The taming of the few: The Economic Crime (Transparency and Enforcement) Act 2022

This article was co-authored by Jonathan Marion, Trainee Solicitor, London. 

After years of discussion about ways to thwart the flow of so called dirty money, Parliament has fast tracked, in what has been reported to be at unprecedented speed, the journey of The Economic Crime (Transparency and Enforcement) Act 2022 (ECA) in response to the recent armed conflict in Ukraine.

Receiving Royal Assent on 15 March 2022, the ECA takes aim at overseas individuals seeking to launder money in the UK and/or greatly restricting access to their ability to transact with the UK’s financial system.

The ECA can be dissected into three parts:

• Establishing a Register of Overseas Entities (Register).
• Strengthening the Unexplained Wealth Order (UWO) regime.
• Introducing a fast-track process for imposing sanctions.

We analyse the changes and the potential impacts below.

The Register

It was recently reported that close to a quarter of a million residential properties in England and Wales are registered to overseas individuals, which lead to sustained criticism about the murky and increasing foreign ownership of UK property, where the identity of the beneficial owner was kept hidden.

In finally acknowledging the issue and with the aim of increasing the desire for much demanded transparency, the ECA introduces a Register that compels overseas entities who have purchased land (with a freehold or leasehold interest of more than seven years) in the UK since 1 January 1999 to investigate, identify and provide information about their beneficial owners during a six month transitional period from the ECA’s commencement date.

Overseas entities must also keep the Register updated annually. Failing to do so is an offence that is not only committed by the entity itself but also by every officer of that entity.

UWOs

In our recent article, we discussed the dearth of UWOs, which by and large has arisen following the National Crime Agency burning its fingers on the Aliyev/Baker case. The issue has not gone unnoticed, with the government acknowledging the obstacles that law enforcement bodies faced when contemplating the use of this tool.

Under the ECA, the government’s proposal aims to breathe new life into UWOs and the following changes have been introduced: Where enforcement authorities are unclear on how an entity (other than a legal person) came to own a property, the ECA introduces the wider ambit of ‘responsible officers’, who may now be subject to a UWO even when another party owns the property and not those officers personally. Relevant officers will not be limited to directors and may include managers, secretaries and shadow partners. As an alternative to the income requirement test, the ‘unlawful conduct’ test may be used as an additional ground for applying for a UWO. The definition of unlawful conduct is wide ranging under the Proceeds of Crime Act 2002 and will essentially hoover up all criminality. The impact of this amendment to the regime is that a UWO may be made even if the wealth can be explained. Most UWOs should be accompanied by interim freezing orders, which place a hold on the target properties of a UWO to prevent any dealing with the asset. This combination offers law enforcement agencies sufficient time to undertake their own investigation after a UWO has been complied with or purported to have been complied with. The initial 60 day freezing period was deemed to be insufficient, particularly when the information provided by a respondent required cross border investigation/corroboration. The ECA has therefore more than tripled this timeframe from 60 to 186 days to provide law enforcement agencies ample time to conduct relevant enquiries The issue of costs has also been tackled head-on. Controversially, the ECA limits the costs that can be recovered when a UWO application is unsuccessful. Unless it can be demonstrated that a law enforcement body has acted “unreasonably”, “dishonestly” or “improperly”, the respondent will not be in a position to seek its costs. These words are to be given their ordinary meaning such that there is likely to be a slew in the number of challenges by successful respondents seeking to recover their legal costs. A late amendment requires the government to publish annual reports on the use of UWOs. With this addition, the government is keen to assess the impact these changes will have to the UWO regime and whether they have been successful in increasing their number.

Sanctions

The ECA has introduced key changes to the UK’s sanctions regime to help streamline what some saw as a cumbersome process. The UK can now designate individuals/entities far quicker, especially when those individuals/entities have already been sanctioned by the US, EU, Australia and Canada (in addition to any other country specified in regulations made by a Minister). This new tool was immediately used by the government when it recently designated some 370 individuals that had already been sanctioned by the EU.

The ability to impose civil financial penalties has also been made that much easier with a new strict liability test. Intent/knowledge of a breach is no longer a factor to be considered when the Office of Financial Sanctions Implementation (OFSI) decides whether to impose a civil financial penalty. Although the defence to a criminal sanctions offence remains (i.e. that the individual/entity did not know, nor did they have reasonable cause to suspect that they were in breach), this can no longer be relied on with OFSI’s civil financial penalty regime.

Comment

The ECA has certainly provided law enforcement agencies with a new shiny toy to tame the few. However, rather than being seen as a beacon in the UK’s attempts at tackling dirty money, it should be seen as a piece of legislation that seeks to right the wrongs that should have been tackled well in advance of the recent armed conflict. Likewise, opposition concerns and high-ranking resignations from the government about the snail-like pace it was taking in reviewing this troublesome area should have been addressed at the relevant time rather than now. Instead, it unfortunately took recent events for the government to change its tact, and in doing so, at break-neck speed.

The success of the ECA may well be determined by meaningful, financial and personnel injection to the UK’s law enforcement agencies. It is only when this is done that we will truly know if the ECA fully turbo charges the UK’s fight to tackle dirty money. If this fails, the ECA’s bark is likely to be worse than its bite.

Read other items in the Commercial Brief - May 2022

Related items:

• UW-no - the rise and fall of Unexplained Wealth Orders
• Unexplained Wealth Orders - a solution to dirty money or a way to muddy the waters?