New legislation introduces further sanctions powers and aims to tackle financial crime by revealing identities of overseas beneficial owners of UK property.
Following the UK government’s successive sanctions packages, which are the subject of recent Latham & Watkins Client Alerts,[1] the response to Russia’s invasion of Ukraine has been extended to cover wider financial crime measures.
The Economic Crime (Transparency and Enforcement) Act 2022 (Act) received royal assent on 15 March 2022, introducing a new register of overseas entities (Register) holding UK property assets, alongside changes to the unexplained wealth order (UWO) and sanctions regimes. Reforms to the role of Companies House are expected to follow in subsequent legislation.
The provisions of the Act concerning the imposition of sanctions will come into effect immediately, while other provisions concerning the imposition of monetary penalties for breach of sanctions as well as the Register and UWO come into force on a day to be appointed by the Treasury and the Secretary of State respectively.
These measures concerning the Register and UWOs have been delayed by several years, with similar proposals first noted in a UK government discussion paper in March 2016. A draft Registration of Overseas Entities Bill was drawn up in 2018, but no further progress was made. As recently as January 2022, the Bill was reported to have been put on hold until the 2023-2024 parliamentary session.
Register of Overseas Entities
The Act’s headline provision is the creation of a Register of Overseas Entities. The Register is intended to limit the scope for criminals to launder money through property assets while hiding behind chains of shell companies incorporated outside the UK. The scope for investing ill-gotten gains in prime London real estate has given the UK a reputation as a money-laundering capital. Overseas entities that purchase a freehold estate or a leasehold estate granted for more than 21 years in the UK are now required to identify their beneficial owners and provide certain details about them. This requirement also applies retrospectively to overseas entities that purchased property on or after 1 January 1999 in England and Wales or on or after 8 December 2014 in Scotland; such entities will have six months from the commencement date to submit the required information. A “beneficial owner” is any individual, government, or public authority, or company subject to its own disclosure requirements that, in relation to an overseas entity: (i) holds more than 25% of the shares or voting rights; (ii) has the right to appoint or remove a majority of the board; or (iii) otherwise exercises significant control or influence.
An overseas entity that fails to submit the required details for inclusion in the Register will face restrictions on selling, mortgaging, or granting leases of more than seven years of the UK property it holds. Breach of these restrictions is a criminal offence carrying a maximum penalty of five years’ imprisonment for the entity’s directors.
UWO Reforms
The Act has also introduced a number of reforms to UWOs, which require individual respondents to explain the source of funds for obtaining specified assets. Since their introduction under the Criminal Finances Act in 2018, only nine UWOs relating to four cases have been granted as of February 2022. The key changes introduced by the Act include:
- Limiting the availability of costs orders against applicant enforcement agencies to circumstances in which the enforcement agency: (i) acted unreasonably in making or opposing the application for a UWO; or (ii) acted dishonestly or improperly in the course of the proceedings
- Allowing enforcement agencies to apply to the High Court for more time to review information provided by the respondent to a UWO
- Creating an additional test to be able to grant a UWO, namely whether the court is satisfied that the specified assets have been obtained through unlawful conduct
Breach of UK Sanctions
The Act also makes additional changes to the UK sanctions regime. Chief among these are provisions that allow the Treasury to introduce regulations that remove knowledge requirements for persons on whom it imposes monetary penalties. This will create a strict civil liability test for those monetary penalties incurred for breaches of financial sanctions.
Presently, the Treasury’s sanctions implementation department (the Office for Financial Sanctions Implementation (OFSI)) must be satisfied that, on the balance of probabilities, a person “knew or had reasonable cause to suspect” that a person was in breach of sanctions. This defence will no longer be available once the new regulations are brought into force. Similarly, any requirements in other sanctions legislation that a person knows, suspects, or believes that certain circumstances exist will no longer apply.
The Act also enables OFSI, through new regulations, to remove the requirement that reviews of OFSI monetary penalty decisions are taken, personally, by a government minister. The regulations will also give OFSI the power to “name and shame” a person who has breached financial sanctions legislation but has not yet been fined.
In addition, the Act streamlines the process of enacting new sanctions regulations and makes it simpler to designate persons as asset-freeze targets if they are also the target of sanctions imposed by certain other countries, such as the United States, Canada, the European Union, or Australia. Moreover, regulations introduced by a government minister may now specify limits on the amount a court may award to compensate someone who successfully challenges their designation under sanctions regulations.
Takeaways and Looking Ahead
- Although these measures were motivated by the invasion of Ukraine, they have applicability across the whole market, and the Register in particular applies to all relevant overseas entities
- Companies with overseas entities holding UK property will have a limited time to submit information to the Register
- The government says this Act is only the first step, and further illicit finance measures are expected in the coming months
- One likely change will be to the role of Companies House, which will become a “company-creation gatekeeper” rather than just the recipient of information,[2] meaning it could query information provided to it, verify ownership, and share suspicions with other agencies
- Companies filings to Companies House will justify additional care and diligence to ensure accuracy
- A second Economic Crime Bill is expected later year, introducing changes to the law on limited partnerships and new powers to seize cryptocurrency assets
This post was prepared with the assistance of Matthew Unsworth and Angus Baird in the London office of Latham & Watkins.
Endnotes
[1] Latham & Watkins published Client Alerts regarding Ukraine- and Russia-related sanctions on 25 February, 1 March, 8 March, and 11 March 2022. Further developments may be the subject of future Client Alerts.
[2] Department for Business, Energy & Industrial Strategy, Corporate Transparency and Register Reform (CP 638, 2022).
