The arrival of the long-awaited Economic Crime and Corporate Transparency Act 2023 (“the Act”) marks, in the government’s words, “world-leading powers which will allow UK authorities to proactively target organised criminals and others seeking to abuse the UK’s open economy”. It also marks a significant attempt to address corporate criminal liability in the UK, and has been welcomed by those involved as strengthening the powers of law enforcement agencies, improving corporate transparency, making easier the prosecution of companies for certain financial crimes, and introducing a new offence of failure to prevent fraud.
Under the terms of the Act, law enforcement agencies will not only have enhanced powers to seize, freeze and recover cryptoassets, but also “groundbreaking legal reforms will allow the courts to dismiss spurious lawsuits which seek to stifle freedom of speech. Prosecutors will be better able to hold large corporations accountable for malpractice”.
The Act, which received Royal Assent on 26 October, supplements the powers set out in the Economic Crime (Transparency and Enforcement) Act 2022 which was fast-tracked through Parliament following the Russian invasion of Ukraine, and addressing what are seen to be weaknesses in the UK’s ability to tackle economic crime. That legislation gave government the ability to move more quickly when imposing sanctions, created a register of overseas entities to improve the ability to target foreign criminals using UK property to launder money and reformed the UK’s unexplained wealth order regime.
Speaking about the new 2023 Act, Business Minister Kevin Hollinrake said:
“We’re providing Companies House with the tools to take a much harder line on criminals who take advantage of the UK’s open economy, ensuring the reputation of our businesses is not tarnished by the UK playing host to the world’s scammers.
“These reforms will remove the smoke and mirrors around companies hiding behind false identities, provide further protection to the public from companies fraudulently using their addresses, and deliver better data to support business and lending decisions across the economy, enhancing the UK’s reputation as a great and safe place to do business”.
What does the legislation seek to achieve?
Under the new legislation, the powers given to Companies House will form what the government describe as “the biggest shakeup to the service in its 180-year history”. These will include enhanced abilities to verify the identities of company directors, remove fraudulent organisations from the company register and share information with criminal investigation agencies.
Once the new provisions come into force, immediate steps will be taken to improve the quality of information on the company register with invalid registered office addresses, such as those used fraudulently to set up companies, removed and verification checks undertaken to assess the identities of those setting up and managing companies – thus helping to prevent criminals from hiding behind false names or registering companies with fictional characters. This will also help to prevent fraudulent appointments and avoid people involved in money laundering hiding behind false names.
There are also changes to public beneficial ownership registers which will close loopholes that allow fraudsters to use opaque companies to move and hide money and which will allow businesses to have greater clarity as to whom they are working with, while allowing civil society organisations to expose corrupt actors, and for the public to increase their trust in governments.
The provisions contained in the new Act are quite extensive and to reflect this, the government has published a number of factsheets addressing different aspect of the Act. These include:
- shareholder identity verification
- strategic lawsuits against public participation (SLAPPs)
- the role and powers of the Registrar of Companies
- preventing abuse of personal information on the Register
- limited partnerships
- cryptoassets, and
- beneficial ownership.
A full list of the factsheets can be found at on the gov.uk website – “Economic Crime and Corporate Transparency Bill 2022: Factsheets”.
Of particular interest to law firms will be the provisions referred to in the factsheet “New regulatory objective in the Legal Services Act 2007”.
What does this mean for law firms?
So what will be the main implications for law firms from this legislation? Inevitably it will mean greater regulatory pressure being placed upon them and yet more unremunerated work checking for financial crime being perpetrated through law firms.
The government is introducing a new regulatory objective to the Legal Services Act 2007 focusing on promoting the prevention and detection of economic crime. In the words of the government “This change will affirm the duties of regulators and the regulated communities to uphold the economic crime regime, and it will put beyond doubt that it is the frontline regulators’ duty to carry out such regulatory action, as is appropriate to uphold this objective. It will also enable the Legal Services Board, as the oversight regulator, to performance manage frontline regulators against this economic crime objective. The intended effects are more effective enforcement action from legal services regulators, as well as reduced challenge of any type for regulators carrying out proportionate monitoring and enforcement activities to ensure economic crime compliance”.
What this inevitably means in practice is more complex and more rigorously enforced requirements for law firms to adhere to.
In particular, the provisions that law firms need to be aware of are those relating to the reforms at Companies House aimed at preventing and shutting down fraudulent companies, reforms to prevent the abuse of limited partnerships, new powers to seize and recover suspected criminal cryptoassets, the new and horribly vague “failure to prevent fraud” offence and measures designed to address strategic law suits against public participation (SLAPPs). However, by far the matter that should be of greatest concern to law firms is that which relates to the removal of the statutory cap on financial penalties for law firms.
Companies House Reforms – new powers will be introduced for the Registrar to:
- require those forming or running companies to supply additional information in relation to material they file with Companies House,
- proactively share data with any persons for purposes connected with the Registrar’s functions or with other public authorities for purposes connected with their functions,
- remove material from the register,
- change the address of a company’s registered office and take action against those persistently failing to provide an appropriate registered office address, and
- make rules which mandate digital delivery of documents and filings.
Limited Partnerships – there is evidence that limited partnerships are being used as a vehicle for fraud – as in the for example in the Azerbaijani laundromat and Danske Bank scandal where as much as $2.9 billion was siphoned through European companies and banks. As a consequence reforms will be introduced which will:
- tighten registration requirements,
- require LPs to maintain a connection to the UK,
- increase transparency requirements, for example requiring fuller information about partners, and
- enable the Registrar of Companies to deregister LPs which are dissolved, which are no longer carrying on business or where a court determines that it is in the public interest to do so.
Cryptoassets – these are increasingly used by criminals to move and launder criminal proceeds and to raise and move funds for terrorist activities. The new legislation is designed to facilitate faster and more efficient processes for the seizure of cryptoassets, and to ensure that these assets can be recovered by taking account of the unique technological qualities of cryptoassets and, where possible, likely advances of that technology which may be susceptible to criminal exploitation or for use in terrorist activities. The aim is to modernise proceeds of crime legislation, and introduce new powers to recover cryptoassets in more circumstances than at present.
Failure to prevent fraud – affecting not just law firms but businesses in general, the provisions contained in the Act will make “large organisations” liable if they do not prevent employees or connected third parties from committing fraud from which the benefit profits. Under the new offence, businesses that come within the criteria will be liable where a specified fraud offence is committed by an employee or agent, for the organisation’s benefit, and the organisation did not have reasonable fraud prevention procedures in place. It does not need to be demonstrated that those in charge of the business knew about or ordered the fraud. The aim is to discourage organisations from turning a blind eye to fraud by employees and encourage more companies to implement or improve prevention procedures, driving a major shift in corporate culture to help reduce fraud. Although the duty will apply to all sectors, it will only apply only to large organisations (as defined by the Companies Act 2006).
SLAPPs – these are defined in the government factsheet as being “legal actions typically brought by corporations or individuals with the intention of harassing, intimidating and financially or psychologically exhausting opponents via improper use of the legal system” and are frequently “brought by wealthy individuals (including Russian oligarchs) or corporations to evade scrutiny in the public interest”. The government is seeking to curtail the use of SLAPPs in the interests of freedom of expression.
Professional obligations require that when lawyers are advising on bringing disputes, their duties to their client do not override their public interest obligations and duties to the court advising clients to use SLAPPs so as to bring cases without legitimate basis, sufficient merit, or proper intent is a misuse of the legal system and may be considered misconduct which warrants disciplinary proceedings.
Financial cap – The Solicitors Act 1974 and the Administration of Justice Act 1985 give powers, delegated to the SRA, to require law firms to pay a penalty if they fail to comply with legal and regulatory requirements or commit professional misconduct. Currently the limit for that financial penalty for the SRA is £25,000. Since other frontline regulators are not bound by that statutory limits, and can amend the level of financial penalties without secondary legislation, the government wants to align the SRA more closely and ensure that it has the necessary enforcement powers and can levy financial penalties that act as a credible deterrent in relation to economic crime matters.
The government believes that the process of referring cases to the SDT is time-consuming and resource intensive and that the SRA should be able to impose a financial penalty above £25,000 if that is applicable to a case. For that reason the legislation removes the maximum financial penalty that the SRA, can direct a person to pay for disciplinary matters relating to economic crime. This will apply to traditional law firms, sole solicitors’ practices and regulated individuals. However, limits on financial penalties in the Legal Services Act 2007 (Licensing Authorities) (Maximum Penalty) Rules 2011 for alternative business structures, which apply to all ‘Licensing Authorities’, will remain unchanged.
Clearly this could be a significant issue for any firm found to be wanting – especially given the somewhat intransigent approach taken by the SRA of late towards firms – and will be regarded by many as unnecessarily heavy handed. The Law Society has stated that it has “… strongly urged the government to carefully consider the proportionality of any further increases to the SRA’s fining powers, given that its fining powers increased from £2,000 to £25,000 as recently as July 2022”. It has gone on to say that there “… is no evidence that the current fining powers are insufficient. Unlimited fines can already be imposed via the independent and ultimate arbiter, the Solicitors Disciplinary Tribunal (SDT), which was established to deal with the most serious cases of misconduct. The independent and transparent SDT process has the confidence of both the profession and the public.”
The implications of this legislation should not be underestimated by firms and they must ensure that all relevant staff are made aware of what the provisions are and how they will impact upon the work of the firm.
In particular, all firms MUST take this as a wake up call in relation to provisions relating to anti-money laundering and take on board fully the fact that, if limitless fines can be imposed by the SRA then large fines can be expected – even if just to fire a warning shot across the bows of everyone.
The prevention of economic crime by this government is a key objective and a blind eye will not be turned to those who do not do all in their power to prevent it from flourishing.