Economic Crime and Corporate Transparency Bill – Companies House and Identity

If the government’s Economic Crime and Corporate Transparency Bill and its plan to bring more transparency and accuracy to company’s ownership is to be effective, it must focus on how digital identity data will be managed

On May 10, the UK government used the Queen’s speech to announce plans for a second economic crime bill as part of its effort to end anonymous ownership of companies and stem the flow of dirty money.

This legislative development is a consequence of the war in Ukraine and the imposition of economic sanctions on Russian oligarchs, which has accelerated efforts to bring more transparency to the creation of companies and the identities of the people behind them.

As the government states, the purpose of the proposed Economic Crime and Corporate Transparency Bill is to “crack down on the kleptocrats, criminals and terrorists who abuse our open economy” and to “ensure these people, including Putin’s associates, do not benefit from the UK’s open society”. 

Mandatory verification checks

A central feature of the bill is the reform of transparency and identity checks at Companies House, the UK’s registrar of companies. It would introduce mandatory verification requirements for those who manage, own, and control companies and other UK registered entities.

This includes new and existing company directors, members of limited liability partnerships, general partners of limited partnerships, or people with significant control (PSCs) of companies, otherwise known as beneficial owners. They must all have their identity verified by photographic ID.

Furthermore, all registered entities at Companies House must have at least one verified person directly associated with the company on the public register. A director’s appointment cannot be registered at Companies House without a verified account and any director not registered will be guilty of an offence and liable for a civil penalty, as will the company. 

Law firm Osborne Clarke has stated that these proposed reforms will have “profound implications” for how companies are established and administered in the UK. It will also have a fundamental impact on the role of Companies House, transforming it from a passive administrator to an active gatekeeper and custodian of company information.

Data management implications

There are also important technical implications from the bill – not least how all of this verification information will be captured, stored, processed and maintained. 

 Both the first and second economic crime bills have been introduced to bring more transparency and accuracy to Companies House information and the corporate structure behind unlisted companies. Previous efforts to address this have not always proved successful. 

For example, in 2016, the UK introduced the people with significant control (PSC) register, which was lauded as the world’s first public beneficial ownership register. 

However, an independent interrogation of the data by a team of data scientists (Global Witness) found insufficient safeguards to ensure the accuracy of the data. It also found inconsistencies in the way the data was reported. For example, when it came to filling in the ‘Nationality’ field, there were over 500 ways of writing British.

“This is going to be a serious challenge for the credibility of the register and the government will have to provide more reassurances on how it is going to ensure data accuracy,” stated Global Witness at the time. 

The problem back then was the lack of resources afforded to Companies House to police its new register. There is a danger that the same could happen with the proposed verification checks. 

The bill proposes that Companies House will be given extended powers to question information before it is entered on the register or to remove information. But with extended powers comes extended responsibility. This includes ensuring the integrity of the register.

This is not a straight-forward task, especially without the necessary resources. What is needed is an effective identity solution that enables company directors to prove their identity. 

This would free up Companies House to focus on proving the identity of those without UK bank accounts, where the vast majority of fraud emanates. 

A solution that stores verification data in a secure system and in a consistent format would help meet more of the bill’s objectives, “to enable businesses in the financial sector to share information more effectively” and “to enable Companies House to deliver a better service for over four million UK companies”.

A concern is that the government will decide to pay a private company to develop a system from scratch that could take years and cost millions instead of leveraging the solutions that already exist.

By taking the latter approach, the government could immediately free up the resources at an already overstretched Companies House against a backdrop of reduced civil service spending and dramatically reduce another source of fraud.