December 17, 2024 How ECCTA creates challenges for Law Firms
We are entering a new era where Companies House is taking a more active role in enforcement (and penalties) regarding information filings.
We have discussed with a breadth of Knowledge, Corporate and Risk teams at UK law firms about what this may mean for them and their clients. Here we list some of the specific issues focusing on new risks and considerations for carrying out compliance work and filing with Companies House.
Introduction
The Economic Crime and Corporate Transparency Act 2023 (ECCTA) introduced new objectives for Companies House and new powers and punishments for offenders. The Authorised Corporate Service Provider (ACSP) regime is part of this process.
Once ECCTA is fully in force, a person will only be able to file on behalf of another firm, if that person is an officer or employee of the firm, or they are (or work for) an ACSP. In line with Companies House’s new objectives and powers, there will also be much greater enforcement, supervision and regulation of ACSPs.
As frequent users of Companies House services, we are already seeing a different approach in terms of the scrutiny of filings, the time taken to review matters and the penalty regime. Change is already afoot.
Implications for Professional Services Firms
A crime can be committed ‘unknowingly’
On 4 March 2024, s102 of ECCTA came into force and amended the existing false statement criminal offence in s1112 CA 2006. This now makes it an offence to deliver a filing or statement to the Registrar that is false, deceptive or misleading in a material particular, ‘without reasonable excuse’.
Previously, to commit this offence, the person must have delivered the false document or statement, ‘knowingly or recklessly’. The amended offence lowers the threshold where it can be committed, presumably meaning that a failure to carry out reasonable due diligence on the accuracy of the filing could lead to committing a criminal act. This therefore increases the risk exposure for those professional firms filing on behalf of clients.
What’s your (reasonable) excuse?
There is debate in the industry as to what a ‘reasonable excuse’ will be. We expect that, where the person making the filing is an ACSP, then the guidance issued to ACSPs (which is yet to be published) will form the basis of what is considered a reasonable excuse. If the ACSP follows the guidance then this will, hopefully, be a reasonable excuse even if the filing turns out to be false (assuming the ACSP did not know this).
In our experience, firms should follow formulaic steps, both in terms of checking the accuracy of documentation and in terms of record keeping. If the ACSP does not follow the guidance, then there is likely to be a high burden to show that they had a reasonable excuse.
To mitigate this risk, firms should designate internal accountability and empower individuals. For example, firms engaged in transactional work must ensure that seemingly minor steps in the push to close a deal are not overlooked. In all other scenarios, firms will want to consider broader training requirements.
Association made at Companies House
We are already seeing that where a third party has filed on behalf of a company, Companies House will approach that third party concerning issues. Once the ACSP regime comes into force we expect this to increase. In essence, the ACSP will be connected to the company in the eyes of Companies House. There is also the possibility that, as with the Register of Overseas Entities regime (ROE), the name of the ACSP that made a filing goes on the public register. This would then connect the law firm to the company indefinitely.
We saw under the ROE regime that journalists would reference the firm that registered the overseas entity in stories about the overseas entity (and their beneficial owner). Firms will need to consider how they would deal with similar queries and any risks they pose.
Increased AML Sectoral Risk
The SRA makes clear that “Trust and company service providers (TCSPs) are at a high risk of being used for money laundering or terrorist financing.” The SRA considers it to be one of the highest-risk services that a law firm provides.
The introduction of the ACSP regime is only likely to increase this risk factor for law firms as it brings a greater focus on a firm’s TCSP work as they effectively become gatekeepers of information provided to Companies House.
Compliance for ancillary services
The filing of forms at Companies House on behalf of clients is rarely what a law firm is engaged to do. However, it is common for this to be ancillary to a wider piece of work. For example, the filing of corporate changes relating to an M&A transaction or the filing of a charge in relation to a security that a client has taken over a borrower.
Law firms must be able to deliver these ancillary services, but many firms are now reconsidering whether they do this internally or whether they outsource it to a third party such as Elemental.
The implications of carrying it out internally touch the issues already raised around training, process and accountability. However, there will also be implications of timings, irrespective of whether a firm continues to file itself or outsources the work. For example, it will no longer be possible to incorporate a company without conducting ID verification of all the directors. Therefore, previously straightforward tasks will become more complex and time-consuming.
How Elemental will help
In recent times law firms have been evaluating the increased compliance workload caused by changes to legislation, and the upcoming ECCTA changes are accelerating this.
We are shaping how we support law firms (and their clients) with these new processes, such as providing an outsourced filing service or connecting it with our existing company secretarial services.
Much will depend on the details of the regime which we are still waiting for. If you are facing the issues raised here and would like to discuss how we can help, please get in touch.
