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Economic Crime and Corporate Transparency Act 2023 (Financial Penalty) Regulations 2024

Volume 837: debated on Monday 25 March 2024

Motion to Approve

Moved by

My Lords, before I begin, I draw noble Lords’ attention to my interests as set out in the register of interests, including as a person with significant control and shareholder of Cashmaster (Holdings) Ltd, Badenoch Investments, Badenoch & Co, Badenoch Partners, Badenoch Advisors, and the Badenoch Trust, as well as a shareholder of several other companies.

These regulations were laid before the House on 19 February under the Economic Crime and Corporate Transparency Act 2023, which I will refer to hereafter as the 2023 Act. This Act is a prime example of the Government’s continued investment in tackling economic crime. The 2023 Act’s reforms will enable us to bear down on the kleptocrats, criminals and terrorists who abuse our open economy, strengthening the UK’s reputation as a place where legitimate business thrives and dirty money is unwelcome.

A substantial secondary legislation programme is now needed to make these reforms a reality. The instrument before us today, as well as some 50 other statutory instruments, will facilitate the necessary changes, including new processes and procedures at Companies House. I am glad to say that the first set of regulations in the programme was already approved by both Houses. These regulations provided the registrar with enhanced powers to rectify instances where address details for companies and company officers have been fraudulently filed on the register of companies. Since 4 March, Companies House has started to make use of these new powers, meaning that it has started to cleanse its register and quickly remove people’s names and addresses where they were used without their consent.

I turn now to the details of this instrument, which applies across the whole of the United Kingdom. At the moment, obligations under the Companies Act 2006 are enforced primarily through the criminal justice system. There is currently only one civil penalty regime operating under the Companies Act 2006, namely the accounts late filing penalty regime. Under this regime, a company automatically incurs a penalty for not filing its accounts on time—this regime will not be affected by these regulations.

The 2023 Act sets out that the registrar may impose a financial penalty as an alternative to prosecution, where she is satisfied beyond reasonable doubt that a person has engaged in conduct which amounts to a relevant offence under the Companies Act 2006. In turn, this instrument sets out how financial penalties will be imposed and enforced.

There are a few points here that I consider worth highlighting. First, the penalties will be based on the severity of the offence, and the maximum fine under the criminal law, up to a maximum total of £10,000. The registrar can also impose more than one penalty in certain cases. This provides flexibility to ensure appropriate and effective targeting of offenders.

Secondly, these regulations provide the registrar with the power to revoke or vary the financial penalties she has issued. For example, she could do this in cases where new information comes to light which aggravates or mitigates an offence.

Thirdly, the 2023 Act allows that, where a civil penalty is imposed on a person, it can contribute to that person being disqualified from acting as a UK director.

The registrar will now have the discretion to choose between issuing a financial penalty or passing a case on to law enforcement to consider criminal sanction. Therefore, this new financial penalty regime will be another tool in the registrar’s arsenal to promote compliance and maintain the integrity of the companies register. It ensures that we are striking the right balance between deterring non-compliance and not unduly burdening a small business.

The regulations before us today also make minor and technical changes to the Register of Overseas Entities (Penalties and Northern Ireland Dispositions) Regulations 2023 to ensure consistency between the two financial penalty regimes.

I will now provide an update on the ROE financial penalties regime. As of 19 March, 30,698 overseas entities had registered with Companies House. A further 857 overseas entities had notified Companies House that they had disposed of their interests in land before the register opened. Companies House has taken action against those that have failed to comply with the requirements. As of 19 March, over 400 penalty notices have been issued, with penalties totalling over £20 million. This includes cases where Companies House has received representations and appeals which are ongoing. In the next phase of the compliance process, Companies House will start imposing charges against land held by overseas entities where penalties remain unpaid.

I am of course happy to provide noble Lords with an update on progress when we debate the next set of regulations related to the register of overseas entities—these will be laid before Parliament in the coming months.

In conclusion, let me stress that these regulations are an important part of the effective implementation of the 2023 Act, and I hope noble Lords will support them. I beg to move.

My Lords, I think, the mantle having passed through several Ministers, that this is an economic crime debut for the noble Lord, Lord Offord, so I welcome him to our world. He is ideally suited to bearing down on economic crime.

We welcome this statutory instrument; it is part of the process of having debated the economic crime Bill. Many of us had high hopes for what the economic crime Bill would and could achieve, but at the centre of what we ended up with was the performance of Companies House and its strength to uphold what we need. This is another important step.

I have a couple of questions on the first part of the statutory instrument: first, the potential for multiple penalties. If we were to use the real-life Knighton example of literally hundreds of companies being registered to an unwitting property owner, in theory could Companies House levy a £10,000 penalty for each and every one of those companies registered? It would, clearly, have discretion over whether do that. My second point is on the right to appeal. If Companies House is levying those penalties on the wrongful registration of a company, what is the right of appeal? Is it judicial review—a long period of review and appeal—or is it a relatively swift action?

The Minister mentioned the opportunity to update us when the next tranche of statutory instruments comes through; this would be good. We had a very useful briefing from the Companies House representatives while we were debating the Bill, and it was clear that there was a tremendous amount of resolve there but also an awful lot to do. A full update on where Companies House is on capability and capacity—for example, on recruitment and on starting to implement these measures; I saw reports that it has taken actions that it was not able to before the passing of the Act—would be very helpful. But with those provisos, we look forward to the next 50 statutory instruments.

My Lords, I draw the attention of your Lordships’ House to my registered interests as director and shareholder of McNicol Consulting Limited, which is registered at Companies House.

I have read the Commons debate on this SI, and I have gone through the Act and the Explanatory Memorandum—the memorandum was very helpful, so I thank the Bill team. We will support this SI on these Benches. I have a few questions for the Minister. Will Companies House require more resources if these cases are to be dealt with internally rather than passed on to the criminal justice system? If more are resources needed, will the Government be fulfilling those needs?

Paragraph 7.6 in the “Policy background” section of the Explanatory Memorandum says that the

“financial penalty regime will sit alongside possible criminal sanctions”.

Is it completely at the discretion of the Registrar of Companies whether a business or an individual is issued with a fine or pursued through the criminal justice system? Perhaps the Minister would like to say a bit more about that difference and what will lead to an internal fine rather than pursuit through the criminal justice system.

Paragraph 7.4 of the Explanatory Memorandum says:

“This instrument confers a power on the Registrar to impose a financial penalty”.

The Minister touched on this briefly. How will the Government or the Registrar of Companies ensure consistency in decision-making when deciding whether to issue a civil financial penalty versus criminal prosecution? Is there a specific threshold by which an offence under these obligations becomes criminal rather than civil?

Is there a defined financial penalty for specific offences? On the only other power in respect of the penalties that Companies House can set for late filing, my understanding is that these are at set levels. Is Companies House looking at developing specific levels for specific offences within these categories?

The Minister talked about some of the individuals the Government are hoping to catch through this measure. The maximum fine is £10,000. Given that the profit margins of some organised fraudulent crimes are well in excess of this, will £10,000 be enough of a deterrent, and will it be reviewed?

I have a question about proceeds. Will the proceeds of the fines come back into Companies House? Will they go to the treasurer? I think the Minister talked about £20 million in another case. Will that money be able to be used within Companies House to develop this further?

On the numbers, the bar is being reduced from the criminal prosecution level down to some form of automatic fine or fines through the Registrar of Companies. Are we expecting the number of cases being taken to increase due to the lower threshold and that lower bar? Has any modelling been done?

My final question is about speed. As we welcome this SI, the presumption on these Benches is that it will speed up the ability to go after fraudulent individuals and businesses. What will that look like? Have Companies House or the department done any modelling on the imposition of a fine by the Registrar of Companies, as opposed to having to go through a very clogged-up criminal justice system, as it is just now?

With those questions, we on these Benches support the statutory instrument.

I thank noble Lords for their contributions. I reiterate that the Government are firmly committed to the fight against economic crime and, thus, have worked to implement the 2023 Act as quickly and effectively as possible. As we have said, alongside the registrar’s new powers, which take effect from 4 March, the new financial penalty regime instigated by the regulations before us today will help to promote compliance and maintain the integrity of the UK’s companies register. This will indeed constitute a further step in that journey to transform Companies House from a relatively passive institution to a more active player tackling economic crime.

I turn to some of the points made by the noble Lords, Lord Fox and Lord McNicol. In relation that made by the noble Lord, Lord Fox, on multiple penalties, where an address is misused—for example, in relation to more than one company—more than one financial penalty can be imposed, of up to £10,000. Appeals—there is an appeals process; of course, there must be an appeals process—will be heard in a county court or in the sheriff court in Scotland.

Regarding an update on implementation and resources, next month a report will be provided to Parliament. The House can be reassured that Companies House will have the resources it needs. For example, the incorporation fee has been increased from £12 to £50. Recruitment is well under way to ensure that Companies House has the right capabilities to deliver on these reforms—that point was raised by the noble Lord, Lord McNicol. To ensure that the teams are in place, recruitment is under way, including new Companies House investigation teams. We are looking at additional staff in the hundreds. By the summer, Companies House will have onboarded over 240 new roles in its intelligence and enforcement teams. This is a new culture for what has previously been a very passive institution. There will be further guidance on this as we work with Companies House to build this capability out.

In relation to the point that the noble Lord, Lord McNicol, made about the discretion of the registrar to impose a financial penalty or to pass the case to law enforcement officers to pursue prosecution, the registrar will soon publish guidance on that enforcement approach. It will provide more detail and clarity on how it will make use of new powers. Obviously, proportionality will come into play. Where there is perhaps more petty behaviour, then fines will be appropriate; where there is more systematic criminal behaviour, clearly that will result in the exercise of criminal sanctions.

The amounts of penalties will be considered on a case by case basis but are capped by the maximum fines able to be imposed under criminal law. Financial penalties are obviously one enforcement measure available to the registrar, alongside criminal prosecution and disqualification. Companies House will work with other agencies where there is evidence of serious and organised crime, as there may be active investigations that the registrar would not want to disrupt.

In terms of where the penalty money goes, it will be paid into the Consolidated Fund held by the Treasury, as required by the 2023 Act.

Having dealt with most of the points, I think there is consensus around the new regime, the devil being in the detail of how it is implemented. This has been a good debate, illustrating the need for a robust financial penalty regime. I hope noble Lords will agree that the regulations provide for just that.

Motion agreed.