Economic Crime (Transparency and Enforcement) Act 2022 – The Long-Awaited Introduction of the Register of Overseas Entities

22 April 2022

The Government has for some time promised to introduce a register requiring overseas entities holding UK property to identify its beneficial owners, in its effort to increase transparency in UK property ownership and reduce the attraction of the UK’s property market to money launderers. Indeed, we last blogged about the potential overseas entities register in May 2019.  With UK-based entities subject to strict information-sharing requirements since 2016 (in the form of the register of People with Significant Control or “PSC Register”), many have been calling for an equivalent overseas entities register to be implemented to provide a way of tracking overseas owners who ultimately own and control UK land.   

The response to Russia’s invasion of Ukraine has taken the overseas entities register off the legislative back-burners to enactment in just two weeks. But who is caught by the Act? What information will overseas entities be required to disclose? And will the Act succeed in making UK property ownership more transparent?

Who is caught by the Act?

In the Government’s own words, the Act aims to require “those behind foreign companies which own UK property to reveal their identities”. 

“Overseas Entities” holding “Qualifying Estates” will be required to apply to Companies House for registration. In doing so, each entity must confirm whether it has and can identify one or more “Registrable Beneficial Owner

Taking each of these definitions in turn:

Overseas Entities” are legal entities (body corporate, partnership or other entity) which are governed by the law of a country or territory outside the UK and which are legal persons under that local law.

Qualifying Estates” are freehold interests in land or leasehold interests granted for a term of more than 7 years.

Registrable Beneficial Owners” include any person who meets one or more of the following criteria:

  1. directly or indirectly owns more than 25% of the shares in the Overseas Entity
  2. directly or indirectly has more than 25% of the voting rights in the Overseas Entity
  3. directly or indirectly holds the right to appoint or remove a majority of the board of directors of the Overseas Entity
  4. has the right to exercise, or actually exercises, significant influence or control over the Overseas Entity or
  5. has the right to exercise, or actually exercises, significant influence or control over a trust or partnership or other unincorporated association which owns the Overseas Entity (in other words someone who controls an entity which is not a separate legal person and which owns UK land).

 

What information is required?

Overseas Entities must take reasonable steps to identify all Registrable Beneficial Owners. They can serve an “information notice” on anyone who they believe holds requisite information in relation to the Registrable Beneficial Owner(s). This notice will require the recipient to confirm whether or not the individual qualifies as a Registrable Beneficial Owner and if they do, to provide the requisite information (which includes names, addresses and confirmation of any relevant overseas governing law).

The exact form of the register is not yet known and will be finalised by Companies House during the implementation of the Act. Whilst the register is intended to be open to public inspection, it is clear that some detail will not be available to the public (e.g. personal addresses and dates of birth). However, the Act does not impose an obligation on the registrar to ensure that such details are not revealed by other documents which are available to the public.  As a result, applicants must be careful to ensure that information they wish to remain confidential is not inadvertently disclosed elsewhere.

 

Deadlines for compliance

The provisions affect all Qualifying Estates bought by Overseas Entities in England and Wales on or after 1 January 1999 (and from December 2014 in Scotland). In other words, the legislation applies retrospectively and those who hold property through an Overseas Entity must review their portfolios and ensure that they have the necessary information to comply.

The Act provides for a six month grace period in which affected Overseas Entities must complete their registration. It is not yet clear when this six month period begins, but the Government has tasked Companies House with implementing the register “as quickly as possible” and given the speed at which this Act has been enacted, we suspect that the commencement date will be sooner rather than later.

Any Overseas Entity selling property between 28 February 2022 and the implementation of the register will be required to submit the required information at the point of sale.

 

Sanctions for non-compliance

The Act provides for a number of significant sanctions. Whilst we suspect that these may largely act as a deterrent, the extent of their use and the process by which sanctions are applied has been left for Companies House to finalise during the implementation of the register.

The sanctions include fines (which can be as much as £2,500 per day for compliance failures and are unlimited for materially false statements) or imprisonment or both. Significantly, failure to comply with the Act amounts to an offence by the entity and every officer of the entity who is in default.

 

How does this affect Property transactions?

In addition to requiring Companies House to create a register of overseas entities, the Act also imposes an obligation on the Land Registry to enter a restriction on the title of properties owned by Overseas Entities (and acquired since 1 January 1999 in England and Wales) which restricts the registration of any dealing with the properties by the Overseas Entities unless they are registered at Companies House.  Note that dealing includes any transfer of a Qualifying Estate, the grant of a lease for a term of more than 7 years and the grant of a legal charge. The wording of the restriction and the evidence that the Land Registry will require is not yet known, but dealing with a property without being a registered Overseas Entity will be an offence by the entity and every officer in breach and can incur a fine of up to £5,000 or imprisonment or both. 

In addition, an Overseas Entity acquiring a Qualifying Estate in the future will not be able to be registered at the Land Registry unless it is registered on the new Overseas Entities register at Companies House.  Whilst some Overseas Entities will benefit from an exemption to register, and the requirement to enter a restriction on property they already own will not apply either, these exemptions are unlikely to apply to many Overseas Entities in practice. 

 

How does this affect Corporate transactions?

We often see, for tax reasons, UK property owned by an Overseas Entity and it is the Overseas Entity owning the UK property which is frequently sold rather than the underlying property.  Anyone buying such an Overseas Entity which owns UK property will now have to consider what registration requirements have applied to the Overseas Entity in the past and what obligation to update the Companies House register will apply to the new owners.  Additional protection for the buyer may therefore be required in the purchase documents in the form of specific warranties and enhanced due diligence will be inevitable.  Anyone financing such a transaction will also have an interest as they will want to ensure that there is no restriction registered against the property in order that adequate and proper security can be taken.

 

Conclusion

Broadly speaking, the Act introduces stronger restrictions and sanctions than the bills which preceded it and as we stated in our 2019 blog the legislation is undoubtedly a positive step towards lifting the corporate veil and increasing the transparency of overseas ownership in the UK property market.

However, until Companies House implements the register and we see how the available sanctions are applied, it remains to be seen whether the majority of beneficial owners will be revealed and how effective the sanctions are as a deterrent.

Early criticism of the Act has highlighted two areas where transparency may not be achieved:

  1. Definition of “Beneficial Owner” – in imposing a 25% threshold test for the holding of shares or voting rights, a person may hold significant power without the need to register. Where numerous connected persons hold less than 25% each, but hold a significant share when combined, the Act may fail to capture this information;
  2. There will be entities which are not recognised as a separate legal person and they will not be caught by the Act.  For example, overseas trustees may not have separate legal personality.  Whilst they may have registration obligations under the separate UK trust registration framework that came into effect in 2017, they might not be required to register under this new register.

In reviewing earlier bills, we concluded that it seemed inevitable that “the effectiveness will rely on the enhanced due diligence of acting solicitors to ensure that proposed buyers or sellers are appropriately registered”. Until the Act is implemented and tested in practice, it is likely that the same conclusion can be drawn.

The title of the Act is slightly misleading as it suggests that an economic crime must have taken place for its provisions to apply to property ownership.  That is not the case.  The new overseas entities register will apply to all relevant Overseas Entities which own property here so if you would like to discuss how the Act may affect you, please contact us.

FURTHER INFORMATION

For further information on issues raised within this blog, please contact John YoungLaura Harper or Tom Beak

About the authors

John Young is a partner in the corporate and commercial team and specialises in the business needs of entrepreneurial, high growth and family businesses, advising them throughout their lifecycle - from startup through to listing and beyond.

Laura Harper is a partner in the Private Client team. She advises both UK resident and non-UK resident/domiciled individuals, families and trustees on a wide variety of UK tax, trust law and international estate planning issues, including the planning to be undertaken when moving to or from the UK. She also has extensive experience working on cross-border matters and structuring involving family-owned businesses.

Tom Beak is an Associate in our Real Estate team and is experienced in a range of commercial and residential property matters. Tom acts for property investors, developers, lenders, landlords and tenants

 

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