Economic Crime (Transparency and Enforcement) Act 2022 – update


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In response to the Ukraine war, the UK Government recently passed the Economic Crime (Transparency and Enforcement) Act 2022 (the Act).

This will, among other things, establish a statutory Register of Overseas Entities setting out details of the beneficial ownership of overseas entities which own UK real estate (defined as any company or similar legal entity that is governed by the law of a country or territory outside of the UK).

The Act requires overseas entities that own, wish to purchase or dispose of UK real estate to register details of their beneficial owners with the UK Companies Registry. The sole onus is on the overseas entity for registration, rather than its legal or financial adviser. 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) further to applications made on or after 1 January 1999, and in Scotland since 8 December 2014.

The Act requires overseas entities that own, wish to purchase or dispose of UK real estate to register details of their beneficial owners with the UK Companies Registry. The sole onus is on the overseas entity for registration, rather than its legal or financial adviser. 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) further to applications made 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.

Main points

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

Although the Act received Royal Assent on 15 March 2022 it is unclear when the relevant obligations will take effect. We expect that there will be a 6 month transitional period (not 18 months as was included initially) from the Act's commencement date to obtain an overseas entity ID. We currently do not have a set commencement date.

All overseas legal entities to register

All legal forms of overseas entity (body corporate, partnership, or other entity) 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 changing the application information required by overseas entities, this being on the basis that overseas entities would 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 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 this includes:

(a) commercial and residential freehold transfers; and

(b) commercial and residential leasehold property (where the lease is granted for a term of more than 7 years); and

(c) granting a legal charge.

Registration at the Companies Registry

Overseas entities must provide details of their beneficial owners to the Companies Registry in order to register, following which they 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 he owns more than 25% of the overseas entity's shares or can control more than 25% of its voting rights, or if he has 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 (i.e. its directors, managers or secretary).

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. Including a description of the officer’s roles and responsibilities in relation to the overseas entity.

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, 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 an 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 will 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 (but note our comments below about transactions since 28 February 2022). 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 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 28 February 2022

An overseas entity must disclose information to the Companies Registry about itself and the transaction where it has (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 until the end of the transitional period. It would appear that this will apply irrespective of whether or not it registers as an overseas entity at Companies House. Failure to comply with this requirement will be a criminal offence punishable by a fine.

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 annually. Failure to do so will 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 unlimited 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.

Practical implications

Overseas entities with UK real estate portfolios will need to start planning what they propose to do once the new regime comes into force: whether to keep or dispose of some/all of their UK real estate. If they plan on keeping it, they will need to put in place appropriate compliance arrangements to ensure that the requirements of the new regime are met. Entities should not underestimate the time taken to identify beneficial owners, especially in complex structures.

Overseas entities intending to acquire UK real estate should keep the proposals under review, consider identifying their beneficial owners now and will need to obtain an overseas entity ID once the regime is in force. 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. Clearly on transactions involving UK real estate there will be much more due diligence on beneficial ownership.

Individuals who own their UK real estate through overseas entities to safeguard their privacy will need to consider how to deal with that property once the proposals become law. If they wish to restructure their real estate portfolios they will need to evaluate the costs of such restructuring which may well be expensive especially if loan finance is involved.

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 entities 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.

Significantly more KYC work will need to be done by professional advisers, including accountants and lawyers, to verify identity to comply with the new requirements.

Other provisions of the Act

The Act also makes changes to the unexplained wealth orders and the sanctions regimes.

Conclusion

All current and intending overseas owners of UK real estate need to be aware of and comply with these provisions once the relevant provisions of the Act come into force.

At the time of writing, it remains to be seen how the process of actually obtaining an overseas entity ID will work practically although the Government has said that Companies House will begin work to implement the new register "as quickly as possible", working closely with HMLR . The Government intends to provide an update on progress in implementing the new law within six weeks.

This is only the first stage of a package of reforms to improve corporate transparency and tackle the misuse of UK companies for financial crime. The Government plans to introduce a second Economic Crime Bill in the next Parliamentary session to ensure that:

1) Companies House can more effectively verify the identity of directors and PSCs,

2) companies will be allowed a maximum of one layer of corporate directors which must be UK-based and the natural persons directing that corporate director will be subject to identity verification, and

3) overseas agents will no longer be able to form UK companies.

These measures will make anonymous filings harder and discourage those wishing to hide their company ownership through nominees or opaque corporate structures. 

 

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