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Today (Tuesday, 15 March 2022), the UK parliament passed the Economic Crime (Transparency and Enforcement) Act (the Act). Royal assent was granted as parliament sat into the early hours of the morning to ensure the fast-tracked measures became law.
- The legislation, which has been repeatedly delayed since its inception six years ago, has received renewed focus since the Russian invasion of Ukraine and was expedited through both Houses of Parliament.
- Following debate, the final version of the legislation includes tougher measures than set out in the draft Bill.
- The UK government is now expected to announce further sanctions against Russia.
- Ministers have committed to the rapid implementation of the new measures and will provide a progress update within six weeks.
The Act introduces new measures which cover:
- the creation of a register of overseas ownership in UK land and property, which requires the registration of the ultimate beneficial owners;
- reforms to the unexplained wealth orders (UWOs) regime, which will make it easier for enforcement authorities to issue UWOs to individuals or legal persons who are suspected of having criminal links; and
- lowering the liability threshold for the imposition of civil monetary penalties for breaching financial sanctions to strict liability, as well as introducing the power to ‘name and shame’ companies that have breached sanctions, regardless of whether or not they have been fined.
See our recent client alert on the rapidly developing sanction regimes with respect to Russia.
Register of Overseas Entities
In an attempt to increase transparency over property ownership within the UK, the Act introduces a requirement for overseas owners of UK property to register their identities with Companies House, the UK’s registrar of companies.
Identification will act as a deterrent to those seeking to launder the proceeds of crime in land in the UK. Business Secretary Kwasi Kwarteng said “Our new Register of Overseas Entities, the first of its kind in the world, will have an immediate dissuasive effect on oligarchs attempting to hide their ill-gotten gains, ensuring that the UK is a place for legitimate business only.”
Overseas entities will be required to take reasonable steps to identify any ‘registrable beneficial owners’ in relation to the entity, i.e., individuals who have significant control over the entity, for example by holding 25 per cent or more of the voting rights or having the right to appoint or remove a majority of directors.
The register will apply to all property purchases made within the last 20 years in England and Wales (and since December 2014 in Scotland). Entities that refuse to reveal their beneficial owner will face tough restrictions on selling the property and those that break the rules could face a fine of up to £2,500 per day or up to five years in prison. All parties proposed an amendment to increase the daily default fine from £500.
The draft legislation had allowed owners 18 months to register their properties; however, following debate, the government reduced the grace period to six months. Critics, including the Labour party, had pressed for a further reduction to 28 days, but the government pushed back on a further reduction, citing fears that a short transition period risked opening the new register up to legal challenge. Instead, a new disclosure requirement has been introduced which compels any overseas entity selling UK property between 28 February 2022 and the full implementation of the register to provide information about its beneficial ownership. The opposition parties also called to remove the ability of the secretary of state to exempt an individual from the requirement to register their overseas entities on the grounds of the economic wellbeing of the United Kingdom, closing what the Liberal Democrats described as a major ‘oligarch loophole’. The government conceded to this amendment, which ultimately expedited the passage of the legislation through parliament.
Unexplained wealth order reforms
UWOs allow law enforcement agencies to demand explanations of how assets worth more than £50,000 have been acquired where there is a suspicion that an individual’s legitimate income is not enough to afford the asset. Whilst a UWO is in effect, a freezing order can be imposed in respect of the assets.
Targets of UWOs are politically exposed persons (PEPs) outside of the EEA, persons suspected of serious crime or those connected to such persons. Since the introduction of UWOs in 2018, only a handful have been granted and they have occasionally resulted in huge expense to the taxpayer.
The new measures provide extra time for authorities to review responses to UWOs before deciding whether to bring a claim against the target. There are also new limits on costs rules in court cases, with full costs only being available to a respondent where the issuing authority has acted unreasonably, dishonestly or improperly. This will go some way to mitigate the legal costs incurred in unsuccessful claims brought by enforcement authorities.
Where a respondent is not an individual, authorities will also be able to target ‘responsible officers’, which includes individuals such as directors or trustees, allowing wider scope to investigate property held in more complex legal structures.
Sanctions
The Act also sets out a tougher approach to penalising those who have breached financial sanctions. Previously the UK’s sanctions enforcement agency, the Office for Financial Sanctions Implementation (OFSI), was required to demonstrate that firms either had knowledge, or a reasonable cause to suspect, that they were in breach of sanctions in order to impose penalties. The Act intends to do away with this potential safety barrier for non-compliant firms, imposing a strict liability test.
The OFSI would also have the freedom to publish reports where a person has breached or failed to comply with an obligation imposed by sanctions legislation, regardless of whether a fine has been imposed.
Comment
The government intends these new measures to “tackle the scourge of economic crime in the UK and safeguard our reputation as a clean and safe place for legitimate investment”, but it remains to be seen how successful they will be in practice.
Concerns exist that the legislation does nothing to prevent individuals exploiting loopholes which would allow the true ownership of property to be obscured, for example through nominee agreements with professional service firms. Enforcement also remains an issue. The OFSI has only commenced a handful of enforcement actions since it was established in 2016. Critics argue that without proper resourcing for enforcement agencies, new legislation will have a limited impact.
Some commentators have also highlighted the absence of any reforms aimed at Companies House itself, in respect of which the government initiated a consultation nearly three years ago. Instead of draft legislation, the government has published a white paper detailing a planned revamp of Companies House, which would include mandatory identity verification for those setting up companies – a key safeguard which does not currently exist.
Further legislative proposals to tackle illicit finance can be expected in the coming months, including introducing new powers to seize crypto assets more easily. The prime minister has also announced a new ‘Kleptocracy Cell’ based in the National Crime Agency, which has been created “to target sanctions evasion and corrupt Russian assets hidden in the UK”.
Client Alert 2022-081