The recent Royal Assent of the Economic Crime and Corporate Transparency Act introduces robust measures that bolster the capacity of UK authorities to dismantle criminal networks and thwart those exploiting the nation’s economic openness.
Companies House will receive strengthened authority to verify the identities of company directors, purge fraudulent entities from its records, and collaborate by sharing vital data with law enforcement bodies.
The Act extends greater control to authorities over cryptoassets, allowing them to seize, freeze, and reclaim such assets. In a significant legal shift, courts will also have the power to dismiss insubstantial legal claims that are intended to suppress free speech. These advancements will lead to more effective legal action against corporate wrongdoing.
These legislative changes are designed to create a fairer environment for businesses and cement the UK’s reputation as a premier global centre for legitimate commercial activities.
Failure to prevent fraud – Implications for businesses
The new “failure to prevent fraud” requirement obliges businesses, as well as individuals within these organisations, to undertake reasonable measures to avert fraud.
While many firms may have such processes already in place, the Government’s regulations are designed to clamp down on those unscrupulous entities that have not taken steps to prevent fraud, thereby placing their customers at increased risk.
For businesses, this could necessitate a thorough reassessment of their current fraud prevention strategies and a close examination of potential vulnerabilities.
Who is at risk of conviction?
Under the Act, as it stands, only large companies, which are those with over 250 employees, a turnover exceeding £36 million, and total assets above £18 million, are within the remit of this offence.
A conviction can result in an unlimited fine, the amount of which is determined by the court. It is critical to note that, while individuals can be prosecuted for engaging in or aiding fraud, the new legislation does not extend to prosecuting individuals for a failure to prevent fraud.
Measures to avert fraud
The new law mandates that all large organisations, including charities, implement reasonable fraud prevention measures. These measures may encompass:
- Employing secure authentication processes
- Utilising secure payment systems
- Encrypting confidential data
- Training staff to recognise and respond to common fraud types
- Conducting random audits of inventory and finances
- Informing customers about potential fraudulent schemes
If an organisation’s risk of fraud is deemed very low or non-existent, it may also be reasonable to not have any measures in place.
Changes to Companies House requirements
Companies House will undergo its most significant transformation in its 180-year history. The agency will take immediate action to improve the reliability of its company register, including the removal of invalid office addresses and tighter verification checks.
New rules around public beneficial ownership will close existing loopholes, enabling a more transparent business environment. This will help in revealing corrupt actors and building public trust.
However, one of the most profound changes is the requirement for all companies to publish full accounts, removing the option for small companies to file ‘filleted’ accounts, which previously allowed them to withhold their Profit and Loss (P&L) statement from public disclosure.
It isn’t yet known whether the requirement to file a P&L statement with Companies House will include the need to publish it on the public record. However, this shift towards full transparency could mean that the detailed financials of SMEs could now be available for public scrutiny, including by competitors and employees.
The Government intends to deter fraud and promote transparency, but it may inadvertently lead to privacy concerns for small businesses.
Many will consider alternative business structures or practices to maintain confidentiality.
Reverting to historical practices
This move represents a reversion to practices predating 1985 when all companies were required to publish comprehensive financial details.
The potential consequences of these changes are complex, with businesses likely to explore various strategies to address the resulting loss of financial privacy.
These strategies may include:
- Business splitting
- Changing company names and other identifying details frequently
- Utilising holding company and subsidiary structures
- Creating new service companies for cost recharging, which could reduce the apparent profitability of the primary company
Some of these strategies can be compliance nightmares, so consulting with a qualified solicitor is always advised.
Increased transparency for limited partnerships
For SMEs operating as limited partnerships, the Act tightens registration requirements and demands greater transparency.
This is likely to result in more stringent reporting obligations for your business.
Non-compliance could lead to penalties or, worse, intensive tax audits, which could disrupt business operations.
Strengthened anti-money laundering measures
The Act also enhances anti-money laundering regulations, necessitating a higher level of financial disclosure.
This increased scrutiny could uncover discrepancies in bookkeeping that may attract HMRC investigations – a situation most businesses strive to avoid.
Safeguarding your enterprise
An uptick in corporate responsibility for fraud prevention, particularly within larger firms, is anticipated.
In light of these changes, business leaders and key decision-makers may find it increasingly necessary to seek specialised assistance. To find out how we can help, please contact us.