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Economic Crime (Transparency and Enforcement) Act 2022: corporate and property aspects

  • United Kingdom
  • Corporate
  • Real estate

29-03-2022

Overview

The Economic Crime (Transparency and Enforcement) Act 2022 (“Economic Crime Act” or “Act”) received Royal Assent on 15 March 2022. Amongst other changes, the Act (Part 1 and Schedules 1 to 5) introduces a ‘Register of Overseas Entities’ at Companies House in the UK “to crack down on foreign criminals using UK property to launder money”. The Act creates a number of criminal offences and for some provisions has retrospective effect from 28 February 2022.

The introduction of a new beneficial ownership register for overseas owners of UK property is intended to compel overseas entities that own land in the UK to register their beneficial owners. There will be a new register established at Companies House for this purpose. The Economic Crime Act also imposes a duty on overseas entities to update the information provided to the register annually. The register will be publicly accessible (subject to certain restricted information).

In order to register title to land, an overseas entity will have to be registered with Companies House. If entities don’t register (or qualify for an exemption) then they will not be able to register as an owner of qualifying UK property or register a disposition of the title to a property. For property in England and Wales the dispositions covered include transfers, the grant of a lease for a term of more than seven years or the grant of a legal charge.

The new regime applies retrospectively to property in England and Wales where an overseas entity became registered in the register of title as proprietor pursuant to an application made on or after 1 January 1999 and since December 2014 in Scotland. There will be transitional provisions that effectively give overseas entities in scope a period of six months from when the relevant sections of the Act come into force to either register or to dispose of the qualifying estate. If an entity, which isn’t exempt, chooses to dispose of the qualifying estate rather than register, it will still have to submit equivalent information to Companies House where it has disposed of a qualifying estate on or after 28 February 2022.

Which overseas entities are in scope?

An “overseas entity” means a legal entity governed by the law of a country or territory outside of the United Kingdom. A “legal entity” means a body corporate, partnership or other entity that is a legal person under the law by which it is governed. This will therefore include non-UK incorporated companies and LLPs and non-UK partnerships that have legal personality.

There will be a new register established by the Registrar of Companies (“Registrar”), consisting of a list of registered overseas entities, along with certain specified documents that must be delivered to the Registrar to be included on the register. Information will also be required in respect of the registrable beneficial owners.

When registering, an overseas entity must confirm either:

• that it has taken reasonable steps to identify its registrable beneficial owners (discussed further below, including additional requirements in respect of any registered beneficial owner that is a trustee), and must provide the required information about those identified;

• that the entity has no reasonable cause to believe that it has any registrable beneficial owners, in which case it must provide the required information about its managing officers (for example, directors or company secretary); or

• that it has reasonable cause to believe that it has a registrable beneficial owner, but has been unable to identify the beneficial owner, and cannot provide all the required information. In this case, the entity must provide whatever information it can about the beneficial owners, and the required information about each managing officer of the entity.

There are specific provisions that did not appear in the original Bill regarding registrable beneficial owners that are trustees of trusts which are commented on below.

When an overseas entity is registered, the Registrar will allocate and register an overseas entity ID. This will be required to register property transactions at the Land Registry (see below).

What information is required and who must appear on the register?

Information to be provided in respect of the overseas entity

Schedule 1 to the Act sets out the information to be provided about the overseas entity and (if necessary) its registrable beneficial owners and managing officers. The requirements depend on the person or type of entity, but broadly include their name and address, and for beneficial owners, when they became a beneficial owner. For beneficial owners, this also includes whether the individual or entity is a designated person listed on the UK Sanctions List (within the meaning of section 9(2) of the Sanctions and Money Laundering Act 2018).

Who is a registrable beneficial owner?

Schedule 2  sets out the threshold for becoming a registrable beneficial owner (RBO). This broadly mirrors the regime in place for UK entities that are subject to the UK persons with significant control (PSC) regime that is currently in place for UK companies, although there are additional disclosure requirements in relation to trustees.  

In summary, a beneficial owner must be registered if they:

  • hold more than 25% of the shares or voting rights;
  • have the right to appoint or remove a majority of the board of directors; or
  • have some other significant influence or control over the overseas entity (including through a trust or partnership that is not itself a legal person).

A registrable beneficial owner may be an individual, a legal entity or a government or public authority.   

There is further technical detail that apply to each of these conditions, and Schedule 2 expands on this, including to set out the criteria for those beneficial owners that qualify indirectly.

Verification of registrable beneficial owners and managing officers

Supplemental regulations will make provision for verification of the information provided by an overseas entity in respect of its beneficial owners prior to registration. This appears to give the register greater impact, as actual identity verification of Companies House information does not currently take place (although reforms have been proposed in this area).  The Act provides that these regulations must be made so as to come into force before applications for registration are made by overseas entities at Companies House. There is presently no timescale for the publications of any such regulations.

Exemptions from registration

The power of the Secretary of State to exempt persons from the registration requirements is narrowly drafted, and can only be used where the Secretary of State is satisfied that to do so is necessary in the interests of national security or for the purposes of preventing or detecting serious crime. A third ground provided in the original Bill that a person may be exempted where necessary in the interests of the economic wellbeing of the United Kingdom has been removed.

The Secretary of State may also make modifications to the application or updating requirements for a certain description of overseas entity, to reflect information that is already publicly available. An example might be where the entity is already providing equivalent information in its country of incorporation.

Applications during the transitional period

Another new provision that did not appear in the original Bill relates to applications for registration made during the transitional period, being six months following the provisions of the Act regarding the creation of a register of overseas entities coming into force. Where an overseas entity applies for registration during the transitional period, the entity must provide certain prescribed information about relevant dispositions of land made after 28 February 2022 and declare the relevant information regarding beneficial ownership immediately prior to making the disposition. If no relevant dispositions have been made, the application must state this. It is an offence for unregistered entities that are not exempt to fail to provide information about relevant dispositions.

Sanctions for failure to register

The Secretary of State may by notice require an overseas entity to apply for registration within a period of six months where they are a proprietor of a relevant interest in land and are not registered (or exempt). If the overseas entity fails to comply a criminal offence is committed by the entity and every officer.

It is also a criminal offence for someone to deliver misleading, false or deceptive information to the Registrar pursuant to this part of the Act without reasonable excuse, subject to a fine, or where that is done knowingly, punishable by up to two years’ imprisonment.

Financial penalties may also be imposed by the Registrar for offences committed under this Part of the Act.

Additional information regarding trustees

Where an individual or entity meets the condition of being a registrable beneficial owner by virtue of being a trustee, the Act (Part 5 of Schedule 1) sets out additional information that must be provided in relation to the trust. A statement must also be included as to whether the entity has reasonable cause to believe that there is required information about the trust that it has not been able to obtain. This is relevant to the application for registration, removal from the register or complying with the duty to update information.

In addition to information regarding the trustees, this includes equivalent information in relation to each beneficiary, each settlor or grantor and any ‘interested person’, being any person who has rights in respect of the appointment or removal of trustees or the exercise by trustees of their functions.

As with certain other information provide under the Act, required information about a trust will not be available for public inspection. There is a power for the Registrar to disclose the trust information that is delivered to it to HMRC.

A ‘trust’ is defined so as to include arrangements under the law outside of the UK that are of similar character to a trust.

Updating the information and other provisions

Duty to update

There is a duty on registered overseas entities to update the statements and information provided to the Registrar

at least annually to include all the changes within the year. The first update would be due 14 days after the first anniversary of registration. There are also provisions that allow entities to apply to be removed from the register (ie when they no longer own the UK property). Failing to update the register will be a criminal offence (punishable by a fine and a further daily fine for continued non-compliance), committed by the overseas entity and every responsible officer of it (such as a director).

Identifying beneficial owners

There are provisions in the Act which require overseas entities to take “reasonable steps” to identify beneficial owners that need to be registered, and obtain the required information about them. This includes giving notice to any person that the entity knows or has reasonable cause to believe is a registrable beneficial owner. Notice may also be given to someone who is not a beneficial owner but who the entity believes could know who the beneficial owners are, or could know someone else who may know this information (for example, advisers or a real estate agent).

Failure to respond to an information notice under these provisions without a reasonable excuse, or responding with information the respondent knew or suspected was false, is a criminal offence punishable by up to two years’ imprisonment.

The register will be publicly accessible. Certain information such as dates of birth and residential address will be protected.

It a criminal offence for someone to deliver misleading, false or deceptive information knowingly or recklessly to the Registrar pursuant to this Part of the Act, punishable by up to two years’ imprisonment.

The Act also includes a provision for HMRC to share information with the Secretary of State or the Registrar for the purposes of taking action in connection with an offence in relation to the registration of overseas entities.

Impact on land ownership and transactions

The proposed regime applies retrospectively to property in England and Wales (ie to overseas entities who became registered in the register of title as proprietor pursuant to an application made on or after 1 January 1999) and since December 2014 in Scotland.

The Economic Crime Act makes certain amendments to Land Registration legislation in England, Wales, Scotland and Northern Ireland to provide that an overseas entity must have registered on the overseas entity register (and be in compliance with the updating duty outlined above) in order to register title to land and/or make certain dispositions in respect of land, including granting a charge. There are certain exceptions, such as if the overseas empty is exempt or transfers under a court order or power of sale. A transfer of land, the grant of a lease (of over seven years in England and Wales) and a charge by the overseas entity when it isn’t a registered (or exempt) overseas entity, is a criminal offence.

Under transitional provisions, an overseas entity that became the registered proprietor of a ‘qualifying estate’ (ie a freehold estate in land in England and Wales or a lease granted for more than seven years) before the Economic Crime Act came into force (provided that occurred on or after 1 January 1999 in England and Wales) will have a period of six months from the coming into force of the relevant part of the Act to either become a registered (or exempt) overseas entity, or, if it does not wish to do so, to dispose of the qualifying estate. Separate rules apply in Scotland and Northern Ireland. This period was reduced from 18 months in the original draft Bill in response to criticism. However, such entities may be caught by the provisions regarding applications made during the transitional period.

In England and Wales only, the Land Registry will place restrictions on title registers of qualifying estates as soon as reasonably practicable once the relevant part of the Act is in force, to prevent transfers, the grant of leases of over seven years or charges unless the overseas entity is a registered (or exempt) overseas entity, or one of the small number of exceptions applies, such as the completion of a contract entered into before the restriction was added to the title register. The restriction takes effect at the end of the six month transitional period.

Failure to comply with registration requirements: summary

Criminal liability may be incurred for failure to comply with these provisions of the Economic Crime Act relating to the registration of overseas entities by both the entity and each of its officers in a number of ways. This includes failing to provide information in connection with dispositions of UK land made on or since 28 February 2022; making a disposition of UK land that is restricted as set out above; failing to respond to a notice requiring an overseas entity to apply for registration; failing to provide an update on the information on the register annually; or delivering documents or making statements that contain misleading, false or deceptive information to the Registrar. The latter is a strict liability offence, and there is a further aggravated offence where this is done knowingly.

Non-criminal financial penalties may also be imposed by the Registrar in the alternative in the event of a failure to register at Companies House and/or comply with the duty to update.

Impact and next steps

The provisions regarding establishing a register of the beneficial owners of entities that own UK property are long-awaited, having first been proposed in 2018. We await regulations that will bring the relevant parts of the Act into force.

Given the retrospective nature of the provisions of this part of the Act and the relatively short time frame of six months for registration, and the potential impact for in-scope existing and prospective owners of UK real estate, such entities will need to identify their registrable beneficial owners (where applicable) and the information that will need to be registered.

Useful links

Economic Crime (Transparency and Enforcement) Act 2022