Economic Crime Act – Register of Entities
Update — overseas entities owning UK property to disclose details of owners in public register.
Further to our previous bulletin (March 2022), dates for compliance with the Economic Crime (Transparency and Enforcement) Act 2022 (the Act) have now been announced; namely 1 August 2022 for registering beneficial owners on the UK Companies Registry (held by Companies House) and 5 September 2022 has been highlighted as the possible date for overseas entities to begin to register their overseas entity ID (obtained from Companies House) with the Land Registry.
The Act requires overseas entities (defined as any legal entity which is governed by the law of a country or territory outside the UK, whether a company, partnership, corporation, government or public authority) that own, wish to purchase or dispose of UK real estate to register details of their beneficial owners with the UK Companies Registry, unless a limited exemption applies. The Act also impacts intended purchasers of UK property currently owned by an overseas entity and tenants of registrable leases lasting more than 7 years.
Unusually for UK legislation, the Act will apply retrospectively to overseas entities registered as proprietors of land in England & Wales at HM Land Registry (HMLR) on or after 1 January 1999, and in Scotland since 8 December 2014.
The Act applies to the UK but it applies differently in England and Wales, Northern Ireland and Scotland due to the different land registration regimes in the three jurisdictions. This note sets out the position for England and Wales.
Background – PSC register and consultation
The UK Government has long been concerned about the potential for the misuse of corporate vehicles and aims to make the UK a more transparent place to do business.
In 2016, the UK introduced a register of beneficial owners of UK companies, known as the register of people with significant control (PSC) or PSC register, which allows the public access to a central record of this information. However, the PSC register does not apply to companies incorporated outside the UK.
The Government's aim in introducing the Act is to prevent and combat the use of land by overseas entities for the purpose of money laundering or investing illicit funds.
The purpose of the Act is to create an equivalent register to the PSC register for overseas entities that own, wish to purchase or intend to dispose of UK real estate.
Timing – As stated in the introduction, the key provisions of the Act come into force on 1 August 2022. There is due to be a 6-month transitional period, but the timing of the commencement of this is currently unclear and we are waiting for Companies House and the Land Registry to confirm the position.
If you fall within the remit of this Act, it is recommended that you commence the registration process with Companies House, as soon as you are able to, to prevent any delays in registering your overseas entity ID obtained from Companies House with the Land Registry, once the registration opens.
All overseas legal entities to register – All legal forms of overseas entities which can hold UK real estate (commercial and residential freehold and registrable commercial and residential leasehold property) will be required to register with the Companies Registry and provide information about their beneficial owners. The Act permits the Home Secretary to make regulations for exemptions, for example, in the case of overseas entities which have to provide beneficial ownership information to registries in their own jurisdiction which the Government considers to be equivalent to the new register of overseas entities. Trusts are excluded from the definition of an overseas legal entity as they do not usually have separate legal status in English law, but they are caught by a separate regime. Where the beneficial owner of real estate is a trustee, details about the trust will need to be supplied.
Overseas individuals holding property through a UK corporate vehicle will not be caught by the Act as a UK company is already subject to the PSC regime which requires disclosure of the ultimate beneficial owner of a UK company.
UK real estate – for the purposes of the Act includes:
- commercial and residential freehold transfers; and
- commercial and residential leasehold property (where the lease is granted for a term of more than 7 years); and
- granting a legal charge.
Registration at the Companies Registry – Overseas entities must take reasonable steps to identify their registrable beneficial owners by sending information notices to all registrable beneficial owners, or any person who might know a registrable beneficial owner's identity. Recipients of the information notice have a maximum of one month to respond to such a notice and any information provided will need to be translated to English, before it is lodged with Companies House.
Once all of the information is collated by the overseas entity it can be lodged with Companies House and recorded on their Companies Register and provided the information is verified (which is explained in more detail below) and complete, it is expected that the overseas entity will be given an overseas entity ID. This ID will be used by HMLR to register the overseas entity's transactions, similar to the way in which a UK company's registered number is entered on the title register.
Disclosable owners – The definition of beneficial owner for the register at the Companies Registry is very similar to that used in the PSC regime. Broadly speaking, a person will be a beneficial owner if they own more than 25% of the overseas entity's shares or can control more than 25% of its voting rights, or if they have the right to appoint or remove a majority of the board of directors or otherwise to exercise significant influence or control over the overseas entity. If the overseas entity's beneficial owner is another entity, then it must continue up the chain of ownership to disclose the beneficial owners or, if there are none, it must include a statement from its managing officers.
Can entities unable to get information about their beneficial owners still register? – Yes. Overseas entities will be required to take reasonable steps to find out who their beneficial owners are. If they are unable to provide beneficial ownership information (either because they do not have any or they cannot identify them) they will still have to register and will instead have to provide information about their managing officers.
What information must be included in the register? The Government requires the same information for the new register as for the PSC register, for individuals, governments and public authorities and other legal entities. For legal entities the information will be its name, country of incorporation, registered or principal office, service address, email address, the entity's legal form, its governing law and any public register in which it is entered, the date upon which it became a beneficial owner and an explanation as to why it qualifies as a beneficial owner. Not all of the information provided to the Companies Registry will be included in the publicly accessible register, so details of an individual's residential address and their date of birth would be suppressed.
Must current real estate owners register? – Yes. HMLR will enter restrictions on the register of all qualifying estates if it is satisfied that the registered proprietor is an overseas entity whose proprietorship was registered further to an application made on or after 1 January 1999 and a limited exemption does not apply. So, current owners of registered UK real estate will be required to register and obtain an overseas entity ID (as well as intending purchasers and tenants of registrable leases). There is due to be a 6-month transitional period to comply with the new requirements during which overseas entities can still sell UK real estate of which they became the registered proprietor on or after 1 January 1999. At the end of the transitional period, if the current owner is still in breach of the registration requirements it will be prohibited (subject to certain limited exceptions) from dealing with the real estate by way of a restriction on the title register at the HMLR. The exceptional circumstances in which it will be able to deal include: where the dealing is pursuant to a statutory obligation or court order; where the Secretary of State has issued an exemption; where the contract was entered into before the restriction was registered; and where a lender (e.g. a bank) exercises its power of sale to realise its security. Failure to register will also be a criminal offence, punishable by fine or imprisonment or both.
Transactions since 28th February 2022 – Where an overseas entity applies for registration at the Companies Registry during the anticipated transitional period, it must state if it has (or has not) (a) transferred freehold land or (b) granted a lease for a term of more than 7 years or (c) granted a legal charge since 28 February 2022 (the date the draft Bill was first introduced into Parliament) and, if it has, it must supply certain specified information about its beneficial ownership. Failure to comply with this requirement will be a criminal offence.
Must intending buyers register? – Yes. An intending buyer will have to apply to the Companies Registry to register details of its beneficial ownership with the Companies Registry and obtain an overseas entity ID number to enable it to register both its legal title to the property and, where it has borrowed monies to fund the purchase, for its lender(s) to register a mortgage of the land. A restriction will be added to the title register that prohibits dealing with the property if the owner is in breach of the registration requirements.
Where an intending buyer's real estate purchase is to be financed, the lender is likely to insist on the buyer registering details of its beneficial ownership at the Companies Registry as a condition precedent to providing the financing for the acquisition.
Buyers/sellers/landlords/tenants of real estate will also need to consider whether ensuring that an overseas entity has obtained an overseas entity ID number is a condition of exchange of contracts or completion, which we would expect to see become the norm.
Annual obligation to keep the information on the register up to date – Overseas entities will be required to update the information provided to the Companies Registry either annually, within a 14-day annual update period, or outside of this period, when a beneficial owner and/or managing officer is required to be removed from the register. Failure to do so may result in criminal sanctions. Overseas entities will be able to apply to be removed from the register if they cease to be interested in UK real estate. Note that the updating obligation subsists for as long as the overseas entity remains registered, even if it no longer owns any UK real estate. So once property is sold, an overseas entity should apply to be removed from the Companies Registry.
Consequences of breach
Overseas entities that fail to register or fail to comply with the obligation to update the registered information, will not be able to deal with the UK real estate that they own.
It will also be a criminal offence for both the overseas entity and its officers:
- to deal with UK real estate without being registered;
- to fail to comply with the obligation to update the registered information at least annually; or
- to deliver misleading, false or deceptive information to the Companies Registry.
The sanctions for the criminal offences include fines and/or up to 5 years imprisonment, depending on the severity of the breach.
The Act also includes the ability for the Government to impose a charge on the property to secure unpaid fines.
Overseas entities with UK real estate portfolios will need to put in place appropriate compliance arrangements, as soon as possible in light of the deadlines, to ensure that the requirements of the new regime are met. Entities should not underestimate the time needed to identify beneficial owners, especially in complex structures and to have the information verified.
Overseas entities intending to acquire UK real estate will need to obtain an overseas entity ID. SPVs that are set up to acquire UK real estate will need to ensure that they can obtain an overseas entity ID number in advance of completing the purchase of real estate. As a result, incorporating SPVs earlier in the transaction process than might typically be the case is important. Clearly on transactions involving UK real estate there will be much more due diligence on beneficial ownership.
Parties (sellers, buyers, landlords, tenants, investors and lenders) dealing with overseas entities will want to check that the overseas entity has an overseas entity ID number, appears on the register of overseas beneficial owners and try to obtain some assurance that the overseas entity will comply with its annual updating obligation. In addition, buyers, tenants and lenders will need to ensure that they have the contractual protection in place so that they can be registered as the proprietor of the property/charge respectively at HMLR.
Once the overseas entity registers its information on its beneficial owners or managing officers with Companies House, it will be given 14 days for a recognised "supervised agent" (as identified below) to lodge a verification statement, confirming the accuracy of the information. The 14 days will not apply if the relevant information is lodged together with the verification statement of the supervised agent.
These "supervised agents" are:
- Credit institutions;
- Financial institutions;
- Auditors, insolvency practitioners, external accountants and tax advisors;
- Independent legal professionals;
- Trust or company service providers; or
- Estate agents or letting agents.
The supervised agent will need to verify the information on the basis of documents or information obtained from a reliable source which is independent of the person whose identity is being verified.
It should not be underestimated how time consuming this process will be. Significantly more KYC work will need to be done by professional advisers, including accountants and lawyers, to verify identity in order to comply with the new requirements. In many cases, the supervised agent will not be able to rely on KYC previous issued by the relevant entity because of the dates within which the information must have been verified.
Other provisions of the Act
The Act also makes changes to the unexplained wealth order and the sanctions regimes.
All current and intending overseas owners of UK real estate need to be aware of and comply with these provisions.