Economic Crime (Transparency and Enforcement) Act 2022: Is the U.K. Finally Serious About Fighting Economic Crime?
On 15 March 2022, the UK passed the Economic Crime (Transparency and Enforcement) Act (the Act), to tackle economic crime.
For the last six years we have been hearing discussions on economic crime. In 2016 the then Prime Minister, David Cameron, promisingly announced the possibility of a register of overseas entities owning U.K. real estate. In 2018 a draft Economic Crime Bill had been prepared but then placed on the backburner for a few years. In January 2022Lord Agnew, who resigned over the government’s handling of COVID loans fraud, said that ministers had ‘foolishly rejected’ what was then the Economic Crime Bill for the next legislative session. Some even questioned whether the Bill had been dropped entirely, but then to everyone’s shock, Russia invaded Ukraine and so changed the fate of the almost abandoned Bill.
Suddenly, the Economic Crime Bill was rescued, and in lightning speed, the Act received royal assent in the early hours of Tuesday 15 March.
The Act contains three key parts:
Part 1: The Creation of a Register of Overseas Entities
Part 2: Amendments to the Unexplained Wealth Order (UWO) regime
Part 3: Amendments to the existing legislation on U.K. sanctions
Part 1: The Creation of a Register of Overseas Entities
Overseas investors in U.K. real estate should assess their position now with only a six-month window to comply with the requirements of the register for beneficial owners of overseas entities (the Register) introduced by Part I of the Act. The Register has not yet gone live, but when it does, the six-month window will run from the date of implementation. The key takeaway for overseas entities holding U.K. real estate is not to delay in preparing for these new disclosure rules.
The Act applies to an ‘overseas entity’, which is defined as any body corporate, partnership or other entity that is governed by the law of a country or territory outside the U.K. The Register will be operated by Companies House and will be publicly accessible.
Since the introduction of the Persons of Significant Control (PSC) regime in 2016, U.K.-incorporated companies have been subject to ongoing disclosure requirements about their beneficial ownership to Companies House. The beneficial ownership tests for overseas entities will be broadly similar, although the reporting requirements will be greater.
An overseas entity will have to disclose and maintain beneficial ownership information on the Register where it holds a ‘qualifying estate’ in land. Under the Act, this comprises either a freehold interest in land, or a leasehold interest in land granted for a term of more than seven years from the date of grant. Any land acquired before 1 January 1999 in England and Wales will not be subject to the requirements of the Register.
The registration requirements cease once an overseas entity no longer holds any qualifying estate.
The information an overseas entity must file and maintain at Companies House will include:
- its name, country of incorporation, address for service and any overseas registers on which it is registered;
- its registrable beneficial owners, including their names, addresses and dates of birth (not all information will be available for public inspection) and the date on which the person(s) became a beneficial owner and the nature of their interest(s); and
- where the beneficial owner is a trustee, relevant details of its current and historic trustees, although again, not all of this information will be available for public inspection.
During the passage of the Economic Crime Bill through Parliament, the criminal sanctions and financial penalties that could be imposed on an overseas entity that fails to comply with the Act were toughened. An overseas entity must provide an updated statement to Companies House in respect of its beneficial ownership within 14 days of the end of each 12-month period following the date of their initial registration. A failure to comply may result in the levying of a daily default fine not exceeding £2,500 and up to five years’ imprisonment.
HM Land Registry will enter restrictions on all registered titles to qualifying estates held by overseas entities. An overseas entity’s compliance with the filing and updating requirements of the Register will be a pre-condition to dealings with U.K. real estate. An overseas entity will also have to comply with, and be entered on, the Register before they are in a position to acquire a qualifying estate.
The Act requires overseas entities to provide records of U.K. land transactions from 28 February 2022. We recommend that those subject to the requirements of the Register commence preparation and organise compliance measures without delay.
Part 2: Unexplained Wealth Order (UWO)
UWOs were introduced in 2018 as a tool for law enforcement authorities to tackle money laundering.A UWO is an investigatory order placed on a respondent whose assets appear disproportionate to their income to explain the origins of their wealth.
A UWO requires a person who is a Politically Exposed Person (PEP) or reasonably suspected of involvement in, or of being connected to a person involved in, serious crime to explain the origin of assets (minimum combined value of £50,000) that appear to be disproportionate to their known lawfully obtained income.
The Act is designed to reform and strengthen the U.K.’s fight against serious economic crime in that the Act will enable UWOs to be sought against property held in trust and other complex ownership structures such as opaque foundations.
The Act also removes key barriers to the use of UWOs by increasing time available to law enforcement authorities to review material provided in response to a UWO; and reforming cost rules to limit the costs to authorities that unsuccessfully seek to obtain a UWO, with the authority only being required to pay a respondent’s costs where the authority has acted unreasonably, dishonestly or improperly.
The Act aims to therefore re-energise UWOs by making them easier to use and less of a financial burden for law enforcement authorities. This is hardly unsurprising given that the last attempted UWO was a high-profile defeat last year, which left the National Crime Agency with a £1.5 million costs order. The desired impact of the Act may be to increase the number of UWOs being “dished out”, but there is the fundamental question as to who shall be policing these new rules given the current crippling resources and minuscule financial budgets that some law enforcement agencies face. The National Crime Agency and the Crown Prosecution Service have all suffered budget cuts in the last several years and therefore whilst in theory we may now have legislation in place, the question remains - do we have resources in place to police these new rules.
Part 3: Amendments to the Existing Legislation on U.K. Sanctions
The Act is intended to toughen up the current Sanctions enforcement. At present the Office for Financial Sanctions Implementation (OFSI) can only impose monetary penalties on a person who breaches financial sanctions if it is satisfied that they knew or had ‘reasonable cause to suspect’ that they were in breach. The Act removes this requirement, enabling OFSI to impose monetary penalties on a ‘strict liability’ basis.
Under the Act, OFSI now enjoy wider powers and can also publicly name companies that have breached sanctions but have not been fined.
The Act is clearly actively encouraging the OFSI to share information with other law enforcement agencies.
The future weapon against economic crime – Companies House
In a multipronged approach to combatting economic crime through enhanced transparency, the government recently published the Corporate Transparency and Register Reform White Paper (the White Paper), which pulls together responses to the government’s previous consultations in the following three areas:
(i) implementing the forthcoming ban on corporate directors;
(ii) reforming the way company information is held in the U.K.; and
(iii) improving the quality of company accounts.
We would be happy to discuss the numerous detailed proposals contained in the White Paper and what these will mean to your business specifically in practical terms. However, for the purposes of this note, we have sought to highlight some of the key points arising from the White Paper in very general terms.
- Save where an exception applies, corporate entities will no longer be permitted to serve as directors of U.K. companies.
- The exception applies where all of the corporate director’s own directors are natural persons and such natural persons’ identities have been verified prior to the appointment of the corporate director.
- The exception is limited to U.K. entities with legal personality - overseas entities will not be allowed to serve as corporate directors of U.K. companies.
Reforming the register and identity verification
- Companies House will be granted new powers to query information it receives and to remove information affecting the integrity of the register, e.g., fraudulent filings.
- Certain regulated professionals will be obliged to report discrepancies between the information they hold on a company’s directors and registered office and the equivalent data at Companies House.
- Companies House will be granted the power to impose sanctions on entities which fail to reply adequately to queries raised by Companies House.
- Certain individuals (including new and existing company directors) will be obliged to verify their identity with Companies House before they can make filings.
- Existing directors will have a fixed period within which to verify their identity, failing which, such director and their company will both commit a criminal offence.
- Existing PSCs will also have a fixed period within which to verify their identity, failing which, the PSC will commit a criminal offence.
Improving the quality of company accounts
- Small companies and micro-entities will no longer be able to file abridged accounts. Instead, they will be obliged to file a full balance sheet and profit and loss account together with sufficient information to enable Companies House to check that such small company/micro-entity qualifies for the accounting category it claims to fall within.
- Companies House will be granted the power to validate accounts and reject any that do not meet statutory requirements.
Draft legislation is now awaited to implement the above changes and the numerous others detailed in the White Paper. Whilst the proposals are generally welcome and they are broadly perceived as helping tackle economic crime through enhanced transparency, the practical implementation of these proposals by Companies House will be critical to the efficacy of said proposals in the fight against economic crime.