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25th January 2019

Corporate Transparency: under control?

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Since 2016, many businesses have been obligated to publicise information about who exercises significant control or influence over them, under what has become known as the Persons with Significant Control (PSC) regime. Having given businesses time to get to grips with their obligations, Companies House has now tasked itself with improving PSC regime compliance in 2019.


So, what does the regime cover, exactly? And what should businesses be doing to ensure they are compliant? What will Companies House do if they aren't?


Background


The PSC regime was introduced to improve corporate transparency and deter money laundering, following a 2014 review into Transparency & Trust in UK business by the Department for Business Innovation & Skills. It also incorporates the requirements of the EU Fourth Money Laundering Directive.


In England and Wales, private limited companies, LLPs and Societas Europae are caught by the regime. Publicly listed companies (and their wholly owned subsidiaries) are already subject to enhanced disclosure obligations and are therefore excluded. There is no de minimis; even the smallest companies will be caught.


Who has ‘control’?


An individual has control over a corporate entity if, whether directly or indirectly, he or she:


  • holds more than 25 per cent of shares or holds a right to share in more than 25 per cent of capital or profits, as the case may be;
  • holds more than 25 per cent of voting rights;
  • holds the right to appoint or remove a majority of directors (or those who are entitled to take part in an LLP's management, as the case may be); and/or
  • has the right to exercise, or actually exercises, significant influence or control over the entity.

Clearly, this is a broad definition and consideration purely of the shareholding position will not be sufficient to ensure compliance.


There are specific regulations concerning situations in which a business is controlled by another UK company, rather than by an individual, which in many cases will relieve the company of the obligation to ‘look behind’ the corporate owners. That UK corporate owner, referred to as a Relevant Legal Entity (RLE), will have its own disclosure obligations to comply with.


Requirements


The business must take reasonable steps to investigate whether any person or legal entity exercises ‘control’. Once it has reasonable cause to believe it has identified a PSC or RLE, the corporate entity must give notice within one month requesting confirmation. If a business fails to take these steps, it commits an offence, as does every officer in default. This offence is punishable by either imprisonment or a fine.


Each company or LLP that is subject to the regime must also keep a PSC register, even if there are no PSCs or RLEs (in which case the register will state this). Once any PSCs or RLEs have been identified and confirmed, the register should be updated with prescribed details, including a description of the nature and level of their control.


Current PSC information must be publicised at Companies House and any changes must be filed within 14 days. Until now, information provided by businesses to the Registrar of Companies about PSCs has gone unchecked. However, as part of its pledge to improve compliance, Companies House has begun to review filed information and challenge what it sees as misunderstandings. Entities that don’t provide PSC information in their confirmation statement will also be pursued.


Brexit


Corporate transparency and accountability have become increasingly important tenets of the UK business environment, so it is unlikely that Brexit will result in any significant changes in the short term, even though some of the regime’s principles originated in Brussels. In addition, any proposals for change that may come out of the 2019 review might struggle to find a free slot in the Parliamentary calendar for consideration in the coming months.


A final note


With Companies House ramping up its supervision, businesses should be reviewing their registers and protocols to ensure compliance. Although prosecutions are likely to be rare, it is worth bearing in mind that every officer of a company that fails to comply will be guilty of an offence, so compliance should be a priority.


Hewitsons' Company Secretariat team can help businesses to understand the PSC regime, as well as maintain the register on their behalf and manage the Companies House filing requirements.