First published 29 April 2022
Introduction
What is the Economic Crime Act?
The Economic Crime (Transparency and Enforcement) Act 2022 has recently received Royal Assent on 15th March 2022 after going through Parliament in a matter of days. It applies to all of the UK, but in different ways (see below for details).
Its main objective is to increase transparency, and in turn improve AML measures and target evasions.
It aims to deliver that via a range of measures, including: a Companies House register for overseas entities (and their beneficial owners) who own land here; improve the current sanctions regime; and reforming the framework around Unexplained Wealth Orders (UWOs). Each of these 3 components are covered below.
What relevant laws does it amend?
The main ones include amendments to the Policing and Crime Act 2017, and the Sanctions and Anti-Money Laundering Act 2018.
What happens next?
The new register is being rolled out, with a launch date yet to be confirmed. The government has also said a second Act will follow, possibly later this year.
Advice for Conveyancers
What’s the big picture?
There are a few trends emerging which could impact many parts of the property market. These included: the Register when it comes into force; the possible change in client behaviour before that; and growing media attention on the issue. These could particularly affect the commercial property sector, as a considerable amount of UK real estate transaction and investments involve overseas contacts. There will also be some impact on the residential sector, particularly where sanctions and UWOs are involved.
Even where there are no direct consequences for the market sector your firm works with, there may well be indirect ripple effects for your clients and transactions.
These are relatively early days. A lot of work is going on at Companies House and HM Land Registry to plan, test and finally roll out the new Register. This allows the conveyancing sector some time to plan for the impacts and changes ahead.
What should firms do?
It’s recommended that firms should start planning now for the consequences of the new regime. In particular we’d recommend they should:
- Regularly monitor, review and update their due diligence measures.
- Ensure there are clear communication plans in place, so that (current or future) relevant clients are fully informed of the new requirements.
- Ensure all staff are trained on the current and planned changes. Including the penalties.
- Be aware of the reputational and media impacts on their firm (and the profession) if they do not follow the new requirements.
- Monitor potential indirect changes to the property market due to these measures. These are currently complex to predict, but will become clearer later in the year.
- Keep updated on future Acts, and amendments to existing or new ones.
What’s likely to be the main impact?
Day to day, it’s probably going to be around due diligence. Additional verification check could be required by the purchaser’s legal firm from the borrower’s legal firm. And the increased importance of due diligence (possibly along with undertakings) will require an increased focus on evidence at all stages, e.g. when registering, and the security of data. To be ready for these measures, firms should ensure they review – and if needed, improve – their procedures on client handling; filings, and record keeping.
It’s worth noting that Companies House are also looking at a range of changes to Identification, Verification and Know Your Customer (KYC) rules, which are also likely to be enhanced.
What are the Penalties?
Under the Act’s provisions, when a legal firm registers ownership of land and property they have to declare in public records who ultimately benefits from it. If the firm or individual registering the property fails to identify the beneficial owner, they will face restrictions over Property. And any legal professional who breaks the rules could face up to 5 years in prison (see below for more details).
The Register of Overseas Entities
What are the main points?
The Act establishes a new register of foreign owners of UK property, which will be held and administered by Companies House.
The intention is that this will be similar to UK-registered entities, who have to record their details in a dedicated record (the PSC register),
Any overseas entities (governed outside of the UK) which count as ‘legal persons’ will have to register with Companies House. In doing so they will need to reveal the identity of their beneficial owner or owners, i.e. an overseas entity that owns or is entitled to own a “qualifying estate” in the UK (in England and Wales this will be a freehold or a lease of longer than 7 years),
The measures will apply retrospectively to real property purchased after January 1999 in England and Wales, and since December 2014 in Scotland. The register will be available to be viewed by the public. This will be free of charge.
What’s the definition of a beneficial owner?
Anyone who: owns more than 25% of the shares or voting rights; the capacity to either appoint or remove directors; or can exert significant control over the company.
How long does [the owner / my client] have to register?
Companies House has begun work on planning and rolling out the new Register as soon as possible. To cover activity before then, any foreign company selling properties between 28 February 2022 and the full implementation of the register will have to send relevant details at the point of sale.
A transitional period will allow 6 months for registration from the day that the requirement for a register to be kept enters into force. Information will also have to be sent on their beneficial owners, and then resent annually, and also when details change.
What happens if [the owner / my client] doesn’t register?
There will be penalties. Entities that do not reveal their beneficial owner will be prevented from selling, mortgaging or registering leases over the property. Selling such property would mean the company and its managing officers could face criminal sanctions, with penalties of up to £2,500 per day. Or a prison sentence of up to 5 years.
It’s also possible that non-criminal financial fines could be laid down as an alternative. As noted above the legal firm they deal with could also face strong penalties.
Sanctions
What are the main changes?
Along with improving intelligence sharing, the Act removes the obligation for the Office of Financial Sanctions Implementation (OFSI) to prove that a person had knowledge or reasonable cause to suspect their activity breached sanctions. (This only applies to the civil enforcement of sanctions).
It also allows OFSI to publish a notice with details of any breaches of financial sanctions where it has decided not to impose a penalty. Under such public censure it is quite possible (as above) that the legal firm working for the sanctioned person in the relevant case could also be named.
Unexplained Wealth Order Measures
What are UWOs?
Unexplained Wealth Orders (UWO) came into force in January 2018 to help authorities identify and seize property suspected to have been bought by laundered criminal funds, most commonly from foreign sources. They have rarely been used, up to now.
What has changed with UWOs?
The changes include enabling UWOs to be applied on property held in trust and/or complex ownership structures; allowing more time for law enforcement to freeze and review relevant material; and reforming cost rules to avoid major legal costs. The later change in particular could lead to a rise in the UWOs.
Further CLC Information
