Economic Crime and Corporate Transparency Act - what is a 'lawful purpose'?
The Economic Crime and Corporate Transparency Act 2023 (ECCTA) is a landmark legislation to tackle economic crime and improve corporate transparency including, amongst others, introducing a range of measures and powers for Companies House. ECCTA impacts all companies and LLPs registered in the UK.
The statement of lawful purpose
As part of the measures introduced by ECCTA earlier this year, individuals seeking to incorporate a company must now confirm, during the application process, that the formation of the company is for a lawful purpose. Additionally, directors of existing companies are required to provide an annual confirmation that the company’s intended future activities are lawful when submitting their confirmation statements. This represents a significant change from the previous confirmation statement, which only reflected confirmations in respect of historical information filed.
Those incorporating companies and directors of existing companies should carefully consider the implications of this new requirement and take steps to ensure that they can make the statement with confidence and accuracy.
What is a ‘lawful purpose’?
There is no statutory definition of ‘lawful purpose’, however, when making the statement, those incorporating companies and directors should consider:
- Compliance with statutory law
- Adherence to common law
- Contractual obligations
- Corporate governance
- Regulatory compliance
- Avoidance of criminal activities
- Ethical considerations
Compliance with statutory law
Are the company’s current and planned activities over the next 12 months compliant with tax laws, employment laws, health and safety regulations, environmental legislation, and any specific regulations relevant to your sector?
Adherence to common law
In addition to statutory requirements, are the company’s operations also aligned with common law principles established by judges through decisions of courts and similar tribunals?
Contractual obligations
Are the contracts and agreements your company enters into lawful in themselves? This means ensuring that the terms and conditions do not require parties to engage in illegal activities.
Corporate governance
Is the company managed according to the principles of good corporate governance, which includes following the rules set out in the Companies Act 2006 and other relevant legislation, as well as the articles of association and any internal governance policies?
Regulatory compliance
If the company operates in a regulated industry, such as financial services or pharmaceuticals, does it comply with the rules and regulations set by the appropriate regulatory bodies?
Avoidance of criminal activities
The company must not be formed for, nor engage in, any activities that are criminal in nature, including fraud, money laundering, bribery, corruption, and any other criminal offences. Does your company have effective control frameworks in place to monitor and manage risks in these areas?
Ethical considerations
While not always codified into law, ethical considerations can also play a role in determining the lawfulness of a company's purpose. Activities that are legal but widely considered unethical may still be considered to be unlawful.
It is important to note that the definition of a ‘lawful purpose’ is not static; it evolves with changes in legislation, case law, and societal standards. Therefore, companies must stay informed about legal developments to ensure ongoing compliance.
Implications of false statements and the importance of accurate documentation
The ECCTA has introduced new offences and penalties for submitting false or misleading statements or documents to the registrar, without reasonable excuse. This can also apply to the confirmation statement. The basic offence is punishable by a fine, while the aggravated offence can result in up to two years' imprisonment and/or a fine. Additionally, anyone who submits or causes the submission of a materially false document may also be liable for the false statement offences.
How to protect officers when making the lawful purposes statement
Companies might consider documenting their assessment of the lawfulness of their future activities, along with the controls in place to mitigate any associated risks, through a board resolution or during a board meeting.
It is advisable for companies to undertake this assessment:
- At the time of incorporation; and / or
- Annually, before submitting the confirmation statement.
Documenting the board's consideration may serve as evidence to defend against potential prosecution and liability, and may support a 'reasonable excuse' defence in the event that it is found that a false or misleading statement is made.
How we can help
We understand that the new requirements may cause challenges and uncertainties for companies, but we also see it as an opportunity to demonstrate your commitment to good governance and transparency. We can support you with a review of your corporate governance framework, director training and/or preparation of a board memorandum and board resolutions to support the directors to confidently make the statement of ‘lawful purpose’.
Please contact us if you wish to discuss how we can help you to prepare for the ‘lawful purpose’ statement and the wider implications of the ECCTA changes, including the requirements for identity verification, and reforms to limited partnerships, failure to prevent fraud, and the identification doctrine for economic crime offences.
Contact us
Partner, Entity, Governance and Compliance, PwC United Kingdom
Tel: +44 (0)7764 958130
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