On 1 March, the Government introduced the Economic Crime (Transparency and Enforcement) Bill to the House of Commons. In the words of business secretary, Kwasi Kwarteng, in his statement the previous day, the new law is intended "…to crack down on foreign criminals using UK property to launder their money….We will send a clear warning to those who have or who are thinking about using the UK property market to launder ill-gotten gains - particularly those linked to the Putin regime…".
The Bill was fast-tracked through Parliament and received Royal Assent in the early hours of Tuesday 15 March.
In addition to establishing a register of "Overseas Entities" (the O E Register) at Companies House, one of a number of measures designed to increase transparency of both overseas and domestic companies, the Economic Crime (Transparency and Enforcement) Act 2022 (the Act) will also reform the current statutory provisions on Unexplained Wealth Orders (see here for details).
These measures are being supported by a White Paper published on 28 February (see here for details) setting out reforms to Companies House. This is to be followed by a further Economic Crime Bill which is to include anti money laundering measures and powers to seize assets.
In fact, the creation of an O E Register was initially proposed over 5 years ago, but its progress has been dogged by delay. Russia's actions in Ukraine have altered the timetable and catapulted these measures onto centre stage.
What does the Act do?
The Act creates the O E Register in order to record specific information about the entities (including details of their beneficial ownership) and creates a scheme designed to require such Overseas Entities to register if they own land. (Although the Act covers the UK generally, we deal here only with the provisions relating to England and Wales).
What is an "Overseas Entity"?
This is a legal entity that is governed by the law of a country or territory outside the UK. In this context, a legal entity is a body corporate or other such legal person.
What information will be included in the O E Register?
The register will record certain prescribed information about each Overseas Entity, including its beneficial ownership. The declarant is to provide a statement regarding beneficial ownership in one of three alternatives, as follows:
- that the declarant has taken steps to identify holders of a "registrable beneficial interest" and that it has no reasonable cause to believe there are any others, or
- that it has no reasonable cause to believe that there are any registrable beneficial owners, or
- that it has reasonable cause to believe there is at least one registrable owner that it has not identified, or that it is unable to supply information about one or more of the registrable beneficial owners it has identified, or both.
Where the declarant is unable to supply information regarding registrable beneficial owners (cases 2 or 3), the required information may be given instead in respect of a "managing officer" of the entity, which includes a director, manager or secretary.
As a result of amendments made in the House of Lords, where a registrable beneficial owner is a trustee, certain information about the trust must also be given by the declarant, where available, as well as a statement as to whether the entity has any reasonable cause to believe that there is required information about the trust that it has not been able to obtain.
A "beneficial owner" is defined and will include a person that:
- holds more than 25% of the shares in an Overseas Entity;
- holds, directly or indirectly, more than 25% of the voting rights in an Overseas Entity;
- holds the right, directly or indirectly, to appoint or remove a majority of the board of directors of an Overseas Entity;
- has the right to exercise, or actually exercises significant influence or control over the Overseas Entity;
- has the right to exercise, or actually exercises, significant influence or control over the activities of a trust or entity, the trustees of which (or certain other entities that are not legal persons under the law by which they are governed) meet any of the conditions above in relation to the OE in their capacity as trustees.
As mentioned above, where a trustee is a registrable beneficial owner in relation to an overseas entity, information must be provided about the trust, the trustees and, in addition, about beneficiaries, the settlor and any "interested person" in relation to the settlement. An " interested person" is one who, under the terms of the trust, has rights in respect of the appointment or removal of the trustees or the exercise by the trustees of their functions. This would potentially include a protector.
For beneficiaries, settlors or interested persons in relation to the trust, to the extent they are individuals, the information required includes their name, date of birth, nationality, usual residential address and a service address.
The Act includes a power for the Secretary of State to exempt persons from information requirements in specified circumstances. These include the interests of national security or for the purposes of preventing or detecting serious crime. An option included in the original Bill for exemption in the interests of the economic wellbeing of the United Kingdom has been removed on amendment, in response to concerns that this could be used to exempt oligarchs in certain circumstances.
On completion of registration, Companies House will allocate an ID number to the registered entity, which is recorded in the O E Register.
The registered entity is under a duty to update the information as required by the Act. Failure to comply is a criminal offence committed both by the registered entity and every officer of the entity in default. Failure incurs a daily default fine and possible imprisonment.
How does this procedure apply to land ownership?
As set out in Schedule 3 to the Act, no application can be made to register an Overseas Entity as proprietor of a "qualifying estate" (that is the freehold or a lease of at least 7 years) in land at the Land Registry unless the entity is a registered entity or is exempt.
Furthermore, when the Overseas Entity wishes to sell, grant a lease of more than 7 years or charge a property, that disposal will not be registered at the Land Registry unless (subject to certain exclusions, set out below) that company is a registered entity or is exempt. In order to facilitate this, the Land Registry is required by the Act to include a restriction in the title register of all qualifying estates owned by Overseas Entities that have been registered pursuant to an application since 1 January 1999. (This lengthy look-back period will potentially create a significant burden on the Land Registry's already stretched resources, and it is to be hoped that the government are planning an appropriate level of support).
The exclusions include that the disposition is made pursuant to a contractual obligation pre-dating the restriction, pursuant to a court order, or pursuant to a statutory obligation .
However, the provisions in the Act are not only triggered on a sale, charge or purchase of an interest in property. Additionally, the Act empowers the Secretary of State to require an Overseas Entity to apply for registration in the O E Register within 6 months of notice if either the entity is or is entitled to be registered as proprietor of a qualifying estate.
The Act also provides that an Overseas Entity must not make a registrable disposition of a qualifying estate if registration is prohibited by a restriction entered in the register. Breach of this provision is an offence (punishable by a fine or possible imprisonment) by the company and its officers.
Overseas Entities that make an application for registration in the O E Register before the end of the transitional period (6 months after the relevant provisions come into effect) must make a statement as to whether they have made a disposition of land since 28 February 2022. If they have made such a disposition, all relevant information must be included in the application.
In addition, an unregistered Overseas Entity and its officers commits an offence if in the same period, it has made a relevant disposition of land and by the end of the transitional period it is not registered as an Overseas Entity or made an application for registration, unless it is exempt. This offence is punishable with a daily default fine and possible imprisonment.
Are there any potential concerns about the proposed disclosure requirements for registrable beneficial owners?
Overseas entities are required to provide information about their registrable beneficial owners including for individuals (among other things) their name, date of birth, nationality and usual residential address. Information on the O E Register may be made available to members of the public who make a request. However, for individuals this is restricted to their name and the month and year (but not the day) of their birth.
In contrast, required information about trusts may only be disclosed by the registrar to HMRC or any other person who has functions of a public nature and is specified to receive such information by the Secretary of State. This would include information about the trust itself, the trustees, beneficiaries, the settlor and any interested persons within the meaning of the Act.
Many people may not be concerned about information identifying them being publicly available, or others may hold property through a trust or similar structure whereby information will not be available to the public, or through a nominee arrangement where they do not qualify as beneficial owners of the nominee.
However, many other people who have chosen to acquire property through an overseas entity with an interest in that entity that is likely to exceed the relevant threshold, have done so with the sole or primary intention of ensuring that their ownership of the property remains confidential.
For such individuals, just as for beneficiaries of trusts, settlors or protectors, the existence of a register that allows HMRC or other law enforcement bodies to identify them as owners is not an issue; rather it is the public availability of the information on the register that is a concern.
The Act does provide for the Secretary of State to be able to make provision for information regarding a specified individual to be unavailable for public inspection. The conditions for such an application to be accepted are unclear, but it may be that a serious risk of violence or intimidation will be required, as is the case for information on the PSC register. As many wealthy international individuals live with the constant threat of kidnap or other dangers to themselves or their family members, it is to be hoped that the requirements for information on the O E Register to be protected may be broader in their scope.
Will the Act achieve the aims for which it is intended?
Concerns were raised that the rules would not provide transparency in relation to nominee arrangements (otherwise known as bare trusts), whereby an Overseas Entity holds property as nominee for the underlying beneficial owner of the property. In this situation, the "beneficial owner" for the purposes of disclosure on the register will be those with shares, voting rights or other form of control or influence in or over the Overseas Entity. These may not be the same people as the underlying beneficial owner of the property.
The amendments made by the Lords do not appear to have introduced a requirement to identify a beneficiary of a trust (whether bare or otherwise) of which the Overseas Entity itself is the trustee. However, in this context, it is worth noting that non-UK trustees (which would include nominees) are likely to be subject to a separate obligation to register on the Trust Registration Service (TRS).
For non-UK trustees, this obligation was previously restricted to those that were taxable in the UK. However, the scope of the register is being expanded to include, among others, non-UK trusts where all trustees are non-UK resident and they acquire land or property in the UK directly, or have acquired such land or property on or after 6 October 2020. The initial deadline for registration for trustees in this position is 1 September 2022.
As a trustee holding UK property for the benefit of another person or persons, an Overseas Entity would be required to disclose on the TRS details of the underlying beneficiaries or, where appropriate, of the beneficial class. While this provides transparency in regard to arrangements not caught by the O E Register, the TRS does not have such a lengthy retrospective effect as that register.
In most cases, information on the TRS is available only to people who are able to demonstrate a "legitimate interest" in accessing that information, for example an investigative journalist who is looking into a particular instance of money laundering or terrorist financing. Among other requirements, it must also be reasonable for the person making a request to have the suspicion on which their application is based. This contrasts with both the fully public nature of the proposed O E Register where there is no trust, and the greater restriction of trust information on the O E Register to HMRC and other persons with public functions.
Are there any other criticisms of the Act?
Critics have also argued that the legislation is insufficient for other reasons ranging from "feeble enforcement" to lack of a firm timetable. For example, the relatively low level of fines for registration failures may do little to penalise foreign entities for non-compliance. Instead, there are calls in some quarters for graduated sanctions, fines increasing in accordance with the extent of delay, and the possibility of confiscation of assets.
There have been reports in the press of properties owned by foreign nationals being speedily brought to market. This is likely to be an immediate response to the current threat of sanctions and, as discussed above, transactions taking place between 28 February 2022 and the end of the transitional period will not avoid the requirement to register under the Act.
Nevertheless, it remains to be seen whether the Act and additional steps proposed will be effective in the long term.
What to do?
Given the retrospective nature of the legislation, and the penalties for non-compliance, any Overseas Entity that has acquired property in England and Wales since 1 January 1999 should begin now to take the necessary steps to identify relevant ownership structures. They should also ensure that the Land Registry has up to date addresses for service as Land Registry will notify them of the restrictions being imposed on their titles .
In this way, they will be in a position to make the appropriate application for registration once the register is available.
Individuals who own or are interested in property held through structures involving Overseas Entities should undertake the same review process to ensure that they too are ready for registration.
If you have any queries arising from this note or the legislation more generally, please contact either of the authors or your usual contact at Howard Kennedy.