Economic Crime Bill – MPs and peers wrangle over new fraud measure

This report includes a recap of developments so far on the Bill and reports on the Lords debate on 11 September and the Commons debate on 13 September 2023. 

The story so far (with links to our reports)

The Economic Crime and Corporate Transparency Bill was published in September 2022. Measures of particular interest to tax advisers and related professions in the Bill from the beginning include:

Reform of Companies House with more powers for the Registrar

• Regulation-making power to require general partners of UK-registered limited partnerships to provide accounting information to HMRC
• New exemptions from money laundering offences to reduce unnecessary reporting by businesses
• Enabling businesses in certain sectors (including large accountancy and law firms) to share information more effectively to prevent economic crime
• Giving legal regulators a duty to uphold the economic crime agenda

The Bill had a lengthy Commons committee stage, which concluded in late November 2022. A substantial number of government amendments were passed. These included:

• Applying Companies House provisions to overseas companies
• Measures to make the Register of Overseas Entities more accurate
• Extending the protection for businesses sharing information on customers to all civil liability

Further government changes were made at the Bill’s Commons report stage in January 2023, including:

• A power to expand the registrar’s data-sharing ability
• Removing the power to exempt certain individuals from identity verification requirements
• Ensuring a limited partnership’s dissolution and deregistration is transparent
• Allowing the Solicitors Regulation Authority to request information from solicitors for the purpose of monitoring compliance with the economic crime regime
• Expanding the scope of the indirect information sharing clauses to include insolvency practitioners, auditors and tax advisers

The Bill then progressed to its House of Lords stages where it was again debated at length, completing its passage in July 2023. Key Lords changes made by the government are:

• Creation of a new offence of failure to prevent fraud
• Reform of the ‘identification doctrine’ - the principle used to hold companies criminally accountable for the actions of their ‘directing mind and will’
• Introduction of ‘director disqualification sanctions’
• Strengthening of provisions in relation to authorised corporate service providers and identity verification checks
• Changes to provide greater transparency in relation to the Register of Overseas Entities, especially in relation to trusts
• Where an overseas entity holds interests in land as a nominee for another person that person is to be treated as a beneficial owner for the purposes of the register

Additionally, the government suffered six defeats in the Lords at the hands of cross-party alliances of peers:

• Closing the ‘nominee shareholder’ loophole by making it a requirement for shareholders to state, as well as their name and address, whether they are or are not acting as a nominee (Lords amendment 23)
• Rather than the Register of Overseas Entities only being updated annually, entities must notify changes within 14 days (Lords amendment 115)
• Companies House must publish the names of parties to trusts which own overseas entities in the register. Currently Companies House collects this information but does not publish it (Lords amendment 117)
• Extending the new offence of ‘failure to prevent fraud’ to organisations of all sizes, not just large ones (Lords amendment 153)
• Expanding the new offence to include ‘failure to prevent money laundering’ (Lords amendment 159)
• Protecting enforcement bodies from high adverse costs when undertaking civil asset recovery against deep-pocketed suspects (Lords amendment 161)

These six defeats were all reversed when the Bill returned to the Commons on Monday 4 September for Consideration of Lords Amendments. However the government did table an amendment in lieu of the sixth Lords change, which imposes a statutory commitment to review the payment of costs in civil recovery cases in England and Wales by enforcement authorities, and to publish a report on its findings before Parliament within 12 months.

The Bill was then returned to the Lords for a further round of parliamentary ‘ping pong’, which we report on below.

House of Lords Consideration of Commons Amendments – Monday 11 September 2023

The Lords debated the amendments in two groups, the first covering issues around disclosure and publication (the first three Lords non-government amendments listed above) and the second around new offences and legal costs (the latter three Lords non-government amendments).

Shareholders acting as nominees

Lord Johnson of Lainston, Minister of State at the Department for Business and Trade, spoke for the government during the debate. On Lords amendment 23 (shareholders acting as nominees), the minister said that while the government “understand the intention to tackle what we perceive to be an industry of nominee service providers prone to acting unlawfully, I am afraid we do not believe that the amendment is the appropriate way to achieve that goal”. However, he explained, the government were tabling amendments to allow the government “to make regulations to make further provision for the purpose of enabling a company to find out who its PSCs are—that is, people of significant control—in cases where shares are held by a nominee. That could include, among other things, imposing further obligations on companies to find out if they have nominee shareholders and, if so, for whom they are holding shares, or imposing further obligations on nominee shareholders to disclose their status and for whom they are holding shares.”

Lord Vaux of Harrowden (crossbencher) also tabled a motion seeking to amend what had been sent back by the Commons. He wanted to restore the original Lords amendment though “changed to reflect some of the reasons for rejecting it made in the other place—in particular, the question of undue burden”. But he welcomed the government’s own amendments and the recognition that there was an issue here and did not press his motion to a vote.

Labour’s spokesperson, Baroness Blake of Leeds, said that compromise had been reached and that was why the Opposition would not be taking the amendment to a vote. But she said Labour would “look to those delegated powers that have been built in to make sure that, if change is necessary, it will indeed be made”.

The government motion and amendments were passed, retaining the Commons removal of this provision but adding in the additional regulation-making power.

Notification of changes to the Register of Overseas Entities

On Lords amendment 115 (updating of the Register of Overseas Entities), the minister repeated the government’s view that event-driven updates for the register “will not work in principle” and “would create additional risk for purchasers of properties involved with overseas entities”. But he committed to keeping the matter under review, noting that “[we] will have more evidence at our disposal as the first set of annual updates comes through”.

Lord Vaux was pleased to hear the commitment to keeping annual updating under review. He said that, in the meantime, any person who is buying or selling property from or to an overseas entity, or who is entering into a lease over a property with an overseas entity, should “require it to be a condition of the transaction that the entity’s entry in the register is updated immediately prior to the transaction completing. Only by doing that can the innocent party know who they are actually transacting with.”

The Lords accepted the Commons decision rejecting their amendment.

Publication of parties to trusts

On Lords amendment 117 (publishing names of parties to trusts), the minister repeated the commitment to launching “a full public consultation before the end of the year on how we can further improve the transparency of trust information”. The consultation will look at the case for broader transparency regarding trusts, he explained. He asked Lord Agnew to withdraw his amendment (see below).

Lord Agnew (Conservative) thought the Commons’ (in practice the government’s) citing of ‘financial privilege’ as its reason for rejecting this amendment (which he had tabled) was “bizarre, if not worse”. He said he had been blocked from tabling the amendment he wanted to table and he did not press the watered-down one he was allowed to table which sought to specify, among other things, that the planned consultation must include the principle of public access to protected data on a bulk basis.

Lord Eatwell (Labour) supported Lord Agnew. Speaking as a former chair of the Jersey Financial Services Commission, he said that in Jersey “we made a major effort to increase the transparency of trust information so that beneficial ownership could be accurately identified. One of the inhibitions for cleaning up, if you like, the register in Jersey was the behaviour of the Government in the United Kingdom, and their persistent obfuscation of the way in which trusts were to be treated.”

Lord Faulks (non-affiliated), Lord Garnier (Conservative) and Lord Fox (Lib Dem) also backed Lord Agnew.

The Lords accepted the Commons decision rejecting their amendment.

Application of ‘failure to prevent fraud’ to smaller organisations

In addition to the government motion, which sought to put back the exemption of small and medium sized companies from this offence, peers debated a compromise motion tabled by Lord Garnier, which would exclude microentities from the offence but otherwise apply it to smaller firms. “I hope that this will allay the fear, albeit unfounded, that extending the failure to prevent regime further than the Bill currently permits will stifle small businesses,” said Garnier.

In his speech Garnier laid into the government for its stance on this matter. “Let us be clear: there is no SME exemption in the Bribery Act or in the Criminal Finances Act, and Parliament did not think there should be. The criminal law applies to all and if the defence of adequate or reasonable procedures is available, there is no conviction—and often no prosecution. What other criminal offence defines liability based on the size of the defendant? A small thief is every bit as much a thief as a tall one, and as liable under the law if the evidence and the public interest in their prosecution are made out.”

This and the final two issues were dealt with for the government by a Home Office minister, Lord Sharpe of Epsom. Noting Lord Garnier’s motion he appreciated “that he has moved closer to the government’s position on this issue… However, the government remain extremely mindful of the pressures on companies of all sizes, including small and medium-sized enterprises, and therefore do not feel it is appropriate to place this new, unnecessary burden on more than 450,000 of them.”

Baroness Noakes (Conservative), a former ICAEW President, spoke in support of the government position. “If my noble and learned friend Lord Garnier’s Motion E1 is agreed to, I think it could be very significant. I believe that the other place was wise to restrict the offence to larger companies only. Setting the threshold at the micro-entity level would still leave very many small and medium-sized entities within the scope of the offence.”

But Lib Dem and Labour spokespersons (Lord Fox and Lord Coaker respectively) backed Lord Garnier. “The notion that 95% to 98% of the business community should be allowed not to consider their impact on fraud because that would get in the way of their growth is strange, because that growth would then be predicated on very shaky circumstances,” said Fox. Coaker said the government’s argument was “hollow and does not cut through”.

Lord Garnier pressed his motion to a vote and it passed 211-185.

Failure to prevent money laundering

Proposing the government motion disagreeing with Lords amendment 158, the minister repeated that a failure to prevent money laundering offence would be “highly duplicative of the existing regime”. He added that this is not just the view of the government: “in our conversations with industry, it has been very clear that duplication would create a serious level of confusion and unnecessary burdens on businesses.”

Lord Garnier said that, “in the spirit of compromise, those of us who voted for the extension of failure to prevent to money laundering on Report have agreed not to press the money laundering extension today. We happen to think that it should be extended to money laundering… but, on the basis that the best is often the enemy of the good, and in an attempt to meet the Government a lot more than half way down the road, we will not take that matter further on this occasion.”

The government motion passed without a division.

Costs of enforcement bodies

On Lords amendment 161, the minister emphasised that the measure desired by peers would be “a significant departure from the loser pays principle, and therefore not something that should be rushed into without careful consideration.” It could mean “that the state could come after someone’s assets and lose the case, and then the individual—who will not necessarily be a Russian oligarch—would be left with a potentially ruinous legal bill”.

Lord Faulks proposed an amendment which was, he said, “a softening of the original amendment put down by the noble Lord, Lord Agnew, and me—softening because it had to be softened somewhat to comply with the rules.” His intention (unfortunately a typo had crept in confusing things) was that a court “should not normally make an order that any costs of proceedings relating to a case to which this section applies … are payable by an enforcement authority to a respondent or a specified responsible officer in respect of the involvement of the respondent or the officer in those proceedings, unless it would be in the interests of justice”. What will happen if this provision becomes law? “I suggest what will happen is that a judge looking at the end of a case will see that Parliament has decided that normally there should not be an order that the agency pays the costs.” 

Labour’s spokesperson Lord Coaker offered his support, saying Faulks’ amendment “gives us an opportunity to turn the tables and ensure that, rather than the law enforcement agencies being frightened of costs they may incur in ensuring that fraudsters are brought to book, the fraudsters are frightened.” Lord Hope of Craighead (crossbencher) also spoke in support of Lord Faulks, as did Lord Agnew and Lord Fox.

Lord Faulks pressed his amendment to the government’s motion to a vote and it passed 218-186.

Read the full debate in the Lords here.

House of Commons Consideration of Lords Message – Wednesday 13 September 2023

Within 48 hours of the Lords inflicting two further defeats on the government the Bill was returned to the Commons.

Business minister Kevin Hollinrake spoke for the government. While the Commons also needed to agree the government amendments made in the Lords the focus were the two areas the government wished to reverse. “The government appreciate that Lord Garnier has moved closer to the government’s position in agreeing to the principle of applying a threshold,” said the minister. “However, our position remains that such an amendment would still incur significant costs to businesses.” 

Similarly, on Lord Faulks’ amendment on cost protection for law enforcement in civil recovery cases, “the government remain of the view that the amendment would be a significant departure from the loser pays principle and therefore should not be rushed into without careful consideration,” the minister said. He reminded MPs that the government have added to the Bill a statutory commitment to review the payment of costs in civil recovery cases in England and Wales by enforcement authorities, and to publish a report on the findings before Parliament within 12 months.

For Labour, new shadow minister Rushanara Ali took the opportunity to make a wide ranging speech about economic crime. She repeated Labour’s support for the Garnier and Faulks amendments.

Sir Bob Neill (Conservative), chair of the Commons Justice Committee, sought compromise on applicability of the fraud offence. He wanted the government to “see whether there is somewhere between Lord Garnier’s position and that of the government. Perhaps that third tier of the medium-sized entity is a way around this.” On the Faulks amendment he said that at an economic crime summit he had attended it was “overwhelmingly clear that not a single one of the experts could understand the government’s position on this, so I ask them please to think again about it as well.”

Alison Thewliss (SNP) also backed the Lords amendments. Sir Robert Buckland (Conservative) did too, as did Dame Margaret Hodge (Labour). However Kit Malthouse (Conservative) opposed the Garnier amendment, accusing its proponent of lacking “any conception of what it is like to run a small business and the cumulative impact of government regulation thereupon”.

The Garnier amendments (threshold for failure to prevent fraud) were defeated 276-210 in a vote and replaced with the government’s threshold. The Faulks amendment was reversed without a division.

Read the full debate in the Commons here.

The Bill returns to the Lords, to be debated Wednesday 18 October.