Corporate Transparency – identity verification for company directors

corporate transparency

Proposals designed to provide a fundamental shake-up of existing processes at Companies House have been put forward by the government in its White Paper on Corporate Transparency and Register Reform. The changes, which affect principally UK company directors, persons having significant control (PSCs), and third parties involved in filing information at Companies House are intended to be yet another step in the fight against dirty money.

There can be little doubt that the current system is open to abuse, and the aim of the proposals, which are expected to sit alongside the Economic Crime (Transparency and Enforcement) Act 2022 – which, among other things, introduces a register of overseas entities – is to increase the transparency of the information on the companies and limited liability partnerships registered at Companies House and to clamp down on the use of companies as a vehicle for crime and fraud.  Currently, Companies House accepts filings on a “good-faith” basis with the Registrar having limited scope to investigate or challenge the information presented. As a consequence, companies can be incorporated, and directors appointed, with little or no checks being made as to the authenticity of the information that is filed. This has led to growing concerns as to the misuse of companies and in particular whether information filed on the companies’ register is accurate or even genuine. The new proposals, therefore, are designed not only to improve the accuracy of that information but also to strengthen the means by which the UK can target economic crime.

The approach to date in relation to company formation and administration can still be summed up by a statement from 1856 made by Robert Lowe, the then Vice President of the Board of Trade, when introducing the Joint Stock Companies Bill to Parliament.  He said:

“It is right the experiment should be tried; and, in my judgment, the principle we should adopt is this – not to throw the slightest obstacle in the way of limited companies being formed – because the effect of that would be to arrest ninety-nine good schemes in order that the bad hundredth might be prevented; but to allow them all to come into existence, and when difficulties arise, to arm the courts of justice with sufficient powers to check extravagance or roguery in the management of companies, and to save them from the wreck in which they may be involved.”

However, as is stated in the “Corporate Transparency and Register Reform White Paper“, ‘recent years have seen this framework manipulated, particularly in the use of anonymous or fraudulent ‘shell’ companies and partnerships. These provide criminals with a veneer of legitimacy to help commit a range of crimes, from grand corruption and money laundering to fraud and identity theft. This undermines our standing as a free, open and trustworthy democracy and undermines the UK’s reputation as a great place to do business’.

Among the provisions contained in the proposed Act are for all directors, both existing and new, PSCs and third parties that file information at Companies House, to be required to open an account with Companies House and to verify their identity. Thus, directors will be required to produce proof of identity to Company’s House, such as a passport or driver’s licence, and this will be used to establish a verified account that will be used whenever Companies House needs to verify the director’s identity.

The practical consequence of this is that existing company directors will need to have their identity verified, (probably within a transitional period), to continue being directors and before a new company can be incorporated, all prospective directors will need to verify their identity. Similarly, where a company already exists, new director appointments will be conditional on verification taking place.  Failure to comply with the verification requirements will result in a new director’s appointment being ineffective and therefore not appearing on the register of directors at Companies House or for existing directors, failure to verify his or her identity will be deemed to be an offence and leave the director liable to a fine. In addition, the company itself will be guilty of an offence and any verification failure will be recorded in the register and on the records for anyone reviewing that company’s filing history.

Similar provisions will also apply to those who are deemed to be ‘persons with significant control’ (PSCs). Verification will be necessary after the PSC has been notified that they are a person with significant control by the company. Those who already have a verification account at Companies House, for example because they are a director, will automatically be marked as verified by Companies House. However, if they do not have a verification account, they and the company of which they are a PSC will be notified by that their identity must be verified and failure to do so will be an offence.

Clearly these provisions, which are likely to become law in some form not dissimilar to this, are going to have an impact upon solicitors firms and their clients.  Firms will need not only to notify corporate and LLP clients of the need for verification but will also need to ensure that any companies or LLPs in which they are involved are also compliant.  In particular, there will need to be close attention paid to those who are PSCs.

Other changes that are likely to form part of any future legislation include proposals for Companies House to be given new statutory functions aimed at enhancing the registrar’s role in promoting and maintaining the integrity of the register.  This is likely to include the power to query information, both before it is placed on the register and post-registration, the power to remove information and the power to change information.  There are also proposals for a statutory ban on a UK company having corporate directors unless certain exceptions apply, for example all of the corporate director’s own directors being natural persons with verified identities and only UK entities with legal personality (i.e. companies and LLPs) being permitted to serve as corporate directors. Thus, overseas entities will not be allowed to serve as corporate directors of UK companies.  There are also likely to be provisions relating to accounts, personal information and data sharing.


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