Investors and lenders take heed: The Economic Crime (transparency and enforcement) Act 2022

This article was co-authored by Lilia Gatenadze, Legal Assistant, London.

The Economic Crime (Transparency and Enforcement) Act 2022 (the Act) was given Royal Assent on 15 March 2022. The bill (as was) had received its first reading on 1 March 2022 and was subsequently fast-tracked.

The purpose of the Act is to set a global standard for transparency of real estate ownership, and to help eliminate foreign criminals from using UK property as a money laundering vehicle or in breach of sanctions.

Why now?

Even though the original parliamentary bill was introduced in 2018, it was not followed through at that time. However, the legislation was re-introduced to tackle sanctions imposed by HM Government on Russian nationals and organisations following the conflict in Ukraine.

What is being introduced?

The Act applies to properties owned by overseas entities. These include companies and other entities governed by the law of a country/territory outside the UK and have a separate legal identity under that law. The Act requires certain information to be provided in relation to beneficial owners of such entities who hold (directly or indirectly) more than 25% of the shares or voting rights and/or have a right to appoint or remove a majority of the board of directors and/or have significant influence or control. A beneficial owner may be an individual, legal entity or government/public authority.

The Act consists of three main parts.

Part 1 introduces a ‘Register of Oversees Entities’ (the Register), which will be open to the public.

The Register requires details of the true identity of foreign owners who own a qualifying estate in the UK. A qualifying estate means a freehold estate or a leasehold estate granted for more than seven years, of which the overseas entity became a registered proprietor on or after 1 January 1999. Hence, the Act applies retrospectively.

Companies House are working to implement the Register with HM Land Registry’s assistance.

Companies House is able to challenge suspicious information contained in any filings or documentation provided and report it to security agencies. HM Land Registry is then able to place restrictions on titles to qualifying estates of overseas entities.

What information is required?

The Act lists detailed information that must be provided to Companies House by the overseas entity, namely:

  • Country of incorporation or formation.
  • Registered or principal office.
  • A service address.
  • An email address.
  • The legal form of the entity.
  • The law by which it is governed.
  • Any public register in which it is entered.
  • A relevant registration number.

Where a beneficial owner is an individual, the Act requires information which includes name, date of birth, nationality, usual residential address, a service address, and the date when the individual became a beneficial owner.

It must be noted, however, that dates of birth and residential addresses are in a protected category and, therefore, will not be open for public inspection.

Unexplained Wealth Order regime

Part 2 of the Act expands the Unexplained Wealth Order (UWO) regime by amending the Proceeds of Crime Act 2002, from where it originates. The regime allows law enforcement to investigate the ownership of UK property and use civil recovery proceedings where the property is believed to have illegitimate means.

The new change will allow recovery of the property from a ‘responsible officer’ of a respondent, which may include a person outside the UK. The term ‘responsible officer’ has a wide definition and includes any director of a respondent, any board member, company officer or trustee. The aim of having a ‘responsible officer’ is to reduce complex ownership structures that are used to hide beneficial owners.

What is the timeframe?

An overseas entity has a transitional period of six months from the commencement date of Part 1 of the Act to register with Companies House. There is no indication yet as to when Part 1 of the Act will come into force, which will be determined by the Secretary of State.

During the transitional period and when registering an overseas entity, the entity must provide information on whether they have made any relevant disposition of land from 28 February 2022 and include details, such as a date of disposition and a title number. A “relevant disposition of land” means a transfer, a grant of lease for a term of more than seven years or the grant of a legal charge. This provision was introduced to prevent evasion by overseas entities before the Register goes live.

What about the sanctions?

Part 3 of the Act imposes civil sanctions for non-compliance, which include refusal to register a legal owner or the disposal of the relevant title. It will also include criminal sanctions, such as fines of £2,500 per day or a prison sentence of up to five years for the most serious breaches.

How might the Act affect investors and lenders?

As seen from the above, UK property investors with a foreign element are directly affected by the Act. Those who are due to register under the Act should start identifying relevant property holdings and “relevant dispositions of land”, referred to above, for registration with Companies House once Part 1 of the Act comes into force. This will avoid potential sanctions for non-compliance.

Lenders who have provided funds to overseas entities are also affected, as their borrowers might need to register as overseas entities at Companies House. This means that lenders should also start identifying relevant transactions and speaking to their clients to ensure that they register within the timeframe prescribed by the Act. They should further consider amendments to their financial documents to reflect compliance with the Act and any relevant legislation that will follow.

Comment

Even though the Act is bringing an increased transparency into the real estate world, it will no doubt have an effect on investors as well as lenders. We are yet to see how the Act will be applied in practice and what additional obligations the lenders and parties involved in the relevant transactions might introduce to ensure compliance. The overseas entities who are due to register under the Act, and their lenders, should start identifying relevant information and preparing the necessary paperwork to register with Companies House in good time to avoid being caught out.

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