Economic Crime and Corporate Transparency Bill

Supplementary written evidence submitted by Elspeth Berry, Associate Professor of Law, Nottingham Law School (ECCTB09) (giving evidence in personal capacity)

Written evidence to Public Bill Committee: Economic Crime Bill 2022

I teach and research in partnership law, including LPs and LLPs, and was invited to give oral evidence to the Committee.

Summary of key points:

1) The Registrar’s powers are welcome as a first step, but are inadequate and not sufficiently resourced

2) Certificates of good standing should be abolished

3) Identity verification is welcome in principle, but the provisions fail to ensure that it is rigorous and reliable

4) ACSP requirements are insufficient to make them reliable gatekeepers

5) Unique identifiers must be applied to all participants, and be publicly accessible

6) Corporate directors should be banned, and the same restrictions extended to partners and LLP members

7) PSC thresholds should be abolished, and the PSC concept applied to all LPs

8) The companies (and LLPs) investigations regime should be extended to LPs

9) The requirements for an ‘appropriate’ registered office address/email are an improvement but do not guarantee a genuine economic link to the UK

9) General partners should not act until actually registered, and should not act if bankrupt

10) Conduct as an LP partner (general or limited) should be capable of leading to disqualification; and disqualification (of any person) should debar them from acting as either a general or a limited partner of an LP

11) So-called ‘before registration’ changes should not be permitted

12) HMRC powers to require partnership accounts should explicitly refer to Partnerships (Accounts) Regulations accounts, and the register should reflect this

13) The LP dissolution and deregistration provisions will not work as currently drafted

14) Sanctions for default should be on the basis of strict liability, and in LPs should apply to all general partners

1 The Registrar’s powers [1]

1.1 These need to be:

a) framed as duties, not merely powers; and

b) be sufficiently clear to be capable of objective assessment as to whether they have been carried out:

1.1.1 E.g. Objectives 3 and 4 refer to ‘minimising’ falsity and unlawfulness, and the Registrar must carry out such analysis as she considers ‘appropriate’ to prevent or detect crime (Cl 88) - but none of this is capable of objective verification, so how will her action/inaction, and the success of these powers, be assessed?

1.1.2 E.g. the Registrar ‘may’ reject a document (Cl 76), require further information (Cl 80), or remove material (Cl 82) – but there is no duty to do so, or any indication of the ‘red flags’ which should require her to do so (e.g. entities registered on overseas registers, participants appearing in multiple filings, SLPs as directors/LLP members/partners, etc).

1.2 These duties need to be fully resourced. Registration fees are currently very low by international standards, and a legitimate business with a feasible business plan is not likely to be deterred by a fee of up to £1000. However, the Registrar should not be restricted in taking the action she needs to take by an expectation that Companies House (CH) is self-funding.

1.3 Without imposing duties, and properly resourcing them, the accuracy and completeness of the register will not be ensured.

2 Certificates of good standing [2]

2.1 These suggest a qualitative assessment (‘good’) rather than merely a statement of fact. Businesses already receive a certificate of incorporation (companies/LLPs) or registration (LPs) when they have submitted all the necessary paperwork, which is conclusive evidence of their existence as from the specified date. Certificates of good standing should therefore be abolished.

2.2 Alternatively, they could be reframed as certificates of ‘continued registration’ to confirm that all the necessary paperwork is up to date at the date of issue, but state that it is not evidence of the firm’s financial status or of any other matter other than those contained on the register. This would be much less likely to mislead third parties than a reference to ‘good standing’.

3 Identity verification [3]

3.1 Shareholders must be identity verified (possibly subject to a very small de minimis exception). They not only supply the money for the business to function (and benefit financially), but have statutory powers and often additional powers granted in the articles or side agreements. It is essential to know who they are, and to be able to identify where shareholders appear in multiple companies or as partners/members in LPs/LLPs.

3.2 Exemptions (via regulations; Cls 5, 39, 69, Sch) will enable a loophole and are unnecessary. SoS is already given power to to exempt (by notice) from identity verification in interests of national security/preventing or detecting serious crime (Cl 65, and verification of directors, PSCs and (presumably) LLP members can be done by CH and the details kept confidential (although enforcement agencies making enforcement-related filings could be exempted).

3.3 Where LPs are concerned, no exemptions should be allowed (other than possibly enforcement agencies; see 3.2) since this would allow ACSPs (cf CH) to register or file information without verifying the identity of the participants.

3.4 It is not clear why companies, and presumably LLPs, are allowed to verify via the Registrar but LPs are not. The same risks arise in all, and indeed Transparency International’s recent report highlights the significant role of UK LLPs in international wrongdoing. [4]

3.5 Verification by the Registrar means no anti-money laundering due diligence (AML DD) – but by ACSPs means lack of proper regulation in many cases, and the Bill makes AML DD ineffective for LPs because it effectively exempts their PSCs (see 7).

3.6 In either case fake IDs could be provided, and the procedures need to be robust and rigorous enough to counter this.

3.7 PSCs (and RLEs) should be required to be verified from the outset – whereas the Bill (Cl 61) makes this optional and puts the onus on the Registrar to require verification within 14 days. Why make it easier for the rules to be circumvented, and create work for the Registrar?

3.8 It is essential that the public register indicates whether a person has been verified, and by whom (Registrar or a particular ACSP). This information is needed by public authorities (including for crime prevention) and by civil society including investigative organisations and other businesses. There do not seem to be any proposals in the Bill for this.

4 ACSP requirements [5]

4.1 These fail to make ASCPs reliable gatekeepers for identity verification (which is being outsourced to them), let alone AML DD.

4.2 The main problem is that HMRC is the default supervisory authority for various relevant persons , but doesn’t have the resources/expertise to supervise properly. In addition, many current CSPs are maildrop providers only (as providers of a correspondence address are caught by the AML Regulations) – technically regulated by HMRC but certainly not able to carry out proper AML DD.

4.3 What is needed is appropriately aggressive supervision. A separate professional, regulatory body is required , together with a duty to arrange insurance , training , and management of the AML compliance framework . This would reduce the risk of non-compliance and leave HMRC the space to concentrate on failing entities rather than using spot checks across the board.

4.4 Alternatively , particularly if offshore and corporate partners continue to be permitted, ACSP services should be reserved to UK-supervised law firms ( or at very least to onshore ACSPs ) .

5 Unique identifiers (UIs) [6]

5.1 UIs must be applied not only to those who are ID verified (directors, PSCs and partners) and ACSPs, but also to shareholders (see 3.1).

5.2 Since the Bill intends the UI to be a non-public fraudproof one for the use of CH, then a parallel public equivalent needs to be used so that civil society, including investigative journalists and organisations, and other businesses seeking information about a potential business partner, can easily trace and link networks.

6 Restrictions on corporate directors/LLP members/partners [7]

6.1 Corporate directors should be abolished – the concept is demonstrably open to abuse, a ban was originally proposed in the interests of accountability and transparency, and a legal entity is incapable itself of carrying out the functions or duties of a director. Failing this, overseas corporate directors should be abolished.

6.2 The same applies to corporate partners/LLP members, for the same reasons.

6.3 At very least they should be subject to the same requirements as corporate directors. Not only are corporate partners/LLP members a significant feature of wrongdoing LPs/LLPs, the attempts in the Bill to trace an individual somewhere behind them are so complex as to be unworkable in practice – difficult for legitimate businesses (other than well-resourced investment LPs) to understand, but impossible in practice for CH to check, and an obvious route for obfuscation by wrongdoers. E.g the concept of a named officer of a managing officer of a corporate partner (and presumably of an LLP member), compounded by the fact that a named officer’s residential address can be redacted and they need not supply a service address.

6.4 If corporate partners are nonetheless permitted, provision should be made for automatic dissolution of an LP on the insolvency or dissolution of a corporate general partner (as is already the case on the bankruptcy or death of an individual partner, subject to the misguided proposal to enable a bankrupt partner to continue to act; see 10).

7 PSCs [8]

7.1 PSC thresholds should be abolished. As Open Ownership and Global Witness have noted, [9] even a 1% shareholding can be very profitable and create significant corruption risks; and any threshold makes it easy to make a legal PSC statement that discloses nothing.

7.2 The PSC concept must, and can be, applied to all LPs in order to combat opacity and wrongdoing. The fact that English/NI LPs do not have separate personality from their partners does not mean they cannot be controlled by other people. The concept has been extended to SLPs (and some SGPs) and the criteria in those regulations can readily be applied to all UK LPs.

8 The investigations regime should be extended to LPs [10]

Unlike companies and LLPs, LPs are not subject to the investigations regime under Part XIV Companies Act 1985. This gives BEIS the power to appoint inspectors to investigate and report on the affairs of a company/LLP if it has been formed or operated for any fraudulent or unlawful purpose, or the persons concerned with its formation or management have been found guilty of fraud, misfeasance or other misconduct towards it or its members. An investigation may result in its winding up in the public interest, disqualification of its directors/LLP members, or disclosure of the report to a prosecuting authority or regulatory body. Although Parliament has criticised the failure to use these powers sufficiently, [11] the absence of an equivalent power to investigate LPs adds an additional vulnerability.

9 The requirements for an ‘appropriate’ registered office address/email are an improvement but do not guarantee a genuine economic link to the UK

9.1 The ‘appropriate’ address for the registered office, and email address, ensure that the address is used with consent, and someone will answer.

9.2 However, the provisions still lend themselves to maildrops, with no real economic presence.

9.3 None of the options intended to link an LP to the UK demonstrate a real economic link:

9.2.1 Option 1 is apparently already complied with by most rogue LPs already, because they have no real place of business in the UK, so anywhere can be the ‘principal’ place.

9.2.2 Option 2, the usual residential address of a partner, can be redacted, so redaction must not apply if it is also chosen as the registered office.

9.2.3 Option 3 is the address of a corporate general partner, with all the lack of transparency that entails.

9.2.4 Option 4 is an ACSP address, which can be a maildrop.

10 General partners should be prohibited from acting until actually registered, and should not be able to act if bankrupt

10 .1 The Bill should not provide a defence if a general partner reasonably believed notice of their appointments had been given to the Registrar (Cl 111). General partners are personally liable for the acts of one another (see also 14 ) and are jointly responsible for registering / filing notice of appointment . If they themselves fail to register/file , they should be required to wait to see a change on register. Reasonable belief would provide a loophole .

10.2 The Bill inappropriately amends partnership law to prevent automatic dissolution on the bankruptcy of a general partner in an LP (Cl 119). Personal liability is no guarantee of good behaviour if the partner is already insolvent, and indeed the same restriction remain s on general partners of a general partnership (s33 Partnership Act 1890).

11 Disqualification [12]

11.1 There two primary issues can arise in relation to disqualification are :

a) what conduct will lead to disqualification? – currently only conduct in relation to an LLP/company ( indicating unfitness to manage etc) ; and

b) what is the impact of disqualification? - currently a disqualified person is only prohibited from acting in relation to a company / LLP .

11.2 It is unclear whether the disqualification provisions proposed for LPs (Cls 36 and 107) address a) and/or b) – or something else. If they enable :

a) partners of an LP to be disqualified as a result of conduct in relation to the LP ; and

b) disqualification ( whether resulting from conduct in relation to an LP, LLP or company ) to result in a prohibition on acting as partner in an LP , they are to be welcomed. However, it is unclear whether both a) and b) , or only one (and which one) is intended.

11.3 What is clear is that the provisions only apply to general partners , whereas they should also apply limited partners so that :

a) all LP partners are liable to disqualification arising from their conduct in relation to the LP (and if they are, as is sometimes asserted, merely passive investors, then they won’t be committing any conduct which renders them liable to disqualification); and

b) all disqualified persons are prohibited from acting as general or limited partners in an LP . L imited partners are not shareholders; although they are investors, they can also undertake tasks akin to management (see, e . g . the safe harbour list in s6A Limited Partnerships Act; for PFLPs only but indicative) and can be pivotal to the operation of an LP. Why on earth would we allow them to act while disqualified?

12 So-called ‘before registration’ changes should not be permitted

12. 1 These provisions (Cls 111 and 115, ss8S and 10C) permit changes between the making of the registration application and (allegedly – but there is no way of proving this) the date of actual registration if the Registrar is notified within 14 days of registration. Since third parties could legitimately rely on the register until notification, changes should be ineffective until registered. Otherwise, the register is not reliable, and this opens the way to opacity and confusion.

12.2 There are (rightly) no parallel provisions for companies but it remains unclear how LLPs will be treated.

13 Partnership accounts [13]

13.1 These must make explicit reference to the accounts required under the Partnerships (Accounts) Regulations (PAR).

13.2 The confirmation statement and, importantly, the public register, should include :

13.1.1 a statement as to whether it is a qualifying partnership for the purposes of the PAR ; and,

13.1.2 if it is, where the LP accounts are registered or otherwise disclosed ; and,

13.1.3 if on a companies register, under what company name and number .

13.3 The opportunity should also be taken to close a loophole in the PAR. The PAR are intended to mandate disclosure of partnership accounts if all partners are limited liability entities, but in fact they only apply if all partners are companies, and not if they are all LLPs or a mixture of companies and LLPs, even though the liability shield – and thus the need for disclosure – is the same.

14 The LP dissolution and deregistration provisions will not work as currently drafted [14]

14.1 The Registrar must be given the duty, not merely a power, to cause dissolution where the LP is not in existence (Cl 125). A power is insufficient (see 1.1).

14.2 The Registrar must be given the duty to deregister after dissolution. At the moment there is no such power, let alone duty.

14.3 The Reg should also have the duty to dissolve and deregister an LP (or to apply to the court to do so) if she believes that it has been registered without proper AML procedures being conducted, or is being used for illega l activities .

14.4 An LP should not be capable of ‘revival’ after dissolution. This is a legal nonsense since dissolution terminates a partnership as a matter of partnership law; and LPs which do this are frequently associated with wrongdoing. If a partnership dissolves, it can reform as a new LP or GP – but the same LP cannot be ‘revived’.

14.5 All dissolution/deregistration information should be shown on the Register and retained for at least 20 years. This is essential (particularly combined with publicly accessible UIs; see 5.2) so that third parties can fully examine the recent history of a particular participant or investigate suspicious networks.

14.6 There must be a court power to dissolve and deregister in the public interest, and a Registrar duty to act on this. There must also be parallel power/duties in relation to LLPs and companies in order that wrongdoing is not merely displaced to them.

15 Sanctions

15.1 These will be ineffective since loopholes exist.

15.2 E.g. the Bill only makes it an offence to make a false statement to the Registrar ‘without reasonable excuse’ (Cl 92). This should instead be strict liability to ensure that presenters have verified all information supplied.

15.2 E.g. the Bill contains many references to the general partner, or the managing officer of a corporate general partner, being ‘in default’ – but this is defined in a way which enable s liability to be easily avoided, since they are only liable if they ‘authorise or permit, participate in, or fail to take all reasonable steps to prevent, the contravention’. Again, w hat is required is strict liabilit y .

15.4 Furthermore, in an LP, s anctions should apply to all general partners , not only those individually at fault. G eneral partners are bound by the principles of joint and several liability as a matter of partnership law, and are also the people (collectively) responsible for registration and filing.

Other important changes needed to the Bill.

· All registers should be centrally held at CH. It is unclear why the Bill provides that the register of members cannot be central (Cl 48) but those of directors and PSCs cannot be local (Cl 50). It is also not obvious how this will be transposed for LLP members. These provisions are confusing, and the lack of a central register of members will facilitate lack of transparency, and wrongdoing.

· There should be a cap on directorships, or at least a ‘red flag’. Directors cannot function as the law requires if they hold multiple directorships, and multiple directorships are common indicators of suspicious networks. In the absence of a cap, multiple directorships should be a ‘red flag’ for further CH investigation.

· Amendments to the Limited Partnerships Act (LPA) are overly complex and should be simplified so that the legislation is user-friendly for those ‘ordinary’ businesses without access to sophisticated advice (i.e. not investment businesses).

· LPs should be required to supply compliance statements on first registration (as companies and LLPs do). Since only identity is to be verified (and not even of all participants; see 3.1-3.3), rather than verifying all information filed, they remain a useful safeguard and should apply to all registered business organisations.

· The ‘ l unacy’ reference has rightly been removed from s6 LPA ( and s35 of the Partnership Act amended to allow dissolution where a partner has a mental health disorder ) (Cl 120) – but this appears to mean that mental health disorder of a limited partner is now a ground for dissolution (whereas previously it was not) , which cannot be intended .

· LPs registered before changes to s8A come into force have 6 months afterwards to comply (Cl 101). Registrar then needs duty to deregister non-compliant LPs.

November 2022