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The transcript for ICAEW Insights In Focus podcast episode 40: 'What’s in the second Economic Crime Bill?'.

Philippa Lamb: Hello and welcome to the ICAEW Insights Podcast. I’m Philippa Lamb, and this time we’re looking at the Economic Crime Bill currently passing through Parliament. The Bill follows the Economic Crime Act, which became law back in March. That legislation was fast tracked in response to the invasion of Ukraine and included a raft of measures to sever economic ties with Russia. Now, this new Bill aims to bring about wider changes on how financial information is gathered and shared in the UK.

Reforming Companies House is front and centre. As Registrar of Companies the aim is to make it more active in spotting misbehaviour, and in working with law enforcement. So, what will that mean for chartered accountants as reporting and filing requirements for companies change? And what else is in the Bill? Sally Baker is here to shed light on that, she’s ICAEW’s Head of Corporate Reporting Policy. Joining Sally is Paul Brehony, a partner at Signature Litigation, and Ed Smyth, partner at Kingsley Napley. Welcome everyone. So, Paul, shall we start by just laying out what this Economic Crime Bill aims to address?

Paul Brehony: The NCA, that’s the National Crime Agency, estimates the cost of money laundering to the UK economy is more than £100bn annually. This latest Bill forms part of the Economic Crime Plan 2019, so the government had been working on this issue and conscious of its importance for some time. And that sets out the UK strategic priorities for combating economic crime. It follows hot on the heels of the Economic Crime Act, which was enacted at relatively high speed. It was prompted by Russia’s invasion of Ukraine to make sure the sanctions regime would do that quickly and effectively, and also initiate Register for Overseas Entities, which is part of that same process of obfuscating the ownership of assets held in the UK. And a third limb of that was to also beef up the unexplained wealth orders regime, which again ties into the obfuscation of how wealth and assets are held. The Bill itself focuses on five main areas, front and centre very much occupying reforms to the Companies House regime. It has the avowed aim of making the House a more robust gatekeeper. In changes in its expressed function, it is intended to be less of a repository for financial information and to be more proactive. In other limbs, in law enforcement agencies I’ve noticed for some time, there’s been a significant uptick in the use of limited partnerships and limited liability partnerships in money laundering and fraud. So, there are measures being brought in to address lacunas in that regime, and to prevent abuse going forward. There’s a raft of measures being brought in which are effectively going to be targeting crypto assets, which, as we all know, have been used in economic crime and fraud generally, together with measures to encourage information sharing between the agencies, and in particular private sector banks, because you can imagine, most money laundering transactions involve a multitude of banks and transactions across jurisdictions. And so that to my mind is a critical element of the reforms that are being put forward. In addition, there is further intelligence-gathering information showing the powers for law enforcement agencies. Effectively it’s an attempt to keep pace with the exponential growth in financial crime and money laundering, which a lot of it is technology driven. The scale of it is growing exponentially, and it requires regular rule changes in order to keep pace with criminals.

PL: Ed, Companies House is right in the forefront here. It’s a big part of the Bill. As it stands, as the system there stands right now, what are the risks and weaknesses?

Edmund Smyth: Well, I think something we all expressed when we were discussing this beforehand was an element of surprise that what these reforms are bringing into Companies House are elements that weren’t already present. And indeed, perhaps one might have thought they’d be the kind of things that would be present from the inception of a corporate register. So, the introduction of identity verification for anyone who wishes to register a company.

PL: I was amazed that that wasn’t already a requirement. You need ID verification for a gym membership nowadays.

ES: Yes, indeed, but not to register a company, as a director or as a person with significant control. Alongside that, now you obviously will have the requirement to verify identity, Companies House will also have the power to ensure the reliability of the data that is held. So again, as Paul described it, it was merely a repository. Anyone with any particular motives could just stick in that data. It’s publicly available, but because it comes under the banner of Companies House, it therefore has this veneer of credibility, when in fact there are virtually no systems and controls to ensure that it really is accurate. So that’s a real problem as we currently stand. And alongside its rather passive repository role is the fact that Companies House didn’t, and won’t until this Bill is enacted, have the power proactively to approach law enforcement and raise concerns when it identifies red flags. At the moment it has to wait for requests to come to it.

PL: Yeah, I thought that was fascinating. So presumably a lot of things slip through the net because of that.

ES: You would have thought so. Of course, in order to make all of these things effective, you’d want Companies House to have extra resources put in place. At the moment, if it doesn’t have this proactive role – it doesn’t need to have it because it’s not required to – but obviously it’s not structured in a way to give force to those yet.

PL: Yeah, and that’s going to be a significant cost, isn’t it?

ES: One would have thought so, yes.

PL: The cross-checking of data with other public and private sector bodies, the same applies there, doesn’t it?

ES: Indeed, it’s going to need much more allocation towards its communication and alerting function, rather than just being responsive.

PL: What sorts of problems do you think have directly arisen from this?

ES: Well, I suppose I was slightly alluding to it with the idea that anyone can register a company, submit company accounts, verified or unverified, and then use those – first of all, they’d be disseminated because it’s public access – but then use that veneer of credibility to carry out all manner of economic crime, if that’s what they wanted to do.

PL: Any further thoughts on that Sally?

Sally Baker: I think picking up on Ed’s point around surprise at how limited the checks are that are done at the moment, what people may not appreciate is that the registrar actually has very limited powers to be able to reject information that is filed on the register at the moment. So, in actual fact, as long as when companies file information they have ticked certain boxes, there is nothing that the registrar can do about that. And this Act is about giving them the powers that they can see the red flags, and then they will be able to act on those red flags. And at the moment, what we’re seeing is that Companies House are rejecting accounts for very minor misdemeanours, and not being able to tackle the larger issues that are the red flags for economic crime.

PL: Do we have any sense of the scale?

PB: I think we have an idea from the pandemic, effectively. The extent to bounce-back loan fraud and furlough fraud, it’s been quoted as being billions, multiple billions. That’s probably an indication of the issue. And a lot of that is driven, obviously, it’s loans to small companies who are, as Ed says, generally unverified, quite often bogus, and very easy to replicate as another company when a red light does eventually come on. So it’s a persistent problem, it’s about time it’s being addressed. And just to build on another point, as matters stand it operates on a cost-recovery basis, effectively. So, the fees that it charges can only be used for the cost of delivering its service, which is fine if it’s a repository, as Ed says. The Bill is going to significantly address that and bring in funding to investigate and enforce properly. It’ll mean an uptick in that funding, at least we’re told that that’s going to be the case. And to be fair, the Bill does include provisions to cater for that. So that looks promising in that sense. But you’re right, there’s going to need to be a lot of money spent on, for example, improving Companies House’s IT systems, it’s going to need a significant increase in staff, and it’s going to need better analytical capacity. And that’s going to cost.

PL: How does the Bill complement the Economic Crime Act that came in earlier this year?

ES: Well, I think it can certainly be seen as the partner piece of legislation to the Act. The Act probably wouldn’t have been brought into force at the time it was had it not been for the invasion of Ukraine and the need, as Paul says, to give some teeth to the sanctions regime. So, you know, regard the two as one. Had Russia not invaded Ukraine, the central factors of that Act would be sitting alongside the Bill now, I think.

PL: And this is part of this longer journey to safeguarding financial integrity across the piece

ES: Indeed, as we probably all are aware, the UK, and London in particular, has been long touted in a very negative way as being an easy place for people to hide assets to invest without any sorts of checks and balances and scrutiny. And it’s taken some time for lawmakers to get a grip on this. Certainly, that and the new Act are landmarks on the road to that.

PB: Yeah, there is some symbiosis between the two Acts. For example, verification of identities, etc, has been brought into the Register of Overseas Entities. So that’s effectively playing catch-up with the previous Act to bolster identification of who actually owns entities.

PL: Yes, which was obviously a key necessity at that point. So, Sally, when the Bill becomes law, what are the likely impacts on business?

SB: I think this Act is all about strengthening the business environment as much as it’s about combating economic crime and trying to achieve a more reliable companies register. So, Paul and Ed have been focusing very much there in terms of combating economic crime measures, but in terms of strengthening the business environment it’s all about improving the financial information that’s on the register.

PL: And the filing implications specifically?

SB: Definitely the filing implications. So, I think the most significant change in this Economic Crime Bill is that small and micro entities – micro entities being the smallest companies – will be required to file a profit and loss account as part of the information that they put on the public register, whereas previously, they haven’t had to file that bit of information. And I think there’s a couple of reasons behind that decision. It’s all about improving the integrity of the information, because by filing your profit and loss account and disclosing your turnover figure, that enables Companies House to make sure that you are eligible for the regime that you are filing under, so it enables them to do that verification check. And it’s also about boosting the economy in terms of increasing the access to finance of those smaller companies. So information in terms of credit reference agencies facilitating business decisions and trying to boost economic activity.

PL: So those are the wins. What about the challenges?

SB: Well, I think there’s finely balanced arguments on both sides of filing a profit and loss account. On the one hand, it’s the transparency, it’s important for companies to be accountable, it’s the price of limited liability to be disclosing information on the register. On the other hand, the commercial sensitivity is definitely a challenge for businesses themselves, putting that information out there into the public domain. And many would believe that companies should be able to carry on their trade without having that information in the public domain.

PL: Paul, Ed, thoughts on wider challenges?

ES: I’m going to move away slightly from the Bill, although it is an amendment that’s been tabled to the Bill, and that’s the general drive towards criminal liability for failing to prevent a raft of misconduct. And we already have on the statute book failing to prevent the facilitation of tax evasion, albeit that there have been virtually no prosecutions for it. One of the amendments tabled to this Bill is a failure to prevent economic crime. An economic crime is defined extremely broadly. And so that, I think, is indicative of a very clear direction of travel of where we’re going to go, if it doesn’t happen at this time in this Bill, it’s going to happen at some point in the future. So, businesses need to be very, very aware of that. That more and more, there’s going to be an expectation on service providers to take a measure of responsibility for those they’re providing services to for their conduct.

PL: So they should be thinking about that now and preparing for that.

PB: I entirely agree with everything that Ed has just said, I think it’s an inevitable direction of travel. In addition, the House of Lords recently published documents reciting their desire to enact failure to prevent fraud, which you would assume would be subsumed within the amendment that’s been tabled as well.

PL: So that’s going to be dealt with as a separate issue?

PB: Well, that remains to be seen. But certainly that seems to be where we’re headed. And that is going to affect professionals, the sort of people who deal on a daily basis with operating companies for their clients, putting together corporate simplification, tax-driven structures, which often involve an overseas jurisdiction – for example, BVI or other such entities to facilitate a tax advantage – which then brings a corporate into play which isn’t necessarily within the English regime. And historically, third parties could, without being subject to any UK legislation, actually make submissions to Companies House in that respect. That’s going to change. But one thing that I think the ICAEW has commented on is some of the penalties – particularly in the context of verification of registered overseas entities – are very draconian.

PL: What sort of thing are we talking about?

PB: In the case of a more egregious example, it’s a prison term, potentially, for an accountant, which is quite punchy.

PL: Sally, what’s that going to mean? Is that going to mean that the accountants become cautious about providing their services?

SB: Definitely. And we’re advising firms to be quite cautious around providing verification services. I think members are concerned that the liabilities are quite strict. So firms being liable for false verification, even if it didn’t know that it was false at the time, and only discovering after the event that it was false, that is quite a quite a concern. So we are advising members to be quite cautious.

PL: Understandably. But that’s a problem, isn’t it? Because presumably that’s going to create a roadblock in the system, if someone has to verify. So what will happen about that?

ES: Who knows exactly what will happen, but I can certainly say anecdotally that I know legal service providers are very reluctant to get involved in this at all. We were approached fairly regularly, where an aspect of the overseas register and verification for that will be an add-on to the to the main instruction, and there’s just an absolute aversion to getting involved in at all because of the personal liability to the individual as much as to the reputational damage it can cause the firm.

PL: Completely understandably, but doesn’t that mean that this is a problem in the way the Bill is drafted? If it’s going to create a situation where professional advisors just don’t want to get involved?

SB: If the lawyers aren’t doing it, and if the accountants aren’t doing it, who’s going to do it?

PL: So what would be the better way forward? Are these penalties unduly draconian?

PB: To my mind, it’s maybe a little over the top. This isn’t an aggravated instance. I suppose if the pattern is particularly egregious, perhaps it might be appropriate or proportionate in that context, but bear in mind as well, as it’s already alluded to, we’re very likely to be seeing potential liability for organisations failing to prevent money laundering, economic crime fraud, whatever. If you compound that into the existing penalties, it’s almost a double whammy potentially, isn’t it? You’d have thought?

ES: I think so. And part of the problem that service providers have is that there’s been this lack of prosecutions and lack of enforcement action of any kind. So no one has a frame of reference to actually properly assess the risk. And therefore the safety-first approach is, well, let’s take no risk at all.

PL: So it’s very hard to come up with a protocol that doesn’t put you at risk, so why would you get involved? Sally, that’s a big one, what else should accountants be thinking about?

SB: There are some other moves in terms of filing requirements. As well as the profit and loss account that I alluded to earlier, the move towards digital filing, whilst it’s not explicit in the Bill, the direction of travel is very much there. So the power to mandate the manner of filing of accounts has been transferred or is being transferred to the registrar, as opposed to the Secretary of State. That will enable the registrar in future to be able to implement requirements for digital filing more quickly. It remains to be seen whether that will be mandated or whether it might be encouraged first or mandated with a bit of a phased approach. So that’s very much a direction of travel, and again, fitting in with the needs of the modern digital economy and trying to promote business. And I think another measure that’s in the Bill, which is relating to economic crime, is around an audit exemption statement, and that includes for dormant companies as well. At the moment, companies that are dormant are able to say that they are exempt from having an audit. In the future, the directors of those companies will have to more explicitly identify the exemptions that they’re taking and say that they qualify to be able to take those exemptions. And that’s because there’s an issue around dormant companies that aren’t actually dormant, and it’s trying to deter that activity and also provide more evidence for enforcement to Companies House.

PL: There’s cost here for accountants, isn’t there? Is this going to be a particular issue for smaller firms?

SB: I think it is going to be an issue for small businesses and smaller firms, and more changes at that end that we’re seeing rather than at the larger end. So yes, there will be implications.

PL: OK, I think we’ve explored pretty comprehensively where we’re at now. Once this Bill passes into law, what comes next?

ES: Well, we’ve already discussed the evolution of the failure to prevent offence, and how it covers a number of different aspects. Something that’s also included in the Bill – and it’s going to sound initially a bit granular, but bear with me, because it does have wider application – is a new addition to one of the regulatory objectives under the Legal Services Act. So at the moment, that will only apply to legal services, regulators, but one can see it stretching further, and that is an objective to promote the prevention of economic crime.

PL: That’s a whole other thing isn’t it?

ES: It’s moving things on to another level to where that will be a foundational principle that professional regulators are expected to do. Now, I can’t necessarily give clarity on what that’s going to look like, what the shape of that will be. But it is an interesting development, there are obviously questions to be asked about why specific economic crime and not all sorts of other crime, particularly now we’re in a world where ESG and things like that are becoming all the more important. But also, is it actually appropriate for a regulator to have that duty? Particularly in the area of legal services where one sometimes has duties to a client as well as to your professional obligations. I’m concerned about a sort of mission creep of that sort of objective. What would happen, would a lawyer be required to disclose certain information that might cut across their duty of confidentiality or legal professional privilege? It’s not going to be easy, but it’s certainly an important thing to look out for.

PL: So would it be fair to say there’s a question mark over the appropriateness of this shift towards moving responsibility to the professions?

ES: Yes, I think so. Not wanting to sound like a stuck record, but alongside the failure to prevent it does seem to be part of this shift towards putting almost a law enforcement role on to those who are not actually law enforcers.

PB: And we’ve seen that. I suppose the oldest articulation of this is probably the Bribery Act, which is effectively structured in a very similar way to how then it would be envisaged that failure to prevent offences would work. In that context, there is an adequate procedures defence, so if one puts in place a sufficiently robust due diligence process, and there’s a failing but your systems are suitable and fit for purpose, then one could normally avoid liability and you would hope and anticipate the case in this context as well.

PL: So that would feel fair enough, if that same thing was replicated?

PB: Well, as Ed has mentioned, we have an existing piece of legislation dealing with a failure to prevent tax evasion. But that’s been almost entirely untested so far, certainly in the UK, as far as I’m aware.

PL: Ed, what about crypto?

ES: We’ve touched briefly on it, haven’t we? One thing that this Bill does do is draw crypto into the pre-existing structure for the freezing and forfeiture of assets. It’s actually one of the few success stories from a law enforcement perspective of the last decade or so. There’s a very straightforward, cheap and simple process by which law enforcement can seize assets. And now crypto fall into that as well.

PL: Sally, Ed, Paul, thanks very much for being with us. If you’d like to learn more about the Economic Crime Bill and the evolving responsibilities of accountants, the ICAEW Economic Crime hub is continually being updated with new analysis and resources. You’ll find a link to it in the show notes. Thanks for listening today. In the next In Focus podcast later this month, we’ll be reviewing the most significant financial and political events of 2022 – plenty to talk about there. Don’t miss it. In the meantime, if you found this useful, please let us know by rating, reviewing and sharing this episode, and subscribing to ICAEW Insights on your podcast app.