New economic crime and corporate transparency bill: All bark and no bite?

The second reading of the draft Economic Crime and Corporate Transparency Bill took place on Thursday 13 October 2022. The Bill, which is said to contain “[w]ide ranging reforms designed to bear down on kleptocrats, organised criminals and terrorists abusing the UK’s open economy”, contains a package of different measures and is intended to complement the Economic Crime (Transparency and Enforcement) Act which came into force earlier this year.

The most eye-catching reforms proposed by the Government seek to strengthen Companies House, to allow it to “become a more active gatekeeper” by giving the organisation greater verification, investigation and enforcement powers. These reforms have been described by the head of Companies House as the “most significant and far-reaching” in the registrar’s history. Elsewhere in the draft Bill, additional powers are proposed to enable law enforcement authorities to tackle the criminal use of crypto-assets, and expanded investigation and intelligence gathering powers are to be granted to the National Crime Agency and the Serious Fraud Office.

The Government factsheets on the draft legislation can be found here, but the headline measures are:

• introducing identity verification for all new and existing registered company directors, People with Significant Control, and those delivering documents to the Registrar;
• new powers for the Registrar to check, remove or decline information submitted to, or already on, the companies register;
• providing Companies House with more effective investigation and enforcement powers and introducing better cross-checking of data with other public and private sector bodies. Companies House will be able to proactively share information with law enforcement bodies where they have evidence of anomalous filings or suspicious behaviour;
• additional powers to enable law enforcement to more quickly and easily seize and recover cryptoassets which are the proceeds of crime or associated with illicit activity such as money laundering, fraud and ransomware attacks;
• reforms to enable businesses in certain situations to share information more easily for the purposes of preventing, investigating or detecting economic crime by disapplying civil liability for breaches of confidentiality for firms who share information to combat economic crime;
• expanding the Serious Fraud Office’s pre-investigation powers under section 2A of the Criminal Justice Act 1987 to apply in all cases; and
• expanding the circumstances in which the National Crime Agency is able to obtain an intelligence-gathering information order.

The delayed Bill has been welcomed by NGOs such as Transparency International, who described the draft legislation as “long-overdue”. But others such as Spotlight on Corruption have queried how enforcement of the new powers will be funded.

Stepping back, there are three key concerns about the proposed reforms:

1. Bodies like Companies House and the Serious Fraud Office have a poor track record and may be unable to implement the proposed reforms in practice.
2. To truly crack down on economic crime, proper resourcing is required – and it is not clear that there will be the necessary uptick in funding to support the new measures.
3. The proposed legislation is just tinkering at the edges – and not the wholesale change required to tackle economic crime.

Agencies with a poor track record

Companies House is the UK’s registrar of companies. It was established pursuant to the Joint Stock Companies Registration and Regulation Act 1844, a groundbreaking piece of legislation which was passed to “prevent the establishment of fraudulent companies, and to protect the interests of the shareholders and the public”. We are now in a very different world to 1844.  In the first 25 years of Companies House, just over 10,000 companies were registered. As of March 2022, nearly five million companies are on the register, and the Registrar has struggled to keep pace.

The journalist Oliver Bullough has described the UK as the “headquarters of fraud” for allowing “thousands of fake companies” to exist, despite “tell-tale flaws” such as “invented addresses, offshore ownership, dormant companies acting as other companies’ directors”. In 2018, the writer shone a light on the UK’s first ever successful prosecution for providing false company information, of an individual who “was fed up with the epidemic of fraud and created a company with the business secretary as director to illustrate how easy it was to make stuff up and put it on the companies register”.

And while the Government has been engaged in a “transformation programme” of Companies House since 2020, criticism still abounds, with many fake listings still appearing on the register, including the likes of Mr. S Claus and Mr. J Christ. It remains to be seen how tinkering with the powers of Companies House will help the agency overcome its record of systemic failure.

As for the National Crime Agency and the Serious Fraud Office – the UK’s two main fraud-busting agencies – will the new powers move the needle in the fight against economic crime? Probably not.

The NCA has been late to the party in the fight against crypto-crime, and has done little to show it is up to the task. Where the US authorities have been seizing crypto-assets for nearly ten years, the NCA first confiscated crypto-assets in 2021-2022, and the organisation’s annual plan for 2022-2023 doesn’t mention crypto-assets once.

The SFO is reeling from a bad couple of years. Disclosure failings led to the collapse of the Serco trial in 2021. Three convictions were overturned at the Court of Appeal in the Unaoil case after the “wholly inappropriate” involvement by the SFO with an individual described as a “fixer”. There was heavy criticism of the SFO’s culture and practices in the Sir David Calvert-Smith report published in July. And in ENRC’s landmark case against the SFO, the agency was found by Mr Justice Waksman to be “in serious breach of its own duties” in relation to 15 meetings or calls between SFO officers and ENRC’s former solicitor, Neil Gerrard (in the words of the Judge, “again and again”). Two SFO officers were found to have given dishonest evidence in the trial which took place in 2021, and the Judge found that the SFO had been motivated by “bad faith opportunism” in inducing Mr Gerrard to behave wrongfully.

Resourcing issues

Companies House is being asked to flip from administrator to enforcer, virtually overnight. And while £20 million has been spent by the Government already in transforming Companies House, given recent developments there has to be real doubt about whether the £63 million promised in the 2021 spending review will be delivered. The Bill gives Companies House expanded fee-raising powers, but in circumstances where the £12 incorporation fee yields something in the region of £10 million a year for the agency at the moment,^[1] it would take a fairly dramatic rise in Companies House fees to bring in anywhere near the level of revenue needed to make the agency effective enough to implement these wide-ranging reforms.

Although the NCA has a budget of nearly £800 million for 2022-2023, the former head of the agency said that the organisation needed more than £1 billion a year to do its job, and that was back in 2019, before the surge in fraud during the COVID pandemic. Resource constraints mean that the NCA actively refrains from using some of the tools available to it – such as Unexplained Wealth Orders – because the possible adverse costs risk is just too great.

The SFO’s budget is tiny by comparison to the NCA – in the region of £60 million. That’s less than £500,000 a year per active investigation. The SFO does not have the resources to retain talent. The Director of the SFO has said that the organisation “proudly welcome[s] professionals from the legal sector, law enforcement, accounting and tech, and benefit[s] from a revolving door with the private sector” but the reality is that individuals are far more likely to flee the SFO for the private sector, not the other way around. As the Shadow Solicitor General Andy Slaughter pointed out during last week’s (13 October 2022) debate, “despite the massive increase in economic crime” in the past five years, “the number of financial investigators, case progression officers, lawyers and case controllers has grown by just 11 officials”.

The plight of the NCA and the SFO is a far cry from the well-resourced crime-fighting agencies of the United States, where many of the best and brightest spend several years working for the Department of Justice or Securities & Exchange Commission before moving into the private sector.

Tinkering, not transforming

There are lots of good ideas in the draft Bill. But ideas alone aren’t enough to fight economic crime, which is surging following the pandemic, with an increase of 25% in fraud over the past two years alone. Nearly two thirds of fraud incidents are now cyber-related.

And so while it is encouraging that the draft Bill is finally engaging with issues around cyber-crime and, relatedly, how to go about recovering crypto-assets, it is not clear that there is an overarching strategy for how the Government plans to fight what has been described as an “epidemic of fraud” by the Labour Party.

There are no proposals to dissolve or merge the different agencies that feature in the draft Bill. This is consistent with the Government’s approach to the Sir David Calvert-Smith report published in July this year: rather than asking whether the scandals of recent years pose existential questions for the SFO, the Attorney General instead chose to accept the eleven recommendations made by Sir David Calvert-Smith to reform and improve the SFO. The Government seems determined to work with the institutions it has, rather than thinking big, and focusing on a more joined-up approach, potentially involving a single agency set up to combat economic crime.

That lack of ambition is seen in the failure to implement the Law Commission’s recommendations on corporate crime reform in the UK. The Secretary of State for Wales (and former Lord Chancellor) Robert Buckland suggested last week that such reforms could be added to the Bill as it moves through Parliament. But it is doubtful that the current Government has the political capital – or will – to push through such sweeping reforms.

A number of questions still remain.

Is there a tension between taking robust steps to tackle fraud and the UK being a light-touch regulatory regime that is open for business?

Will Companies House be properly supported in using its new enforcement functions?

Which agency is expected to take the lead in fighting serious and complex cyber-fraud?

Is the current multi-agency approach to fighting economic crime appropriate?

Will MPs push through sweeping reforms to economic crime legislation of their own accord?

We will continue to monitor the Bill as it progresses through Parliament.