Beyond Sanctions: Practical guidance for financial services firms series
On 15 March 2022, the Economic Crime (Transparency and Enforcement) Bill (the Bill) received Royal Assent becoming the Economic Crime (Transparency and Enforcement) Act 2022 (the Act). The Act has been some time in the making and can be traced back to 2016 when the then Prime Minister, David Cameron, gave a warning to foreign companies in an anti-corruption summit that they would be required to disclose the beneficial ownership of UK property. Whilst the Bill was placed on a back-burner following Mr Cameron’s speech the events in Ukraine re-ignited a desire to push through the Bill and it was fast tracked through Parliament.
Three key components
The Act has three key components which can be summarised as follows:
- Creation of a Register of Overseas Entities (Part 1, sections 1 to 44 of the Act).
- Amendments to the Unexplained Wealth Order (UWO) regime (Part 2, sections 45 to 53 of the Act).
- Amendments to the existing legislation on UK sanctions (Part 3, sections 54 to 66 of the Act).
The Act applies across the UK.
Certain parts of the Act make different provision for different jurisdictions, for example, by catering to the differences in land law between England and Wales, Scotland and Northern Ireland. However, the overriding policy objectives are similar across the UK.
Register of Overseas Entities
Comparatively little is known about overseas owners or leaseholders of land in the UK. The Act seeks to remedy this by establishing a Register of Overseas Entities (Register) that would, according to the explanatory notes to the Bill, “deliver transparency about who ultimately owns and controls overseas entities that own land in the UK.” In addition the Register is intended to act as a deterrent to those who would seek to hide and launder the proceeds of bribery, corruption and organised crime in land in the UK. The Register, to be operated by the Companies House registrar, becomes the third register of beneficial ownership in the UK. The other two are The People with Significant Control (PSC) Register for companies and Trusts.
In a nutshell, the Act provides that any overseas entity wishing to own UK land would need to identify their beneficial owners and register them. Importantly, not all beneficial owners need to be registered. Generally, a beneficial owner needs to be registered if they hold more than 25% of the shares or voting rights in an entity; can appoint or remove a majority of its directors; or have some other significant influence or control over it (including through a trust or partnership structure). These thresholds are in line with those for becoming a registerable beneficial owner under the existing PSC regime for companies. Schedule 2 of the Act expands on each of these thresholds in technical detail, and gives the Secretary of State the power to amend the thresholds under certain circumstances.
In relation to exemptions to registration, the Secretary of State can, by giving written notice to someone (without any parliamentary procedure) exempt them from the registration requirement. An exempt person is not considered a registrable beneficial owner so they will not be disclosed on the Register and will not have to respond to any information notice submitted to them. But the Secretary of State can only grant an exemption for certain reasons: in the interest of national security or for the purpose of preventing or detecting serious crime.
As for what information must be provided to Companies House, Schedule 1 to the Act sets out the information to be provided about the overseas entity and (if necessary) its beneficial owners and managing officers. Section 19 provides that the documents delivered to Companies House must be in English.
When an overseas entity registers, Companies House will allocate them an “overseas entity ID” and send it to them along with details about their date of registration, their duty to keep the register updated and their right to apply to be removed from the list.
In terms of UK land already belonging to overseas entities, the requirement to register would apply retrospectively to land bought on or after 1 January 1999 in England and Wales, and 8 December 2014 in Scotland. Overseas entities will have a 6-month transitional period from Parts 1 and 2 of the Act coming into force to dispose (sell off) their land or register. In Northern Ireland the requirement to register only applies prospectively (after the Act comes into force) so there is no need for a transitional period.
Failure to register or submitting false information will be a criminal offence and will also prevent the overseas entity from being able to buy or sell (or mortgage) UK property in the future. A transfer of land by an overseas entity in breach of the registration requirement will also be a criminal offence committed by the overseas entity and every responsible officer of it, punishable by a fine or imprisonment.
The Government has also published a fact sheet: The Register of Overseas Entities which accompanied the Bill.
Unexplained Wealth Orders
The origins of UWOs can be traced back to the Criminal Finances Act 2017 which inserted new sections in the Proceeds of Crime Act 2002 (POCA). For those unfamiliar with an UWO, these are a court order against someone relating to certain property. The order requires them to explain their interest in that property, how they obtained it, and other information relating to that property. The respondent to the order has a fixed period (as decided by the court) to respond. Two categories of people can be served with a UWO: politically exposed persons and someone suspected of being involved in serious crime (there need to be “reasonable grounds” for the suspicion). An UWO is intended to make it easier to obtain a Civil Recovery Order by reversing the burden of proof.
The amendments to UWOs as presented in the Act follow a targeted consultation that the Government undertook last November with a number of respondents feeling that the legislation was not meeting the policy intention behind them.
In terms of the changes that the Act makes to UWOs, these can be summarised as follows:
- Creation of a new category of person who can receive a UWO. This will now include “responsible officers” of the entity that owns the property. If the named respondent of an UWO is not an individual (i.e. a company) the UWO may now also name the responsible officer who must provide the necessary information. The purpose of this amendment is to try and navigate the use of “complex structures” that seek to hide the true owner of property. A “responsible officer” includes a director, manager or partner of a partnership, both in or outside the UK.
- Creation of a new alternative test for granting an UWO. Prior to the Act, when granting an UWO a court had to be satisfied that “there are reasonable grounds for suspecting that the known sources of the respondent’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property.” The Act provides for a further ground, being that “there are reasonable grounds for suspecting that the property has been obtained through unlawful conduct”.
- When applying to the court for a UWO, the relevant enforcement authority may apply at the same time for an interim freezing order which would prohibit the person receiving the UWO from selling it.
- Limiting the liability of enforcement authorities to pay costs in legal proceedings relating to UWOs (or interim freezing orders).
Whilst a review of the sanctions elements of the Act are outside the scope of this briefing it is worth noting that the legislation amends the Policing and Crime Act 2017 and the Sanctions and Anti-Money Laundering Act 2018 in four ways by:
- Removing the requirement that people must have known or suspected that they breached sanctions law to receive a monetary penalty for such breaches.
- Removing the requirement that a minister must undertake reviews of penalties for breaches of sanctions law personally.
- Allowing the Treasury (Office of Financial Sanctions Implementation) to publish notices on cases where it thinks a person has breached sanctions law but it has not (for whatever reason) imposed monetary penalties.
- Expanding information-sharing powers relating to sanctions.
Whilst some will claim this Act does not go far enough it is clearly an important development. The momentum set by this Act is clear – standards of diligence in overseas wealth entering the UK can no longer operate in silo to that of the ordinary UK citizen. Authorities now have significant powers and offenders face both fines and custodial sentences.
London has enjoyed an unprecedented position in the eyes of the ultra-wealthy – an infrastructure that goes far beyond the property purchases preoccupied by the Act. Luxury goods suppliers, money managers and services providers will undoubtedly be assessing their own governance and controls to ensure they are aligned to both the spirit of the Act, and a growing public sentiment against any perception of a ‘soft’ approach towards dubious funds entering the UK.