government’s information-gathering powers in relation to trusts, which are currently effectively limited to only one trust in an overseas entity’s corporate structure.

The Levelling Up Bill

It is also worth noting that, although the Bill would not extend the Government’s information-gathering powers to trusts over land itself, its separate Levelling Up and Regeneration Bill (which is also proceeding through Parliament) would give HM Land Registry power to require information to identify persons who own interests in land or have the ability to control or influence (directly or indirectly) the owner of an interest in land.

The Explanatory Notes to that Bill explicitly state that the purpose of this power is “to identify attempts to evade sanctions or the new disclosure requirements placed on companies owning UK land and property contained in the Economic Crime (Transparency and Enforcement) Act 2022”.

The Government’s associated policy paper (from May 2022) states that it will also have the power to collect additional real-time ownership, funding and transaction data, enabling a fuller understanding of who owns and controls land and property in England and Wales. These proposals originate from a call for evidence on data on land control launched in August 2020. For more information on that call for evidence, see our previous in-depth piece.

These proposals have their origin in the call for evidence on data on land control which was launched back in August 2020

We should therefore expect further developments in this area.

Limited partnerships

There have also been some amendments to the Bill insofar as it affects limited partnerships established in the UK.

These changes are more functional in nature and do not significantly change concerns previously raised about the Bill’s impact on the UK fund industry. (See our previous in-depth piece for more information on these.) They include mandatory identity verification for registered officers of general partners, and a new power to wind a limited partnership up on public interest grounds.